Steering the portfolio for a positive impact on climate: Interview with Anne-Sophie Castelnau, ING’s Global Head of Sustainability

By Gaia Lamperti

With COP26 kicking off this week, many financial institutions are seeing the UN conference as an opportunity to reflect on their climate conduct and develop strategies to enhance their ESG agenda. Leading the way in steering the portfolio towards the net-zero commitment is ING Group. The Dutch bank is making its most positive impact on climate action through financing, while also setting ambitious targets and tracking its progress annually.

Following the release of the bank’s first-ever Integrated Climate Report, which was published last month, IBS Intelligence interviewed Anne-Sophie Castelnau, ING’s Global Head of Sustainability, who described the measures taken by the company to ensure that its loan book contributes to limiting the rise in global emissions and explained ING’s approach to reaching net-zero emissions by 2050.

What are the intent and methodology behind ING’s first Integrated Climate Report?

As a bank, ING makes the most positive impact on climate action through our financing, via the money we loan to companies and customers. We’re steering hundreds of billions of euros towards meeting net-zero emissions by 2050, focusing on the nine sectors in our loan book that are responsible for most greenhouse gas emissions: power generation, fossil fuels, automotive, shipping, aviation, steel, cement, residential mortgages and commercial real estate. We call this the Terra approach.

We report the progress we’ve made on an annual basis since 2019, and we released our first Integrated Climate Report in September 2021. In our integrated climate approach, we lay out our objectives under both of these priorities, climate risk and climate alignment, and demonstrate how they work together and overlap.

Which were some of the main findings of this year’s report? How are you planning to act on them?

Of the nine sectors, five (power generation, automotive, residential real estate, shipping and fossil fuel) are on track with existing climate-alignment pathways. Another three sectors (steel, cement, commercial real estate) are within 5% of their scenario and we’re confident we can bring these into alignment in the years to come. Finally, aviation comes out well above the pathway due to the extraordinary impact that Covid-19 had on the sector in 2020. Over the next period, we’ll work on the steps and intermediate targets that are needed to get us on the more ambitious net-zero pathway. We aim to do this for all sectors in scope for Terra by the end of 2022.

Climate risk is becoming more and more important as climate change could have an impact on our clients and the assets we finance. As the climate crisis worsens, extreme weather patterns and the associated impacts on society create a range of physical and transition risks that we need to address. ING is working to embed the management of these climate risks into our overall risk management approach and our business practices.

And what are some of the technologies ING leverages to assess climate risk, as well as to measure its footprint and monitor its climate achievements? 

While ING’s Terra approach makes use of various methodologies, there is one that applies to most of the sectors in scope. This is the methodology ING co-created with the 2˚ Investing Initiative (2DII), a global think tank developing climate metrics in financial markets. It’s called PACTA for Banks. It looks at the technology shift that’s needed across certain sectors to slow global warming and measures this against the actual technology clients are using, or plan on using in the future.

In addition, we provide an overview of financed emissions. Because, while we believe that the best way for banks to have a positive impact on the climate is by steering portfolios, using emission intensity targets rather than absolute emissions targets, we also believe that keeping track of and transparently disclosing the amount of financed absolute emissions is an important step towards climate action. Such conviction is also reflected in our commitments with the Net Zero Banking Alliance and the Task Force on Climate-related Financial Disclosures reporting guidelines to disclose greenhouse gas emission figures and align with the expectations of stakeholders such as governments and regulators.

As part of our integrated approach to climate action, we’re also working to be more resilient to climate risks, which includes both physical and transition risks. We’re identifying and assessing these risks; using future scenarios and scenario-based stress testing to better understand the impact these risks could have on our books. We will manage the risks associated with climate change as an integral part of our risk management framework, including credit, market, liquidity and operational risks. Our approach continues to develop as methodologies advance and regulatory guidance and requirements evolve.

Let’s expand on the Terra Approach: When did the program start?  What are its measurable results and impact so far? 

In 2018, we announced our commitment to steer our lending portfolio in line with the goals of the Paris Agreement, we call this our Terra approach. Terra is an inclusive, science-based, forward-looking and engagement-driven approach. With Terra, we focus on the nine sectors in our loan book that are generating the most climate impact. Per sector, we use the most appropriate methodology available, acknowledging that there are more ways to Paris and that in the end, it’s the impact that counts.

But it became clear that more ambitious targets were needed, so we sharpened our goal and committed in August 2021 to steer our portfolio in line with keeping the rise in global temperatures to 1.5 degrees Celsius rather than well-below two degrees, to achieve net-zero by 2050 rather than 2070.

As a bank, we are a participant in the real economy and believe in dialogue and transition over exclusion. That’s why we choose to be part of the solution by providing transition finance for best-in-class assets and by developing industry-guiding standards. And for some sectors, we see a decrease necessary. For instance, we aim to decrease funding to upstream oil & gas by 12% by 2025, which is a new, intermediate target that can help us steer and be held accountable.

How is ING collaborating with other key stakeholders to reach net-zero? Why are these kinds of collaborations crucial for all financial institutions at large? 

We believe all banks would benefit from having an industry-wide standard, increasing transparency and therefore our collective effectiveness in fighting climate change. For this reason, ING was joined in December 2018 by the global banks BBVA, BNP Paribas, Société Générale and Standard Chartered in signing the Katowice Commitment – a pledge to steer our portfolios toward the well-below the two-degree goal of the Paris Climate Agreement and work together to further refine the metrics and tools needed to do this. In September 2019, the Katowice Commitment formed the groundwork for the UN-backed Collective Commitment to Climate Action, signed by ING and more than 30 other banks that together represent $13 trillion in loans. PACTA for Banks, the open-source methodology we co-created with 2DII, was released in September 2020. Then ING and the four other Katowice banks published our blueprint for how we will put the tool into practice. In August 2021, ING joined the Net-Zero Banking Alliance and committed to steering our portfolio towards net-zero greenhouse gas emissions by 2050.

In May 2021, ING and five other banks have formed a working group to take action on climate in the steel sector. These banks, all leading lenders to the steel industry, will define common standards for measuring progress on climate targets, proactively supporting the sector’s decarbonisation by working together with the industry and experts. ING is leading this working group. We’re working to draft a climate-aligned finance agreement for the sector, including the scope, emissions pathways, methodologies, and governance structure. The goal is to set global best practices on climate for financial institutions that facilitate steelmaking. The working group’s ambition is to define a pathway to 2050 to achieve net-zero steelmaking.

The agreement will be modelled after the Poseidon Principles, the first sector-specific climate-aligned finance agreement for maritime shipping. The Poseidon Principles were launched in July 2019 with 11 banking signatories representing $100 billion — or 20% — of senior shipping debt and have since more than doubled to 24 signatories representing $175 billion as of March 2021. Developed through an unprecedented multi-stakeholder collaboration between major shipping lenders, industrial corporates, and experts, the Poseidon Principles set the stage for a similar framework in other sectors, such as steel.

How does ING see the ‘green economy’ opportunity? What is the roadmap to get there?

There is no more doubt about the ‘why’ of climate action. It is clearer than ever that extreme weather events, unprecedented biodiversity loss and persistent inequality have put the world in a state of emergency. We recognise that climate action is a business and economic imperative and that there are both risks, and opportunities involved in the energy transition.

The real issue is what the world will do about it, how and by when. Obviously, a complex dilemma with many varying opinions about where change should come from. Does consumer behaviour have to drive demand and make companies change their business models? Do governments need to set legislation and regulations to force change? Do companies need to motivate consumers to choose more sustainable options? The answer to all these questions is “yes”.

Everyone has to play a part in fighting climate change and reaching a net-zero emissions world. We’ve always believed in an inclusive approach to fighting climate change – working with our clients to support their transition. Working together with peers in an international platform like Net Zero Banking Alliance will help shape global standard-setting and faster learning curves by exchanging insights and learnings.

At the same time, regulators and governments have a role to play in supporting and facilitating the road to a net-zero-emission world wherever they can. We call upon them. We need stronger, bolder regulations that require and support the necessary changes – it takes three to tango when it comes to climate action. It has to be a united global effort.