ING wants other banks to use its approach to judging companies' transition plans. Robert Spruijt explains why to Michael Hurley
Dutch bank ING has invited other banks to use an artificial intelligence (AI)-enabled methodology it has developed to judge the credibility of the transition plans of its clients.
Robert Spruijt, head of sustainable finance EMEA at ING, tells Environmental Finance why, and what its approach can offer.
Environmental Finance: Why do banks need a dedicated approach to assessing the credibility of corporate transition plans?
Robert Spruijt: "Under the Net Zero Banking Alliance (NZBA) commitment, an increasing amount of banks are committing to net zero and set intermediary targets, which is a good development.
"Under our own net zero approach (called Terra), we set science based targets for the sectors in scope, monitor the progress of these portfolios (and clients) and disclose this in our climate publications on a regular basis.
"Although monitoring progress is important, the pitfall remains that it only provides a backward-looking picture of such progress.
"Therefore, next to understanding how our clients are progressing towards net zero, we need to understand what kind of actions our clients are taking to get to net zero. This gives us a much better view what the direction of travel is of our clients.
"In 2023, we decided to assess the transition plans of our Wholesale banking clients, that are in scope of Terra and of clients we have the most business with. We are including these Client Transition Plans (CTPs) in our decision-making processes."
EF: How does the assessment work?
RS: "The starting point of our assessments, is to determine what the key components are of a credible transition plan.
"For this purpose, we benchmarked the most relevant current and upcoming regulations and standards, such as the European Sustainability Reporting Standards (ESRS), International Sustainability Standards Board (ISSB), US Securities and Exchange Commission, Task Force on Climate-related Financial Disclosures, Science Based Targets initiative, but also took into account [approaches by] data collection providers such as CDP.
"From these regulations and standards, we extracted the common denominators from which we composed in total 19 questions, and put them in four buckets. These are:
- "Historic emissions: it is important to know if a client has a clear understanding of their current and historic greenhouse gas emissions of: their operations (Scope 1), of the power they purchase (Scope 2) and in their value chain (Scope 3). This indicates that a company understands its climate impact, both under its own control and in their value chain. It also gives a good understanding where the highest emissions are in the company. For a steel company, this would be Scope 1 (emissions in their production process), but for example for an upstream oil & gas client, the highest emissions will be in the products they sell (Scope 3).
- "Targets: Has the client set targets to reduce their emissions, such as:
- Commitments: if a client has a commitment, like a net zero commitment.
- Quantitative emissions reduction targets. This shows that the client is not only committing to decarbonise, but also sets targets for itself with specific deadlines.
- "Some clients even have Science Based Targets. Those clients have gone to the effort of aligning their corporate targets with a certain temperature pathway (for example 1.5°C), which shows an advanced understanding of how their business needs to decarbonise.
- "Action plans: this shows whether a client already knows how they are going to reduce emissions, including the potential new investments needed to achieve their targets.
- "Governance & strategy: this creates more clarity on if the transition strategy is embedded in the overall strategy and whether the client has a clear governance structure to execute the transition plan."
EF: Where do you get the data to judge the plans?
RS: "We initially only collected public data, since (i) public disclosures and commitments are considered to be firmer, since [issuers] are held accountable on their disclosures by their wider stakeholder group and (ii) it avoids that we have to bombard our clients with questions, where most of the information can already be found in the public domain.
"To collect and use the data, we set up an online tool, called ESG.X, which can be used by all relevant internal stakeholders to see the client specific public transition plan information and will allow users to compare companies. In the tool, the proof points [which refer to where in public disclosures the information was found] are saved, to ensure the information is accurate.
"We set a key performance indicator for ourselves that all the relationship managers have to engage with clients on their transition plans"
"Initially the data was all gathered by a team of analysts, but now also a large language model has been added, scraping the public disclosures, getting relevant information that's checked by the analysts.
"We started with assessing the transition plans of our clients but are widening the scope to include other relevant ESG risks/ metrics of our clients, which will allow us to have a comprehensive up-to-date ESG overview of our clients, which we can monitor on a year-on-year basis and embed in our decision-making processes. ESG.X really proves to be a game changer since it creates valuable insights in a very user-friendly manner.
"To embed sustainability further in our organisation and in the client dialogues, we set a key performance indicator for ourselves that all the relationship managers have to engage with clients on their transition plans.
"We see an increasing interest of other banks in the tooling we designed and created, so we are currently assessing if we can make it available to other banks, just like Terra is open source."
EF: There are already a plethora of tools and frameworks dedicated to transition plans and transition planning. Why was it necessary for ING to create its own approach?
RS: "A critical element of assessing the transition plans of clients, is to ensure you perform the assessment on the appropriate client level.
"For example, if you have a company like Volvo, the parent is Geely, which is ultimately owned by Li Shufu. You do not want to perform the assessment on Li Shufu and not on Geely but on Volvo.
"Another example is if you provide financing on an asset level, like a vessel financing. Are you assessing the transition plan of the vessel, the vessel owner, or, for example, the private equity company owning the vessel owner? Where does the transition risk sit? If it is a vessel owner, they have control over the vessels, but the investor has the final say, since they are the majority shareholder. The final control can be with the private equity company, but in their decarbonisation plan it could be that they plan to dispose the vessel company. Therefore, the assessment of the appropriate client level is a diligent process, which we decided to do inhouse."
EF: There is growing momentum behind transition plan disclosure requirements, including in regulation, but also among financial institutions calling for nations to set whole-of-economy plans. What is your view on this?
RS:"It is important that companies have to provide more insights on how they plan to transition, since it allows stakeholders to assess the risks and provides guidance on the direction of travel of the company.
"Although companies can have a beautiful plan in place, the risk still exists for such companies that investments are lossmaking or too risky.
"Here we see an important role for governments. For example, we saw limited investments in plastic recycling, since recycled content could never compete with virgin plastics. Investments generally would result in negative returns for recycling facilities without government support/ incentives. But on the back of new legislation that 25% of PET [plastics] should contain recycled content by 2025, we see that investments can be made. But another example: we saw that Shell stopped the construction of a biofuel plant in Rotterdam, despite the fact that Sustainable Aviation Fuel is crucial to decarbonise the aviation sector.
"It would be useful for stakeholders if the ESRS and ISSB transition plan disclosure requirements would include a category under which the company can disclose why they cannot yet invest in specific decarbonisation activities"
"We see that the transition from a policy perspective could benefit from clearer roadmaps, which creates a more stable ground to make long term investments. It is crucial to have transition plans on country and regional level. Why country level? Since the starting point and fuel mix of each country is different.
"We currently see that transition plans are being constructed mainly starting at the current status quo and are not always considering the transition requirements of the full value chain and/ or infrastructure. Therefore, it would be beneficial if countries start to determine what their net zero economy would look like in 2050, taking into account the real economy impact and requirements for example in the associated infra structure, like for example the sector specific analyses of Japan's METI (through its Roadmap for Promoting Transition Finance).
"As an example, in the Netherlands, roof top solar has been incentivised for homeowners. Now the homeowners who have invested in roof top solar are confronted with unforeseen revenue risks, since the grid cannot always cope with the abundant amount of energy produced and the government is considering to remove the netting arrangements. This would not be necessary if there would be more clarity what the energy mix could be in 2050, with the associated infrastructure investments and what should be done in case of overcapacity in production during sunny or windy days. Currently the transition agenda of many countries feel too much like an 'trial-and-error' exercise, instead of a diligently composed transition plan.
"Furthermore, to create more transparency in the market on why companies in a given country and sector cannot invest in specific decarbonisation activities, it would be super useful for stakeholders (including governments) if the ESRS and ISSB transition plan disclosure requirements would include a category under which the company can disclose the reasons why they cannot yet invest in specific decarbonisation activities. This creates (i) more transparency in the market on sector and country specific impediments and (ii) a better understanding if it is a country related issue, a sector wide trend or a company specific obstacle."
