Transcript | Sustainable Finance
With the dominance of ESG as a key agenda item in the boardroom and C-suite, it’s no surprise that one especially noteworthy topic is sustainable finance – ensuring that investments in products and services are aligned with ESG and sustainability standards. This certainly is a key area of focus in financial services.
In this podcast, Protiviti’s Paul Middleton interviews Ana Carolina Oliveira, Head of Sustainable Finance in the Americas for ING. In their conversation, Ana Carolina and Paul discuss the world of sustainable finance, from current market interest to pervasive challenges and key learnings and takeaways for board members.
Ana Carolina started her career with ING in 2008 as client and policy advisor on Environmental and Social Risk and Sustainability. After working in credit risk and with ING’s healthcare clients, she was appointed to lead the America’s Sustainable Finance group in April 2020, where she is responsible for pitching and structuring sustainable finance products to support clients as they transition to more sustainable businesses. She is also responsible for steering the Americas portfolio in line with the goals of the Paris Climate Agreement, through helping clients set climate targets and supporting their transition to low-carbon operations.
Paul is a Managing Director with Protiviti. He leads the firm’s capital markets business in London.
To learn more, visit Protiviti.com/ESG.
To contact Ana Carolina Oliveira, visit https://gfcmediagroup.com/contributors/ana-carolina-oliveira.
Contact Paul at [email protected].
This is Kevin Donahue, a senior director with Protiviti, welcoming you to a new edition of Board Perspectives. In our latest episode, Protiviti Managing Director Paul Middleton has a highly enlightening and informative conversation with Ana Carolina Oliveira, head of sustainable finance in the Americas for ING. As part of her role, Ana Carolina is responsible for pitching and structuring sustainable-finance products to support clients as they transition to more sustainable businesses. In their conversation, Ana Carolina and Paul discuss the world of sustainable finance, from current market interests to pervasive challenges and key learnings and takeaways for board members.
Hello, and thank you for joining us today for the latest in our Protiviti Board Perspectives podcast series. My name is Paul Middleton, and I’m a managing director in our Protiviti U.K. business, where I lead our U.K. financial services practice as well as our U.K. ESG practice. In today’s podcast, we’ll be focused on the topic of ESG — environmental, social and governance — the thing that is increasingly important to so many of our clients and especially our financial services clients. I’m delighted to be joined by Ana Carolina Oliveira, who is ING’s head of sustainable finance in the Americas, for our podcast today.
Ana Carolina started her career with ING back in 2008 as client and policy adviser on environmental and social risk and sustainability. After working in credit risk and with ING’s healthcare clients, Ana Carolina was appointed to lead ING’s Americas Sustainable Finance group in April 2020, where she’s responsible for pitching and structuring sustainable finance products to support clients as they transition to more sustainable businesses, tying sustainability metrics to financial instruments and ensuring that the goals of the Paris Climate Agreement are met.
Ana Carolina, thank you so much for joining us today, and let me start by asking you to tell us about why sustainable finance is so important both to you and to ING’s strategy.
Ana Carolina Oliveira:
Thank you, Paul. It’s a pleasure to be here, having this conversation. Sustainability is definitely something that’s very close to my heart. I’m from Brazil, which happens to host the lungs of the world with the Amazon, and environmental considerations have been always part of my upbringing and my life, and I was very fortunate to join an organization that thinks in very similar terms when it comes to sustainability broadly.
I used to joke that for Dutch people, acknowledging that with climate change and sea level rising, it’s going to be one of the first places in the planet to probably be submerged. It’s no joke for them when they talk about sustainability. It’s something that speaks to also who they are as a society, as an identity. With sustainable finance, it’s almost the perfect match when it comes to doing good, but having also a meaningful impact and being able to use the balance sheet of large financial institutions and the advisory capabilities to steer toward sustainability. It’s very dear to me because of the impact and the ability to do positive change, and at ING, we hope we can make a contribution there.
Thank you. From ING’s strategy perspective, it is essential to ING’s strategy as a whole in terms of driving for that sustainability agenda?
Ana Carolina Oliveira:
Absolutely. We try to explain our strategy — we managed to have it in one slide with our latest investor meeting, and it’s basically three pillars: The first one is to be client-centric and keep attention to what the needs of our clients are. The second is sector expertise and being able to bring that industry knowledge to our products and solutions. The third, and maybe underlying everything, is sustainability. That’s very telling to show that we bring that very close to our businesses. We make that as part of our business proposition to a point that maybe somewhere in the future, I no longer will have a job because all my colleagues will be able to discuss sustainable finance solutions with all their clients just for the mere fact this is part of who we are as a bank.
Your clients are obviously central to everything that you do. What have you learned from the process of establishing and setting up sustainable-finance products for your clients?
Ana Carolina Oliveira:
Many things! As you might know, ING has been doing this for quite a while. We established the first sustainable-finance team fully dedicated to this topic back in 2012, when there were not many out there. There has been a big evolution, and one of the greatest things, sitting in this business for a while, is to see the change. It’s something that is a journey, and although many times the end goals are similar, the starting points of the clients will be very different. As much as we continue to support green and sustainable clients — for example, our renewable-energy portfolio is about 60% of our lending book, and we are even putting higher targets there to increase that number by 50% by 2025 — by all means, we need to continue working with sustainability champions.
One thing you’ll definitely learn is that everybody needs to play a part in this. As a society, we’re hoping to achieve the U.N.’s sustainable-development goals or the climate-change agenda. Everyone has a lot to do there, so for us, one thing that’s definitely super important is to find ways to work with every single sector and customer type, and identify what is meaningful for them when it comes to sustainability. The very important rule is that there has to be an incremental improvement, so you should always be striving to do better and to do more when it comes to sustainability, but the ways you’re going to translate that will be very different, client to client. That’s very challenging, but it’s also a huge and interesting opportunity to have a very strong impact to our portfolio.
That growing imperative that you talked to, we see across all geographies. Do you see that during the pandemic, and with the post-pandemic, that your clients’ approach to the E, the S and the G has changed? Has it evolved over this time?
Ana Carolina Oliveira:
Absolutely. I’m always a bit careful before saying there is a silver lining to a pandemic because, yes, it’s tragic in many ways, but I do think there is one here very strongly for sustainability: We can definitely point out there is a before and after COVID-19 when it comes to sustainable-finance issuances, and there you would see in the numbers from the likes of Bloomberg and related where you show all the volumes of green bonds, green loans, sustainability-linked loans — all that spectrum has exponentially grown and exploded in a good way since, so one big change is, it became much more mainstream.
In my older days, when I was more on the risk side, people would not necessarily be very keen to talk to me about ESG, and now it’s definitely the opposite. We almost cannot keep up with demand, and there’s much more productivity coming from clients with regard to sustainability, so one is definitely how the demand and the reaction is much more proactive. Interestingly — and that’s a parallel you can make between geographies — as you know, Europe is leading the pack, has always been. It started this market in terms of green bonds and green loans, and you have the regulator playing a very important role in pushing especially the environmental agenda with EU taxonomy and all the disclosure requirements.
What interestingly happened in the Americas with COVID-19 was the macroeconomic and the social background, what was happening in the country then. If you think 2020 with the elections, whole Black Lives Matter movement, and discussions about race and equality, equity, the social, the S of the triad, has become much higher and almost at par with environmental in the Americas. Not quite. Still, climate is very much dominating the headlines, but there has been a huge improvement or attention put to social topics, and I perceive that to be stronger in the Americas, after COVID-19, given everything that happened, than in Europe. That’s a positive development, for sure.
We would absolutely agree with that. I see from a U.K. and European perspective, the S has grown an importance over the pandemic and post-pandemic period, and the importance of people’s authenticity in their response to that as well is under so much more scrutiny, and rightly so. As we now move into this period we have, how are your clients’ boards approaching ESG and sustainable-finance products?
Ana Carolina Oliveira:
There’s an interesting parallel there: In the early days — and in the Americas, that may be three years ago; in Europe, it’s more like five, six years ago — the conversation was about making the business case for why someone should entertain sustainability strategy or sustainable finance. Fast-forward three years to five years, the conversation totally shifted, and now it’s much more about how you’re going to do it, and the discussion becomes how we’re going to choose the right instrument, the right structure that apparently demonstrates your ambition as a company.
One thing that’s very critical before considering sustainable finance is making sure you have a credible sustainability strategy or vision, so you have an aspiration what you want to be when it comes to sustainability. That means selecting the topics or issues that are more material and saying “I want to be the leader” or “I want to have a target that compares me to some of the best performers.” You have to have that ability to say, “This is what I want to be” and have the commitment to come back with the target to demonstrate how you are progressing.
That’s now how I talk to the clients and the senior managers in those clients — how they’re going to position themselves first of to make sure there’s no questioning about their integrity when it comes to this market. That’s an extremely important topic. No one wants to be caught doing disingenuous commitments or anything of that matter. And second, everybody wants to be perceived as one of the leaders in their space, either in their sectors or in their geographies, and the conversation is about how they’re going to do that. That was a 180-degree shift from a few years back, and, yes, words have a huge responsibility to make that happen. Before, maybe it was a conversation from the equity shareholders, and now every single stakeholder will have a question from the employees all the way to consumers about how they’re going to do that.
Well, that’s great to hear, and the points you made around having the underlying strategy in place and ambition in place, that’s almost table stakes now. From that point on, your integrity and, as you said, authenticity is under such focus — that all resonates with so many. From your position, then, when you’re looking and you’re talking to your clients around the products they should consider from a sustainable-finance perspective, what are your clients’ expectations around the performance of those products, the longevity, the risks of those products? How does that compare to some of the previous other products they may have been buying five or 10 years ago? How are their expectations shifted?
Ana Carolina Oliveira:
One thing I like to mention is that while everybody has a role to play when it comes to sustainability progress or advancement, that doesn’t mean that everybody today is suitable to sustainable finance. One question we always have to ask ourselves is whether you, as a company, or the companies, by doing their business, they are not doing any harm or creating any environmental impacts. That’s a hygiene factor, more from the risk side. It still has to be checked very seriously to make sure, again, everybody has an opportunity to improve, but you cannot start by harming the environment when you’re trying to do so. That’s definitely an expectation that’s still there, and I don’t see that going away.
What has been evolving is that, for example, for a first-time issuer, in terms of selecting the targets or the products or the goals they will be pursuing, it would be OK to start with the ones you have more control over. We call those operational targets — think about the emissions to power your own headquarters or the electricity you are purchasing and things like that. The first wave of sustainable finance is structures that are all about tackling the topics that are most within the control of the operational ones. As these continue to evolve, not only are targets becoming tougher because there are more data out there to compare if your target is as good as the next-door person, but there’s also an expectation that you don’t stop what is in your control, but you push that also toward your value chain.
When I say that, think of the suppliers from both ways — from the ones you buy raw materials from all the way to your consumers using your products. How you, as a corporation, can have an influence to improve by making your products more sustainable, you’re helping your customers to be more sustainable, or by making the criteria to accept suppliers also higher on the sustainability forefront, you are making them more sustainable by design. There is that shift that you need to do more and better, broader, as you grow in this process.
That makes a lot of sense. We are in a world now where we have rising interest rates, inflation, possible recession. Do your clients see these types of economic factors impacting their appetite and their view of the future of sustainable products, or are they compatible? Are sustainable products compatible with these economic forces?
Ana Carolina Oliveira:
What is very interesting here, Paul, is that of course, I talk mostly with treasury teams, so think of CFO, treasurers, and their language is all about, “Show me how I can look good to my managers and provide the solution that’s more cost-efficient.” There’s always that underlying thought, and on that front, there is still a huge supply-demand imbalance in the market. If you see big investors, BlackRocks, of this world, and pension funds, saying, “The next percentage of my portfolio has to be used for bringing sustainable causes or investments,” this number is not going away, and it’s just getting bigger, so the offer of green or sustainable debts is still far from that. There is supply-demand imbalance there that keeps favoring on economic terms how sustainable finance is perceived.
To give an example, a bond hits the screen. It’s a company that’s very credible. They have a traditional bond and a green bond, so the credit’s the same. There will be most likely more demand for the green leg because of this dynamic I explained, and, given more demand, you have a tendency to be oversubscribed on the green tranche, and the higher oversubscription will allow you potentially to have tighter pricing. It’s not by design. I’m not telling you, “A green bond is always going to be priced tighter and be cheaper,” but it just so happens that market dynamics lead to that, so that first concern of the treasurers is this more economic solution — it tends to be. Again, it’s not by design, but it still happens to be the case.
A more interesting way to look at this is that these investors, because they have these underlying commitments, they tend to be more loyal. In a market like the one we are facing today, with a lot of volatility and rising interest rates, there’s a bigger reason for them to be there — not only because the credit was good and they had the sustainability targets, but also because they have these interest that helps them also to reach their demands.
What we noticed in some volatility moments or shocks is, when you see a lot of sell-off and things like that, we consistently see that for the green or social pockets, there is more loyalty and they take longer before selling a green paper than a traditional one because it helps them check more boxes.
A third point in this, there is also positioning. Besides all the financial and economic discussion, sustainable finance makes you be more transparent and accountable. By issuing a sustainable-finance instrument, you are volunteering to provide the market with more data or more granularity than you would if you were not. People recognize that you are making that step, that you’re literally putting your money where your mouth is and saying, “If I miss my targets, I will pay a penalty,” and even from all these benefits, to me, that’s the biggest one. The way you engage your stakeholders, the level of engagement, definitely goes up.
That’s powerful to hear. You must still have challenges. When you walk into your clients, I’m intrigued, what are the typical hurdles you see? What are the typical challenges you have from your clients? Why might they be reluctant to embrace sustainable products?
Ana Carolina Oliveira:
There’s still some hesitation as I mentioned. It’s very important that people feel comfortable not to be sending the wrong signal that they’re being disingenuous, and there’s always the concern “How am I going to be perceived by doing that?” The reputation risk is still, not a hurdle, but a very important consideration. You need to feel that your disclosures and your vision are in sync with what’s expected from you from your industry and from your stakeholders, but there’s no question about the business case anymore, so it depends if the stakeholders are more sensitive to the carrot or the stick. The stick is there as an increasing pressure. Regulators expect you to disclose more — your consumers, your employees, too, so there is the peer pressure, and that’s starting to impact your access to capital.
You see some sectors — maybe a co–power project finance these days will not find as many banks willing to finance that. There are very few that will be able to do that, so it starts also to have an impact on your access to capital. But being an optimist, looking at the carrot side of things, there is a stronger economic case with the supply-demand things I was mentioning, and being more economical, but the underlying reason is sustainable companies, the way we see it is that they are better credit.
Companies that are managed more sustainably, they tend to be more efficient. They are paying more attention to diversity to their workforce, and eventually, they will be stronger companies and better credits. If you go by that, they dictate lower risk and lower cost of capital, so there you have it: It’s coming full circle. Being more sustainable actually is better business, and in terms of hurdles, there is some work to be done to issue sustainable finance, but that is an expectation anyway, so the question I always have in return is, why wait? You will be expected to do this anyway, so why not start right now?
You summed it up very well. For those listening who have reluctant stakeholders who may not be embracing sustainable finance, as you said, being sustainable is better business all around. That will resonate. One of the challenges with sustainable products and with ESG more broadly could often be around data and capturing, gathering, data related to the performance of sustainable-linked products. Do you see that as a challenge either from an ING perspective or from your clients’ perspective?
Ana Carolina Oliveira:
ESG data is a challenge in itself irrespective to being associated with the sustainable-linked markets or not, just for the mere fact of the alphabet soup of disclosure requirements and all, so, linking to my harmonization wish, there will be a market where we could use the same standards and compare apples to apples. ESG data is a challenge in itself.
Having said that, there is some tension. You hear some opinions in the market that, especially when it comes to the sustainability-linked-loan market levels, transparency is not as high as you would see in the bond market, because banks might have access to information that are not public yet. That’s indeed the case, but there is increasing effort to bring the two markets aligned, meaning, the product should be a second thought. If a company decides to entertain sustainability-linked structure, if there is a bond or a loan, the process would be the same, so whatever data is being gathered for the public markets would also be available to the private markets. That would be a positive development. It still not quite there, but we are moving in that direction.
Having said that, there is a special challenge for privately owned companies. They don’t have as many people, teams, resources or as much time to make all that data available. They might have it privately, but they don’t make that public, and for that, it will continue to be difficult. The good news there is, you see more and more ESG ratings specializing in privately owned companies and coming with solutions that are more palatable. By having an ESG rating, you start by having more data to be able to disclose and to talk to your stakeholders about, so it’s still a work in progress. I do see more harmonization coming between the bond in the long market and with more options to privately owned, where the biggest challenge is. Things should be going to a better shape.
Would you have any practical recommendations for your clients who are struggling in that? What’s in their control that they can do to improve their ESG data, make a tangible step forward?
Ana Carolina Oliveira:
First, start collecting the data if you have not started yet. Having historical data is extremely beneficial. When you have any discussions, sustainable finance is almost a must. You need to show and to understand how you are performing to be able to set a goal that’s more ambitious than you were doing before. Start collecting the data if you are not doing so, and do look at some of the disclosures, the taxonomies, that are more standard. You have a number of them, but looking at things like the CDP, the GRI, the SASB, having that as guiding your disclosure is helpful, and hopefully, we’re getting to a point where there will be market harmonization. Not quite there, but do make use of them.
Third, start disclosing performance, because even if you don’t have a long-term target yet, by looking every year how you are progressing, you make your story credible to the time when and to the point where you can set a target. Collect the data, create a database, use that to set your targets and disclose your performance as you go.
Let’s tell some success stories. Let’s inspire those listening to us. Can you give us some examples of some sustainable-finance stories that have been successes for your clients?
Ana Carolina Oliveira:
Yes — my favorite part. There are a lot. I’ll give you three just to illustrate different scenarios. The first one is of a company called Aligned Data Centers. They are a data center based in Texas, and we had a chance to work with them to structure the very first sustainability-linked loan ever done for data centers globally.
Data centers, until some years ago, would not come up first in the list of the most sustainable industries given the quite energy-intensive profile of the business. The company decided to bite the bullet and say, “I am very serious about my commitments and I want to show the financial industry I mean what I say.” They structured the first sustainability-linked loan, and what I like about that is not because it was the first — it became an industry standard. Soon after, many of their competitors, realizing what was done, they came back to us and said, “Wait a minute. We understood you did this for Aligned. We have similar goals. Can we do the same?” After that, we have structured similar deals for other data centers: Flexential is one. We just did one for a company called Compass, which has very interesting KPIs going also toward social. It’s a matter of having the first, and that becomes the race for an industry, which is quite nice.
The second one is a company called Cemex. It’s a large cement company based out of Mexico. They are very traditional and a repeat issuer in green, a very experienced green issuer. Interestingly there, every time they go with a new one, they try to set the bar higher, so we worked with them in the sustainability-linked loan for their corporate facilities last year, and they set three KPIs around climate action, given cement being a hard-to-abate sector. Decarbonization is the most critical topic for them, and it was a very comprehensive framework. We received a second-party opinion, which is when someone else other than the company or the bank says this is credible, but there is a rubber-stamping and saying this is indeed the case. They were awarded the sustainability-linked loan of the year by Environmental Finance.
The last one is to introduce a bit of the social. It’s the sustainable bond we have done for FedEx, and there, you have the introduction of increasing the diversity and the market access for minorities and women, small business, and using that money to support the development of those goals. Again, it’s very refreshing to see social coming, and the debate has been about clean transportation and all that. I will stop here. There are many, many more examples.
That’s wonderful to hear, and those are inspiring stories across such a diverse client base as well. Congratulations to you and your team on that, because that’s fantastic to hear. One of the conversations we so often have with our clients and their partners is about driving a bold ESG agenda, and there are a number of hurdles in doing that, but also so much potential and ambition. If you were to have that magic wand, if you were to be able to make a change to be able to drive the ambition you talked to and the potential and how sustainable business is better business, what one thing would you look to change to open the market and be able to drive that type of ambition?
Ana Carolina Oliveira:
My answer is twofold: From a market standpoint, I would go with being able to compare the efforts of the level of ambitions of companies in the space and being able to benchmark the good things they are doing. It’s very hard to do this today because there’s a lack of harmonization in the way you disclose, in the way you measure. If you look at, for example, intensity metrics, there are many different ways you can use as denominators to show intensity, so it’s quite complex for investors or people trying to make sense of this — who is doing better than others. As a market, my wish list would go, can we make this more harmonized so we can all benefit and understand and speak the same language?
For a company or for a board, be bold, and don’t stop at having an ESG-focused strategy. That’s no longer an option. I’m sure the audience knows that. It’s a license to operate these days, but don’t stop short of tackling the tough issues first. On that, you would, of course, look what’s material for your business and for your industry.
That will change, obviously, depending where you are, but things that will probably come up most likely tough will be climate. Everybody has to do something around climate change. Racial equality or inequality, and diversity and inclusion, by all means, there’s a lot more to be done there. And a newer topic, but still very relevant, is biodiversity. You don’t see yet that reflected in sustainable-finance structures as much, but we all agree that with the temperature rising and everything that’s coming with it, the loss of biodiversity has huge implications. I give you just one: the food system. We just don’t know what’s going to happen the way we produce food with the loss of biodiversity.
These are extremely complex challenges — not something you’re going to be able to deliver in a quarter or a year — but don’t feel discouraged by that. Do your part and set your ambition, tackling what’s important first, and make both targets. Companies like ours are here to help you to identify what’s ambitious, but also what’s realistic. Nobody’s in this game to see people failing, so it’s a fine balance between being ambitious and being realistic, but we’ll find that journey. We like to say at ING, there are many roads to Paris, and that will vary with your sector, and our role in the industry there is to support everyone to identify how to get there.
I agree with that. It’s a great point regarding biodiversity. I do agree with that, and that’s inspiring to hear.
We’ve covered a lot of ground there. What are your key takeaways for board members listening? What are the points that you would ask them to take away from this conversation, from everything you said?
Ana Carolina Oliveira:
You can only manage what you can measure, so do make the investment and the effort to improve the data when it comes to ESG — to collect them, to dedicate people’s system to help you to collect the data — because without that, it would be very difficult to stir and to settle what’s ambitious.
Don’t settle for average would be my second point. Don’t just look at what your competitors are doing and say, “If they are doing that, I’m good with that.” Try to push the boundaries. Try to go a step further. That goes not only to see what people are doing but also with the example I gave: If you are setting improvements to your operational metrics, make the effort to bring that to your value chain. Have a dialogue with your suppliers and see how you can help them to adopt some of the measures you are making.
Of course, the third one would be, bring sustainability closer to your business, and a great way to do that is using sustainable finance — attaching sustainability metrics to your capital structure. You can absolutely do that for every single product you have there. And that demonstrates transparency, accountability, and puts you in a better position when this will be a requirement for access to capital. Take a look at that and see what works best for you.
Ana Carolina, thank you for taking the time to speak with us today, and as you proved, it’s such an important topic. To wrap up, I’d like to thank everyone for listening, and if you do wish to discuss any of the topics you’ve heard today, please get in contact with us here at Protiviti. We look forward to catching up with you all very soon. Ana Carolina, once again, thank you very much for your time.
Ana Carolina Oliveira:
My pleasure. Thank you, Paul. Thank you all.
My thanks also to Paul and Ana Carolina for sharing their insights, and thank you for tuning in today. For more information on ESG-related topics and insights for board members, visit Protiviti.com/ESG, and please subscribe to our Board Perspectives podcast series wherever you find your podcast content.