Does sustainable investment stack up?
By 2023 ING is aiming to only have ‘green’ commercial office buildings in its portfolio. We talk to ING’s head of sustainable finance in Asia, Herry Cho, on why responsible investment is no fad.
Cho (pictured) leads sustainable finance transactions in the Asia Pacific for ING Bank, and will be exploring the topic of “ethical investment beyond the boardroom” at Green Cities in Melbourne from 13-15 March.
Runaway climate change is a systemic risk for both the banks and the buildings they finance, she says.
“Stranded assets are no longer fantasies. They are very, very real.”
Cho points to the waning market demand for coal, which fell by 1.9 per cent last year according to the International Energy Agency Coal 2017 report, as “countries continue to develop business plans to meet their Paris climate agreement obligations, and as they review and change their energy mix”.
“Never has there been a time when unsubsidised renewable energy is increasingly competitive versus fossil fuels in some markets, both in terms of cost and demand – and the same principle applies to real estate.”
In 2017, ING was recognised by Corporate Knights as the world’s fifth most environmentally-responsible corporation, and Cho says the bank takes sustainability “very seriously”.
“From ING’s perspective, putting our money towards sustainable, ‘green’ buildings has been successful – not only because we want to do the right thing but because it’s a good business strategy.”
In the Netherlands, where ING is headquartered, the bank ceased new financing of office buildings that do not meet ‘green’ energy label requirements from 2018. This move is in line with Dutch legislation which requires all office buildings to have an energy label by 2023.
“In Australia, we are increasingly focused on buildings with NABERS ratings of 4.5 stars and upwards,” Cho explains.
“If companies want to invest in buildings with lower star ratings, they must show their sustainability strategies and how they plan to improve their asset, and then we will support them on the journey.”
ING has a dedicated real estate finance team on the ground in Sydney which is focused on financing sustainable commercial real estate. Wouter Mijnen, Head of ING Real Estate Finance Australia, says the “main part of the office buildings we financed during 2017 in Australia were sustainable, with NABERS ratings between 4.5 and 5.5 stars”.
Cho, who is also the chairperson of the Sustainable Finance Collective Asia and the sustainability lead for International Capital Markets Association’s Asia Pacific regional committee, says this approach is one that is increasingly being adopted by other banks and lenders. Institutional investors have been moving in this direction for some time, she adds.
The Responsible Investment Benchmark Report 2017, for instance, found that 46 per cent, or almost half, of Australia’s assets under management – around A$622 billion – are invested through a responsible investment strategy of some sort. This represents a four-fold increase in just three years.
Cho’s colleague, ING’s Asia Pacific head of real estate finance, Robert Scholten, says a virtuous circle is at work which has accelerated the number of ‘green’ buildings.
“Our clients – private equity firms, sovereign wealth funds, institutional investors – are complying with the same green strategies as us.
“Our clients are in sync. And tenants are increasingly looking for sustainable space. Governments are also implementing new legislation in this area.”
For example, from April 2018, a new legal standard for minimum energy efficiency will apply to rented commercial buildings in the UK, which will prevent landlords from renewing existing tenancies or granting new ones if their building does not meet certain energy performance criteria.
Lenders are increasingly influenced by corporate sustainability rankings, too, such as MSCI ESG Ratings, Sustainalytics, the Dow Jones Sustainability Index and GRESB, of which Australia has topped the table for seven years straight.
Sustainability is now as intimately connected with financial reward as it is with reputation and brand equity.
Cho points to a recent transaction in Asia with an agribusiness, which involved setting key performance indicators around sustainability metrics. “We agreed with the client ‘if you can meet these stretch KPIs, then we will reward you by tying your sustainability performance to the loan pricing,’,” she explains.
“We can hopefully expect to see this in the real estate sector in the Asia Pacific in 2018.”
ING also created tools to help people better understand and analyse the investment potential of assets. One of these tools is the ING REF Sustainable App which supports clients with the transition to a sustainable portfolio. It shows the improvements needed to make it a ‘green’ building, the investment required, the payback periods and the energy label that would be awarded after various sustainability measures had been implemented.
While the app is currently only available in the Netherlands, the bank is currently exploring how this app can be rolled out around the world, including in Australia.
“We want to be a leader for financial institutions, and to work with companies that think the same way as us.
“Whether we like it or not, sustainable development is coming. The question is do you want to be waiting on the sidelines, or do you want to be an active leader?” Cho concludes.