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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
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