- Ben Poole
- Editorial Team, Treasury Management International (TMI)
The future will only be prosperous if businesses embed sustainability at their core. Treasury can play a vital role in this approach, tapping into sustainable financing to help firms embrace different operating models and emerging technologies that benefit both the corporation and the environment.
The global population will be nudging 10 billion by 2050, according to the United Nations,[1] and the energy demands of that number of people will accelerate the climate crisis – unless action is taken to create sustainable systems. This is urgent: the US Energy Information Administration estimates energy demands will grow by almost 50% by 2050.[2]
Meeting that growing demand will require governments, the financial sector, and companies to work together – whether that is in creating new business models with lower carbon footprints or supporting technology, products, and services that offer a greener vision of the future. Treasurers have an essential role to play in that collaboration.
The great pivot: business is changing
There are plenty of incentives for companies to look into environmental, social, and governance (ESG) focused services and products. For example, research from EY finds that revenue from sustainable products is growing at around six times the rate of other products.[3] This is one reason why the number of companies committing to net-zero emissions by the end of the century tripled in 2020.[4]
Others that have yet to be encouraged to actively pursue new technologies or business models supporting sustainable goals will have to adapt. Research published by ING in April[5] 2021 found that just 32% of businesses are prioritising the ‘greening’ of products and services.
To manage the higher risk of financing companies that are pivoting to new business models or investing in untested technologies, banks will need to develop innovative solutions of their own. Their funding is required: more than half (53%) of companies surveyed by ING cite reduced capital and operating expenditure budgets due to the Covid-19 pandemic, leaving them with a shallower pool of funds to address the significant issues.
Banks also need to understand that traditional financing solutions such as senior loans are ill-suited to companies with a less mature business model or are embarking on a radically different path. In other words, banks must be prepared to develop financing solutions and appropriate services for projects that are unlike any they have previously worked on.
Sustainability through strategy
Meanwhile, companies will not just need to consider new technologies, services, and business models – they also need to put in place a forward-looking sustainability strategy. Banks also have a role to play here.
Leonie Schreve, Global Head of Sustainable Finance, ING, makes the point that this is where banks can step in and provide more risk-bearing capital as an alternative to traditional finance. The advice that banks can offer on how to shift to a financial structure and business model that supports their clients’ sustainability goals is valuable.
“That’s where we are currently focusing on being a partner for our clients,” Schreve says. “It becomes a strategic dialogue with our clients to help them identify investments and divestments to safeguard their resilience in tomorrow’s economy and to remain relevant to growing ESG appetite among investors.”
Banks are increasingly using finance to support innovative green businesses and phasing out carbon-intensive sectors in their portfolios. ING’s ‘Terra approach’, for example, helps to measure the impact of different sectors on the climate. It also sets targets for each sector to transition to a low-carbon future, steering ING’s lending portfolio towards net zero by 2050, in line with its commitment to the UN-convened Net Zero Banking Alliance.
The Terra approach’s strategic advice can extend to supporting companies to navigate complex ESG-related regulations. For example, the EU Green Deal, which includes the EU Taxonomy, requires European companies to report on the proportion of their revenue coming from sustainable products and services, and the capital and operating expenditure involved.
For corporates, regulation is likely to trigger a wave of investment in products or processes that help them align with the regulation. Meanwhile for lenders, regulations offer an opportunity to share practical advice about how to finance more sustainable capital expenditure, for example, or what acquisitions they can make to gain greener assets. Playing that advisory role makes lenders a valued partner to companies and not merely a source of funding.
“For us, it is a good opportunity to guide our clients through this complex regulatory environment,” says Schreve. “We can start a strategic discussion about what they will need to do to transition towards a sustainable economy.”
Powerful partnerships
For many organisations, strategic discussions can go a long way in supporting them in scaling up promising ideas, technologies or systems. Take the use of hydrogen as a source of renewable energy.
Hydrogen has been touted as a low- or zero-carbon energy source, particularly in sectors that are hard to electrify. This makes it “a very important driver in the energy transition”, according to Gido van Graas, Global Lead New Energy Technologies, ING. Since February 2021, 131 large-scale hydrogen projects have been announced globally, taking the total to 359 projects, while investment into projects along the entire hydrogen value chain is estimated at $500bn through to 2030, according to research from the Hydrogen Council this year.[6]
But hydrogen remains expensive – particularly when it is produced by wind or solar energy as opposed to natural gas – which means that this greener mode is not yet competitive. To pave the way to a hydrogen economy, van Graas sees a role for banks such as ING to have “very detailed conversations” with clients about how best they can be supported in scaling up hydrogen projects that will require significant investment to turn them into reality.
“The implementation of hydrogen in the coming decades will require trillions of dollars of investment not only in production facilities but also in transportation and storage,” van Graas says. “We are very keen to support our client base in their energy transition here.”
How finance helps to pioneer new business models
Society’s efforts to reach net zero now go well beyond energy technology, and we need to look more broadly at innovation and business models. One of these models is the circular economy.
Joost van Dun, Circular Economy Lead at ING Sustainable Finance, explains: “In this [circular] model, it is more about financing the access or use of the asset. The collateral value of the asset is limited, as it is in use by a third party. We need to rely more on the contracts between the user and the entity that offers the service and how it generates revenue streams.”
Use cases are emerging where banks have worked with companies to ensure that sustainable finance, based on some level of financial engineering, supports the shift to a circular economy model.
Netherlands-based start-up E-bike To Go (EB2G) is an excellent example of this. The company is working to improve the use of sustainable transportation by shifting away from a traditional model of ownership to enabling access by offering a subscription service to both businesses and consumers for e-bikes. At the start of 2021, the start-up was acquired by industry counterpart GreenMo[7] in a deal designed to improve access to EB2G’s sustainable transportation and provide a path to international expansion.
Jelle Visser, founder of EB2G, says: “This year, we entered the German and Belgian markets, where we provide a sustainable alternative to food delivery companies that use cars or scooters. Demand for our bikes has grown exponentially in the wake of the pandemic, by more than 170%. Riding an e-bike is currently the most sustainable option for urban transportation.”
Given that the Product-as-a-Service (PaaS) business model is relatively new, a different perspective on financing was required: lenders are typically used to financing ‘possession’ rather than ‘use’, and there is a different risk profile to contend with given that defaults on payments, for example, risk occurring periodically rather than in one instance.
Van Dun adds: “In a subscription model, it’s about usage and cash flows linked to that usage. This requires another way of looking at the finance structure.”
Several ING departments, including Sustainable Finance and Midcorporates Netherlands, joined forces to develop a framework to assess these finance structures, taking into account the sustainable and circular aspects of the transaction as well as the business model, the market, and the financial parameters.
“More customers [in a subscription model] also means more options for the supplier to improve and recycle and reuse the products at the end of their lifecycle,” says van Dun. “ING has developed a rating model to value sustainability, and e-bike-to-go scores highly on this rating, which was an important reason for us to support the company.”
How finance supports new technologies
The energy transition is another area where finance solutions that treasurers can harness for their organisations accelerate the development of innovative new technologies.
In July 2020, Swedish start-up Northvolt raised $1.6bn in debt financing from a consortium of commercial banks, pension funds and public financial institutions to support its ambitions to create gigafactories – production plants that can produce lithium-ion batteries with a low-carbon footprint.[8]
Mark Weustink, ING’s Head of Sustainable Investments, says that the deal is an example of “risk-bearing capital [supporting corporates] during their scale-up, helping them accelerate and realise their sustainability ambitions”.
Batteries will help decarbonise the global economy by enabling the electrification of the automotive industry as it phases out internal combustion engines. In Europe, the lack of infrastructure to create batteries means that investment is urgently needed to produce them at scale – particularly when the market is forecasted to be worth €35bn by 2030, which is more than twice its size in 2020.[9]
But “there is no reason for battery performance to come at the cost of the environment,” according to Northvolt.[10] The company is working to develop two gigafactories in Sweden and Germany powered by clean, renewable energy. It has committed to ensuring half of what goes into its new battery cells in 2030 originates from old batteries.
For the types of projects and technologies mentioned here to succeed, banks and corporates need to collaborate. For treasurers, it is vital to have a good understanding of their organisation’s sustainability targets and the variety of sustainable finance tools that are now on offer.
