Why the climate crisis needs a coordinated action plan

"A code red for humanity." That was how United Nations secretary-general António Guterres described the Intergovernmental Panel on Climate Change (IPCC) report of August 2021.

The first IPCC global climate change report since 2013, it warns that global warming could reach 1.5C by 2040. It is a bleak outlook. Researchers say this would demand "immediate, rapid and large-scale reductions" in greenhouse gas emissions to avoid a future beset by environmental catastrophes.

For governments, businesses and banks, there is a pressing need to coordinate on sustainability action plans – the task ahead is too big to tackle alone. Businesses do seem to be willing to play their part: ING research surveying 450 global corporations finds that 57 per cent are looking to accelerate their green transformation plans, but they cannot do this alone.

More than half of respondents (53 per cent) say that Covid-19-related economic turbulence has reduced their capital-expenditure budgets. So how can companies realistically meet their ambitious targets?

Companies need to work with lenders on sustainable finance

For most companies, a serious sustainability plan will include reducing emissions and wastage in existing business models, developing entirely new models that are net zero by default, and/or scaling up renewable technologies.

Each of these will need a financing plan, so lenders have a vital role to play in companies' sustainability makeovers. And banks appear to be increasing their efforts to diversify the sustainable finance instruments available to companies.

The first half of 2021 saw sustainable finance bonds jump 76 per cent year on year to a record $552 billion, while the more targeted green bonds sector reached $259 billion, trebling issuance for the category from the first half of last year.

Sustainable finance can help accountability

For businesses, the appeal of sustainable finance is twofold. It allows them to take faster steps towards meeting the increasingly challenging demands set out by stakeholders or by regulations such as the EU Taxonomy, which is a framework that sets out what is and is not sustainable.

Sustainable finance also ensures accountability: many sustainable finance instruments require businesses to commit to specific environmental, social and governance (ESG) targets. Failure to achieve these can leave firms with a financial penalty to pay to lenders, while success in achieving targets can offer them a discount on interest rates for sustainability-linked loans, for instance.

ING also finds that 73 per cent of companies that have issued sustainable finance instruments say it has improved their ability to put robust internal accountability metrics in place. We also find that 48 per cent of investors think sustainable finance will be more effective than conventional finance in driving the transition of carbon-intensive companies – whether that's through pioneering new technologies or making cleaner business models more feasible.

This positive sentiment towards sustainable finance from companies is welcomed. And for banks and regulators, it offers a more robust set of tools to assess these companies for greenwashing.

By working together and harnessing these tools, sustainable outcomes can be achieved – companies will feel well-equipped to finance their change. Averting the climate crisis depends on it.