ING’s Terra approach
Climate change is an enormous threat to our world, there’s no doubt about that. In the Paris Climate Agreement, governments committed to take action to remain well below a two-degree rise in global temperatures compared to pre-industrial levels. Now, everyone has a role to play to make that happen.
As a bank, ING makes the most impact through our financing, via the money we loan to companies and customers. We have a loan book of about €600 billion across many sectors, which we have begun steering towards meeting the Paris Agreement’s two-degree goal. We call our strategy to get there the Terra approach.
How does ING’s Terra approach work?
ING is focusing on the 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 will measure and benchmark whether our lending in each sector is adding up to contribute to climate resilience. We’re able to do this because we’re co-creating an innovative, accurate way to measure the climate impact of our portfolio. Per sector, we use the most appropriate methodology available, acknowledging that there are more ways to Paris and in the end it’s the impact that counts.
What kind of methodology does ING use?
While ING’s Terra approach will make 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 (2˚ii), a global think tank developing climate metrics in financial markets. It’s called the PACTA methodology for corporate lending. It looks at the technology shift that’s needed across certain sectors to slow global warming and then measures this against the actual technology clients are using – or plan on using in the future.
How does the PACTA methodology work?
Detailed technology roadmaps for each sector are being developed by independent organisations like the International Energy Agency. These are used as benchmarks. An IT tool compares the data from the sector roadmaps to data on the technology our clients are using today and planning on using in the future.
This client data comes from global databases that track public and private companies of various sizes around the world. This makes it easy for clients, as they aren’t required to provide any data themselves.
In the automotive sector, for example, we measure the current mix of our clients’ production of internal combustion engine vehicles compared to zero-emission vehicles and how clients plan to shift this balance over time. We can then compare this with what science-based transition pathways prescribe for the automotive sector in order to reach the below-two-degree goal. The analysis doesn’t only tell us what needs to shift, but also how much and by when. This is where financing comes in – and ING can have an impact.
Why is this methodology so important?
We feel it can change the way banks think about climate impact measurement. Compared to other measurement approaches, this one is precise, tailored to each sector’s needs, forward-looking, and will ultimately have a bigger impact because it steers key sectors towards technologies that underpin a low-carbon future rather than only measure a carbon-rich past.
Where ING’s portfolio stand according to climate alignment measurement?
In September 2019, we released our first Terra progress report. With that we disclosed our Climate Alignment Dashboard, which shows ING’s pathway towards climate alignment in each sector. The dashboard shows each sector’s carbon intensity and whether it is a) outperforming or on track with the relevant climate scenario, b) not on track with the climate scenario but outperforming the market, or c) performing below the market or two-degree pathway identified. For example, our power generation portfolio is outperforming both the market and the two-degree pathway, while we expect our automotive portfolio to outperform the market in the short term.
What are some of the highlights of the progress report?
The first five sectors have been analysed:
- Commercial real estate: on track for climate alignment with our portfolio in the Netherlands. Aim to achieve the Paris Agreement objectives by 2040, 10 years ahead of schedule.
- Residential mortgages: not yet on track, but we’ve set an ambition for net energy positive mortgage portfolio by 2050.
- Power generation: outperforming the market and the two-degree pathway.
- Automotive: not yet on track, but aiming for the portfolio to outperform the market in the short term.
- Cement: on track for climate alignment.
These four are a work in progress:
- Shipping: not included in the Paris Agreement, but the industry set an ambition to reduce CO2 emissions by 50% in 2050 (compared to 2008). To support this ambition, ING has joined the Poseidon Principles.
- Aviation: also not included in the Paris Agreement, but we’re aiming to increase our aircraft finance portfolio to 50% ‘outperforming aircraft’ in terms of fuel efficiency by 2023 (compared to 33% in 2018).
- Fossil fuels: collaborating with think tanks, NGOs and peers on methodology for portfolio alignment with the aim to publish results in 2020.
- Steel: working with partners and peers on a sector measurement so we can benchmark our portfolio and steer it towards the two-degree goal with the aim to publish our results in 2020.
What are the next steps?
We now know where we are and where we should be heading. We’ve set targets and timelines where we can, and we’ve started steering by engaging with our clients and making choices in financing. This milestone marks a new phase in our journey. We’re not there yet. But we’ve definitely moved beyond commitments and are living up to our promise to take action and transparently deliver results. We will continue to monitor and report on our progress.
We’ll continue speaking with other banks and stakeholders, building partnerships and coalitions that are bigger than just us. 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 two degree goal of the Paris Climate Agreement and work together to further refine the metrics and tools needed to do this.
What else do we do on climate?
There are many ways we are working to combat climate change. For example, our commitment to reduce our coal exposure to close to zero by 2025, and the way our sustainability improvement loan rewards companies for their sustainability performance.
We’ve financed billions of euros of wind farms, solar energy, and geothermal power production. In fact, we aim to double our Climate Finance portfolio by 2022 compared to 2017. Read more on our approach to climate action.
What is the 2˚ Investing Initiative and why is ING working with them?
The 2˚Investing Initiative is the leading global think tank on developing climate and long-term risk metrics and related policy options in financial markets. 2°ii coordinates the world’s largest research projects on climate metrics in financial markets, with over 40 research partners in the public, private and philanthropic sector, and over millions re-granted to research partners to date. It’s backed by bodies including the European Commission and various European governments, and supported by academics, expert groups and civil society.
Want to get involved?
Contact us at email@example.com