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Commercial banks and the shift to a low carbon economy

Francis Condon

Carbon Connections28th February 2008

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This presentation covers…

Commercial banks and corporate social responsibility/sustainabilityAn overview of ABN AMRO’s approach to, and experience in addressing, the challenges of corporate social responsibility and sustainability

Additional challenges of climate change issues todayWhat climate change means to commercial banks and how this issue is being addressed in terms of direct impact, risk management and business development

Role in the shift to tomorrow’s low carbon economyWhere commercial banks fit in terms of financing low carbon technologies. Changes that could lead to faster development of new technologies. The link between commercial banks and the higher education sector

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Sustainability at ABN AMRO

Our definition

To live our Corporate Values and Business Principles and to meet the needs of the organisation and our stakeholders, thus seeking to protect, sustain and enhance human, natural and financial capital needed in the future.

Our ambition

We are committed to continuously improving the integration of sustainable development into our working environment and business processes. Our aim is to play a proactive role in contributing to sustainable development, within our areas of influence. We are committed to accountability and transparency in our sustainable development performance.

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Accountability and transparency• Sustainability Report

Direct Indirect

With our assets• Capital allocation

With financial services• Advisory and management

On our employees• Engagement and satisfaction

On the environment• Use of natural resources

In local communities• Community investment

Direct and indirect impact

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ABN AMRO’s Sustainability Strategy

1. Being accountable and transparent

3. Providing responsible financial services

4. Being an employer of choice

5. Minimising our impact on the environment

6. Supporting local communities

• Sustainability reports

• Engagement and dialogue

• Risk policies and tools

• Eco-Markets

• Communities of Practice

• SRI, Microfinance

• Employee sustainability education

• Diversity + Inclusion strategy

• Programmes to reduce energy, CO2, wood and paper usage, travel

• Resource efficiency programmes

• Community investment focussing on sustainable livelihoods

2. Protecting our assets

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Sustainable Development in the Finance Sector

• Sustainability challenges – limited resources, energy constraints, environmental

damage, social inequities and poverty will impact our business environment and our clients.

• Role of the banking sector – recognising that banks have a role, with other finance

institutions and stakeholders, in the creation of a more sustainable future. Many have

commenced the journey to develop and integrate sustainability into their regular business

• Direct influence – understanding where banking activities directly relate to

sustainability issues

• Decision-Making – integrating sustainability into lending, investment and risk

assessment to improve decision-making

• Products & Services – support the creation of innovative financial products and

services

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An ongoing journey

Value

Creation

Loss

Avoidance

Value Destruction

Equator Principles

Risk ManagementIgnorance

Business Development

Strategic

Risk Policies

Reactive

Uncoordinated

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ABN AMRO & RBS lead approaches to climate change

ABN AMROIn January 2008, ABN AMRO was rated as second of forty banks in a CERES survey of responses to climate change

RBSIn September 2007, RBS was rated as one of the three finance sector leaders in the Carbon Disclosure Project

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ABN AMRO and its carbon footprint

Emissions of 414,720t CO2 in 2006

100% green electricity purchased in the Netherlands properties

Continues to introduce energy efficiency measures, e.g. automatic monitors switch off software, movement-sensitive lighting

“Our Carbon Commitment” employee engagement programme

RBS and its carbon footprint

Emissions of 556,041t CO2 in 2006

100% green electricity secured for 2008-2010 in UK and Ireland properties

Has completed 1st phase of 3 year £55m investment in UK property to reduce footprint

Pilots emerging technologies in properties including solar roof tiles, biomass boilers, rainwater recycling, roof mounted wind turbines, ground source heat pumps

“YourWorld” employee engagement programme

Aim is to reduce carbon intensity of operations by around one-fifth between 2007 and 2011

Addressing the carbon footprint of operations

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ABN AMRO

Environmental, Social & Ethical (“ESE”) Risk Filter

ESE risk governance model

ESE risk management capacity

Policies, procedures and practices

RBS

Global Banking & Markets Sustainable Development team

Developed and launched internal training programmes

Revisions to procedures manual and supporting programmes

Decision-making in risk management

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Prospective Business Engagement

ESE Risk Filter

Industry sectorCountry

Specific issueTrack record

External recordOverall concerns

Informal AssessmentList of other sensitive sectors / activities

List of sensitive issuesClient specific track record

External information providers

Formal AssessmentBusiness Values and Principles

Human Rights Position StatementCSERF

Sector Policies

Environmental & Social Frameworks and Tools Ethical Policy Case Review Recommended

Oil & Gas Mining Forestry DefenceHydro Dams

Gambling TobaccoNuclearAnimal testing

Supply chain issues

Others

CDT CDT Template Template

Advice by SRA and Business Unit Advisory Teams

CDT

Lending Activities: Credit Approval System Non-lending Activities: Engagement Committee System

EP

ABN AMRO’s Environmental, Social & Ethical Risk Process

TemplateKey

QuestionsKey

QuestionsAs

requiredAs

required

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Climate change challenges the risk paradigm• Climate change as a challenge for risk management and research

• What is the real risk profile?

• regulatory and other mitigation risks

• physical and other adaptation risks

• How to externalise the cost or value of carbon?

• Deployment of new evaluation filters?

• How to encourage greater client disclosure and engagement

• Revision of lending & investment policies

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ABN AMRO’s climate change regulatory risk project

Identification of projects with large carbon price exposure the bank is financing.

Focus on power plants, oil refineries, and steel manufacturer in both regulated and non-regulated markets.

Direct impact

• Run shadow scenarios for different prices of carbon and analyze the impact on the economics of the project.

• Determine the level of carbon price that makes the project an unattractive investment for the bank.

Indirect impact

• Identify the value chain impacts resulting from input / downstream costs and product risks.

• Integrate in the financial model to determine the adjusted risk/reward ratio of the project.

Develop frameworks to support investment decision and mitigate the bank’s exposure to carbon risk.

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Low carbon banking products & services

• It affects our clients – we need to understand how the issue will affect the bank’s

clients, whether it will change the way they operate, how, and in what ways we can assist

• Our clients require financing and other products and services – the Kyoto

and EU ETS regulatory environments have created trading markets of huge potential

magnitude

• The capital needed for the low carbon shift is substantial – according to UNEP

an estimated USD100 bln was invested in new renewable technology in 2006

• Many ways to satisfy these needs fit with traditional banking competencies

– including: OTC & exchange-based trading; lending products; creation of funding vehicles

for renewable energy and clean technology; advisory services on listings and M&A

• The potential market size is even greater – some analysts suggest that current

renewable energy capital flows represent only 10-20% of total global energy investment.

Projections of up to USD 500-750 bln by 2015

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ABN AMRO’s Eco-Markets businessABN AMRO created Eco-Markets as a cross-discipline group to identify climate-change and environment-related market opportunities and create financial instruments and products that address them to support clients’ needs.

• Emission trading

• Corporate Broking

• Structured finance

• Private Investors Products

• Equity Syndication

In 2007, ABN AMRO created a New Energy Technologies Group to further strengthen its capabilities globally in renewable energy technology and capacity transactions

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RBS’s Renewables financing focus

• Renewable energy finance – in each of the last two years, RBS has

been among the top 3 worldwide largest arrangers of finance for the

renewable energy sector. It is the UK’s largest lender to renewable projects.

• Engagement strategy – focused on developing further the opportunities

to provide products and services to the clean technology sector

• Magnitude - in the last two years RBS has been involved in lead

arranging finance of more than $4bn for renewables globally

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Where commercial banks fit in

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Getting more commercial banking involvement• Risk identification & management

Political risk

Commercial risk

Technology risk

• Choosing the right entry point Discovery

Development

Demonstration

Deployment

• Collaborations between key stakeholders Developers

Early stage finance providers

Offtakers and suppliers

Commercial banks

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Interaction with the academic sector

• Awareness and education – Cambridge Programme for Industry

• Sustainability-related research – EABIS

• Specific projects – Internship programmes & projects

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Conclusion

• Sustainability strategies for banks require management across a

wide range of issues and stakeholders

• The transition to a low carbon economy adds complexity to risk

assessment and development of opportunities

• Commercial banks have a particular role to play in financing low

carbon technologies as they become commercially viable

• Products include lending, traded market activities and advisory

• Collaboration between a number of stakeholders helps to

accelerate low carbon technologies move to commercial viability