ING Groep N : 'Bankers embrace climate activism'

In an interview with the Australian Financial Review, ING CEO Ralph Hamers talks about ING's strategy for approaching the climate crisis. The paper calls him the 'banker at the forefront of Europe's climate change activism'. Read the article below.

Australian Financial Review
The column 'Chanticleer', by Tony Boyd
7 January 2020

You don't have to look too far in Europe to find commercial bankers willing to use the power of their balance sheets to lower carbon emissions and meet the goals of the Paris Climate Accord.

Without doubt, the European banker at the forefront of this climate change activism is Ralph Hamers, the chief executive of ING Group, a global financial institution with $997 billion in loans and a market capitalisation of $68 billion.

In the space of two years he has inspired 33 international banks to promise to align their portfolios to ''reflect and finance the low carbon, climate-resilient economy required to limit global warming to well below two degrees Celsius, striving for 1.5 degrees''.

The fact that National Australia Bank has signed the Collective Commitment to Climate Action, which is based on work done by ING, says the Europeans are having influence far beyond the Northern Hemisphere.

When the banks signed the commitment in New York in September they promised to take concrete action, and within a year of joining the group to ''facilitate the economic transition required to achieve climate neutrality'' and be publicly accountable for their actions.

All the banks in this climate action group are among the 130 banks which signed the Principles of Responsible Lending in New York in September. These banks, which include ANZ Banking Group, NAB and Westpac Banking Corp, have committed to support the United Nations Global Sustainable Development goals, which essentially means supporting a low carbon future.

Banks in this larger grouping are prime candidates to step up and sign the Collective Commitment to Climate Action. It is up to each institution how they use their balance sheet, but Hamers provides a template for how ING and other banks in Europe are approaching the problem.

ING stopped financing new coal-fired power stations in 2015 and in 2017 Hamers said ING would cut its exposure to coal [Ed: power generation] to zero by 2025.

In doing so Hamers knew full well the potential negative economic consequences and possible social chaos from the banking industry pulling the plug on coal.

He grew up in South Limburg, the heart of coal mining in the Netherlands for 400 years. In the mid-1970s, all the coal mines in the region were closed with a promise of government support for those people put out of work.

Hamers says this experience carries lessons for both bankers and governments. They will have to co-ordinate their efforts more closely.

''You need banks for the transition but you also need government policies to really do that in order to ensure that you don't create social havoc in those areas where people are very dependent on mining jobs,'' he says in an interview with Chanticleer.

''These are big social challenges that ... I lived through, because I come from the south of the Netherlands where we had coal mines and we closed all of the mines in three years and we had 50,000 unemployed people there. And one generation later and it's still an area that needs some kind of a support. So you really need a well thought through government policy in order to support that.''

A decade after the coal mines were closed, the unemployment rate in South Limburg had soared from 11.5 percent to 22 percent. The promised restructuring and job creation did not eventuate. It took 40 years for the region to build a new industrial base and bring unemployment within reach of the national level, according to a study published in 2018 by consultant Frank Teeuwisse.

Hamers says ING prefers to make the transition in an inclusive way by supporting initiatives by companies to slash carbon emissions.

''For example, there are many companies that jump on the opportunity to move closer in alignment with the Sustainable Development Goals,' he says. ''What we do as a bank is we basically give them a discount on their credit margin the closer they get to their own goals, because we feel that a company that is closer to its sustainability goals is a better credit. And if it's a better credit we don't have to charge as much margin for it.''

These credit arrangements are only offered to companies that take ''sustainability linked'' loans with pre agreed targets.

The son of a Dutch public servant, Hamers studied econometrics at university before getting his first job at a General Motors factory in Antwerp. He joined the banking industry in 1989 after a brief stint working for an accounting firm in the US.

He diligently worked his way through the ranks of ING in various specialist financing areas, including aviation and film financing.

Hamers is the classic banker of his generation, well tutored in the principles of sound credit risk with experience in working across all aspects of banking in several European countries.

His road down the path to European leadership in low carbon lending started from the point of view that it was futile to wait for politicians to take the initiative.

''We just believe that what we're doing is the right thing, and we don't wait for groups of banks or politicians or regulators to come up with a taxonomy,'' he says. ''We know it is very difficult for some of these organisations or platforms to come up with the taxonomy because there is always a lot of politics and a starting points involved.''

Hamers concluded the carbon footprint of the bank was relatively small and despite the best efforts to become carbon neutral in all aspects of the business it would have a small global impact.

The next logical step was to examine the bank's indirect impact on climate change. This started with an analysis of the bank's loan book in the following key sectors: commercial real estate, residential real estate, oil and gas, automotive, cement, steel, shipping, aviation and power generation.

''Those are the sectors that we looked at and basically per sector we have come up with a scenario developed by the International Energy Agency and together with the Two Degrees Investing Initiative looked at technology already available in the sector, or expected to be available in the sector, that would make the sector a lot less carbon intensive,'' he says.

''On the back of that, we have agreed on the trajectory to comply with in order to be able to deliver on our commitments.''

Hamers says ING realised that it could not move the needle as a single bank with Paris Accord commitments. This led to the idea of encouraging other banks to match its approach. The ING methodology, called the Terra approach, is an open-sourced system that any bank can use.

More than $19 trillion in loan assets are on the balance sheets of the 34 banks to have signed the Collective Commitment to Climate Action. This is a powerful base from which the banking industry can influence the actions of companies they lend to.

Another world-leading example of European innovation in low-carbon financing is at the French bank Natixis, which is led by Francois Riahi. In September it began allocating capital to financing deals based on their climate impact.

Under the Natixis Green Weighting Factor, analytical risk-weighted assets are reduced by up to 50 per cent for green deals, while facilities that have a negative environmental and climate impact see their analytical risk-weighted assets increased by up to 24 per cent.

There is nothing to stop other banks copying the move by Natixis, but it is likely to remain an isolated tool for incentivising low carbon lending until regulators get on board.

While it is unlikely the Basel Committee on Banking will impose different risk weighting for green loans, it is open to prudential regulators to do so if they wish. This happened in December when the Magyar Nemzeti Bank, the central bank of Hungary, released a preferential capital requirement program for credit institutions ''to support the growth of green financial products and to improve the energy efficiency of the Hungarian building stock''.

The central bank said the building stock was responsible for nearly 40 per cent of national energy consumption in Hungary. Borrowers will get a discount for financing green buildings.

Hamers says the Natixis move on green weightings for loans is likely to be one of many innovations designed to support the transition to a lower carbon economy.

''They're not waiting for regulators to come in and start charging higher capital just for the risk of having stranded assets in coal-fired power plants as an example or whatever,'' he says.

''But they look at it both ways. So you can also have a capital benefit for doing the right thing and for supporting the transition.''

Hartzer's $150 million tech win

One of the lesser-known bright legacies of former Westpac Banking Corp chief executive Brian Hartzer is the $150 million profit the bank has made on Zip Co, an emerging leading company in buy now, pay later.

Hartzer was the driving force behind the bank's $40 million investment in Zip in August 2017 when buy now, pay later was not considered a threat to the credit card industry, which is dominated by Mastercard and Visa.

At the time of the investment in 2017 Westpac said it was hard for an organisation of its size to be disruptive.

''It's hard to build quickly, take risks and experiment - that's just a fact,'' the bank's general manager corporate and business development, Macgregor Duncan, said in an interview published on the bank's website.

Duncan, who is responsible for mergers and acquisitions, strategic investments and partnerships, and data development, sits on the investment committee of Westpac's venture capital arm, Reinventure.

''By investing and partnering with innovators like Zip, we can learn a lot,'' Duncan said. ''We've been impressed with Zip's proprietary data analytics platform, for instance. We're also impressed with Zip's vision and willingness to refashion our industry. It's exciting.

''Similarly Westpac can add a lot of value to Zip: distribution, obviously, but also the experience of how to run an organisation at scale.''

The bank paid 81¢ a share for its 15.8 per cent stake in Zip. It was the bank's largest single investment in a fintech.

This stake has grown in value to $192 million, a paper profit of $150 million for the bank.

Westpac, however, did not participate in a recent $60 million share placement, which was priced at $3.70 a share. Zip shares were trading at $3.47 yesterday.

The bank said in a substantial shareholder notice issued in late December that its stake in Zip had been diluted to 14.84 per cent because of the placement.

The placement was oversubscribed by about $150 million, which is a testament to the market's demand for fintech growth stocks.

Zip's prospects look good given the fact young Australians are pushing back against the use of credit cards.

Zip's business model differs from other companies such as Afterpay because it conducts credit checks on its customers. It is actively involved in developing a new code of conduct for the buy now, pay later sector.

This code is due to be released by the Australian Finance Industry Association later this month for consultation.