The world’s population is expected to reach 10 billion by 2050, and the energy demands of so many people will accelerate the climate crisis unless we take action to make our systems more sustainable. It is urgent: some projections estimate that energy demand will increase by nearly 50% by 2050.
âThe challenge here is this: Over the next three decades, the world’s population is expected to grow by around two billion people,â says Gido van Graas, global head of new energy technologies at ING. “This growth dramatically increases energy needs, but it should also come with net zero emissions.”
To meet this growing demand, governments, the financial sector and businesses will need to work together, from creating new low-carbon business models to supporting technologies, products and services that deliver vision. greener of the future.
The big pivot: business is changing
There are many incentives for businesses to look into these services and products. An ING study reveals that 57% of consumers are willing to pay a higher price for products made with respect for the environment. And EY finds that revenues from sustainable products are growing about six times faster than other products. This is partly why the number of companies committing to net zero emissions by the turn of the century has tripled in 2020.
Others who have not yet been encouraged to actively seek out new technologies or new business models in support of sustainable goals will need to adapt. A study published by ING in April found that only 32% of companies prioritize greening products and services, for example.
To manage the higher risk of financing companies that move into new business models or invest in untested technologies, banks will need to come up with their own innovative solutions. Their funding is necessary: ââmore than half (53%) of companies surveyed by ING cite reduced capital and operating expenditure budgets as a result of the Covid-19 pandemic, which leaves them with less pool of funds important to deal with big problems.
Banks also need to realize that traditional financing solutions such as senior loans are ill-suited to companies with less mature business models or taking a radically different path. This means that banks must be prepared to develop both financing solutions and appropriate services for projects unlike any other they have worked on before.
Sustainability through strategy
Businesses will not only need to consider new technologies, services and business models, they will also need to put in place a forward-looking sustainability strategy. Banks also have a role to play here.
According to Leonie Schreve, Global Head of Sustainable Finance at ING, this is where banks can really step in. They can provide more risk capital as an alternative to traditional finance, as well as advice on how to move to a financial structure and business model that supports clients’ sustainability goals. âThis is where we are currently focusing on being a partner for our customers,â she says. âIt becomes a strategic dialogue with our clients to help them identify investments and divestments in order to preserve their resilience in the economy of tomorrow and to remain relevant in the face of investors’ increased ESG appetite. “
Banks are increasingly using finance to support innovative green businesses and phase out carbon-intensive sectors in their portfolios. ING’s Terra approach, for example, makes it possible to “measure the impact of different sectors on the climate, and to set objectives for each sector of transition towards a low carbon future”, guiding the loan portfolio. ING towards zero net worth by 2050, in line with its commitment to the Net Zero Banking Alliance.
The strategic advice of the Terra approach, explains Schreve, can extend to supporting companies with complex regulations. The EU Green Deal, for example, which includes EU taxonomy. This regulatory framework obliges European companies to report the proportion of their income derived from sustainable products and services, as well as the investment and operating expenses involved.
For businesses, regulation is likely to trigger a wave of investments in products or processes that help them align with regulation. For lenders, regulation offers an opportunity to share practical advice on how to finance more sustainable capital spending, for example, or what acquisitions they can make to get greener assets. Playing this advisory role makes lenders a valuable business partner, not just a source of finance.
âFor us, this is a good opportunity to guide our clients through this complex regulatory environment,â said Schreve. “We can start a strategic discussion about what they will need to do to move to a sustainable economy.”
Working together to find new energy systems
For many organizations, 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, especially in sectors that are difficult to electrify, making it “a very important driver in the energy transition” according to van Graas. Since February 2021, 131 large-scale hydrogen projects have been announced worldwide, bringing the total to 359 projects, while investments in projects along the hydrogen value chain are estimated at $ 500 billion. until 2030, according to research.
But hydrogen remains expensive – especially when produced by wind or solar power as opposed to natural gas – which means that this greener mode is not yet competitive. To pave the way for a hydrogen economy, van Graas sees a role for banks like ING to have “very detailed conversations” with clients on how best to support them in scaling up projects of hydrogen which will require significant investments to become a reality.
âThe implementation of hydrogen in the coming decades will require billions of dollars of investment not only in production facilities, but also in transport and storage,â he said. âWe are very keen to support our customers in their energy transition here.
In the field: how finance helps invent new economic models
Society’s efforts to achieve net zero now go far beyond energy technology, and we need to look at innovation and business models more broadly. One of these models is the circular economy.
In May 2020, for example, the German chemicals giant BASF placed â¬ 2 billion in bonds on the capital market, with a tranche worth â¬ 1 billion dedicated to the first green bond of the company. Part of the proceeds is used to develop innovative technologies that support chemical recycling – a key part of a circular economy operation.
According to Joost van Dun, head of circular economy at ING Sustainable Finance, the push towards a circular economy model means new business concepts – ownership of a product remaining with the producer, for example. This pushes companies towards a ârental contractâ and gives producers an incentive to build sustainable products, giving them responsibility for the âuse phase and end of life phaseâ of products. In short, the longer a product is held “in the loop”, the more revenue it can generate.
There are benefits to this, but van Dun says it will require “financial innovation” from lenders.
“In this [circular] model, it is more about financing the access or use of the asset, âexplains van Dun. âThe collateral value of the asset is limited because it is used by a third party. We need to rely more on the contracts between the user and the provider and how it generates revenue streams. “
A number of cases are starting to emerge where banks have worked with businesses to ensure that sustainable finance, based on some level of financial engineering, supports the shift to a circular economy model.
The Netherlands-based start-up E-bike to Go (EB2G), for example, is working to improve the use of sustainable transport in a way that shifts from a model of ownership to access by offering a subscription service to businesses and consumers for electric bicycles.
In early 2021, it was acquired by its industry counterpart GreenMo as part of an agreement designed to improve access to sustainable transport for EB2G and pave the way for international expansion.
Since the business model is relatively new, financing it requires a different perspective: lenders are generally used to financing ‘possession’ rather than ‘use’, and there is a different risk profile to contend with as payment defaults, for example, are likely to occur periodically rather than in a single instance.
For lenders, this means taking a closer look at the cash flow generated by the subscription service and closely monitoring the length of subscription contracts taken out by customers.
In the field: how finance supports new technologies
Energy transition is another area where financial solutions are accelerating the development of new innovative technologies.
In July 2020, Swedish start-up Northvolt raised $ 1.6 billion in debt financing from a consortium of commercial banks, pension funds and public financial institutions to support it in its ambitions to create gigafactories – production plants capable of producing lithium-ion batteries with a low carbon footprint. The deal, according to Mark Weustink, head of sustainable investments at ING, is an example of “risk capital [supporting clients] as they scale up, helping them accelerate and achieve their sustainable ambitions. “
The batteries will help decarbonize the global economy by enabling the electrification of the automotive industry as it gradually eliminates internal combustion engines. In Europe, the lack of infrastructure to create batteries means there is an urgent need to invest to produce them on a large scale, especially when the market is expected to reach 35 billion euros by 2030, more than double of its size in 2020.
But “there is no reason for battery performance to come at the expense of the environment,” says Northvolt. The company is therefore working on the development of two giga-factories in Sweden and Germany powered by clean, renewable energy, and it is committed to ensuring that half of what goes into its new battery cells by 2030 comes from old batteries.
In order to successfully complete projects and technologies like these, it is important that lenders work with businesses. As the population grows and that population grows more concerned with sustainability, they cannot afford not to.