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Commercial banks and the shift to a low carbon economy


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Commercial banks and the shift to a low carbon economy

  1. 1. Commercial banks and the shift to a low carbon economy Francis Condon Carbon Connections 28 th February 2008
  2. 2. This presentation covers… Commercial banks and corporate social responsibility/sustainability An 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 today What 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 economy Where 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
  3. 3. 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.
  4. 4. Direct and indirect impact <ul><li>Accountability and transparency </li></ul><ul><li>Sustainability Report </li></ul>Direct Indirect <ul><li>With our assets </li></ul><ul><li>Capital allocation </li></ul><ul><li>With financial services </li></ul><ul><li>Advisory and management </li></ul><ul><li>On our employees </li></ul><ul><li>Engagement and satisfaction </li></ul><ul><li>On the environment </li></ul><ul><li>Use of natural resources </li></ul><ul><li>In local communities </li></ul><ul><li>Community investment </li></ul>
  5. 5. ABN AMRO’s Sustainability Strategy <ul><li>Being accountable and transparent </li></ul><ul><li>Providing responsible financial services </li></ul>4. Being an employer of choice 5 . Minimising our impact on the environment 6. Supporting local communities <ul><li>Sustainability reports </li></ul><ul><li>Engagement and dialogue </li></ul><ul><li>Risk policies and tools </li></ul><ul><li>Eco-Markets </li></ul><ul><li>Communities of Practice </li></ul><ul><li>SRI, Microfinance </li></ul><ul><li>Employee sustainability education </li></ul><ul><li>Diversity + Inclusion strategy </li></ul><ul><li>Programmes to reduce energy, CO2, wood and paper usage, travel </li></ul><ul><li>Resource efficiency programmes </li></ul><ul><li>Community investment focussing on sustainable livelihoods </li></ul><ul><li>Protecting our assets </li></ul>
  6. 6. Sustainable Development in the Finance Sector <ul><li>Sustainability challenges – limited resources, energy constraints, environmental damage, social inequities and poverty will impact our business environment and our clients. </li></ul><ul><li>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 </li></ul><ul><li>Direct influence – understanding where banking activities directly relate to sustainability issues </li></ul><ul><li>Decision-Making – integrating sustainability into lending, investment and risk assessment to improve decision-making </li></ul><ul><li>Products & Services – support the creation of innovative financial products and services </li></ul>
  7. 7. An ongoing journey Value Creation Loss Avoidance Value Destruction Equator Principles Risk Management Ignorance Business Development Strategic Risk Policies Reactive Uncoordinated
  8. 8. ABN AMRO & RBS lead approaches to climate change ABN AMRO In January 2008, ABN AMRO was rated as second of forty banks in a CERES survey of responses to climate change RBS In September 2007, RBS was rated as one of the three finance sector leaders in the Carbon Disclosure Project
  9. 9. <ul><li>ABN AMRO and its carbon footprint </li></ul><ul><li>Emissions of 414,720t CO2 in 2006 </li></ul><ul><li>100% green electricity purchased in the Netherlands properties </li></ul><ul><li>Continues to introduce energy efficiency measures, e.g. automatic monitors switch off software, movement-sensitive lighting </li></ul><ul><li>“ Our Carbon Commitment” employee engagement programme </li></ul><ul><li>RBS and its carbon footprint </li></ul><ul><li>Emissions of 556,041t CO2 in 2006 </li></ul><ul><li>100% green electricity secured for 2008-2010 in UK and Ireland properties </li></ul><ul><li>Has completed 1st phase of 3 year £55m investment in UK property to reduce footprint </li></ul><ul><li>Pilots emerging technologies in properties including solar roof tiles, biomass boilers, rainwater recycling, roof mounted wind turbines, ground source heat pumps </li></ul><ul><li>“ YourWorld” employee engagement programme </li></ul><ul><li>Aim is to reduce carbon intensity of operations by around one-fifth between 2007 and 2011 </li></ul>Addressing the carbon footprint of operations
  10. 10. <ul><li>ABN AMRO </li></ul><ul><li>Environmental, Social & Ethical (“ESE”) Risk Filter </li></ul><ul><li>ESE risk governance model </li></ul><ul><li>ESE risk management capacity </li></ul><ul><li>Policies, procedures and practices </li></ul><ul><li>RBS </li></ul><ul><li>Global Banking & Markets Sustainable Development team </li></ul><ul><li>Developed and launched internal training programmes </li></ul><ul><li>Revisions to procedures manual and supporting programmes </li></ul>Decision-making in risk management
  11. 11. ABN AMRO’s Environmental, Social & Ethical Risk Process Prospective Business Engagement ESE Risk Filter Industry sector Country Specific issue Track record External record Overall concerns Informal Assessment List of other sensitive sectors / activities List of sensitive issues Client specific track record External information providers Formal Assessment Business Values and Principles Human Rights Position Statement CSERF Sector Policies Environmental & Social Frameworks and Tools Ethical Policy Case Review Recommended Oil & Gas Mining Forestry Defence Hydro Dams Gambling Tobacco Nuclear Animal 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 Template Key Questions Key Questions As required As required
  12. 12. Climate change challenges the risk paradigm <ul><li>Climate change as a challenge for risk management and research </li></ul><ul><li>What is the real risk profile? </li></ul><ul><ul><li>regulatory and other mitigation risks </li></ul></ul><ul><ul><li>physical and other adaptation risks </li></ul></ul><ul><li>How to externalise the cost or value of carbon? </li></ul><ul><li>Deployment of new evaluation filters? </li></ul><ul><li>How to encourage greater client disclosure and engagement </li></ul><ul><li>Revision of lending & investment policies </li></ul>
  13. 13. ABN AMRO’s climate change regulatory risk project <ul><ul><li>Identification of projects with large carbon price exposure the bank is financing. </li></ul></ul><ul><ul><li>Focus on power plants, oil refineries, and steel manufacturer in both regulated and non-regulated markets. </li></ul></ul><ul><ul><ul><li>Direct impact </li></ul></ul></ul><ul><ul><ul><ul><li>Run shadow scenarios for different prices of carbon and analyze the impact on the economics of the project. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Determine the level of carbon price that makes the project an unattractive investment for the bank. </li></ul></ul></ul></ul><ul><ul><ul><li>Indirect impact </li></ul></ul></ul><ul><ul><ul><ul><li>Identify the value chain impacts resulting from input / downstream costs and product risks. </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Integrate in the financial model to determine the adjusted risk/reward ratio of the project. </li></ul></ul></ul></ul><ul><ul><ul><li>Develop frameworks to support investment decision and mitigate the bank’s exposure to carbon risk. </li></ul></ul></ul>
  14. 14. Low carbon banking products & services <ul><li>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 </li></ul><ul><li>Our clients require financing and other products and services – the Kyoto and EU ETS regulatory environments have created trading markets of huge potential magnitude </li></ul><ul><li>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 </li></ul><ul><li>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 </li></ul><ul><li>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 </li></ul>
  15. 15. ABN AMRO’s Eco-Markets business <ul><li>ABN 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. </li></ul><ul><li>Emission trading </li></ul><ul><li>Corporate Broking </li></ul><ul><li>Structured finance </li></ul><ul><li>Private Investors Products </li></ul><ul><li>Equity Syndication </li></ul>In 2007, ABN AMRO created a New Energy Technologies Group to further strengthen its capabilities globally in renewable energy technology and capacity transactions
  16. 16. RBS’s Renewables financing focus <ul><li>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. </li></ul><ul><li>Engagement strategy – focused on developing further the opportunities to provide products and services to the clean technology sector </li></ul><ul><li>Magnitude - in the last two years RBS has been involved in l ead arranging finance of more than $4bn for renewables globally </li></ul>
  17. 17. Where commercial banks fit in
  18. 18. Getting more commercial banking involvement <ul><li>Risk identification & management </li></ul><ul><ul><li>Political risk </li></ul></ul><ul><ul><li>Commercial risk </li></ul></ul><ul><ul><li>Technology risk </li></ul></ul><ul><li>Choosing the right entry point </li></ul><ul><ul><li>Discovery </li></ul></ul><ul><ul><li>Development </li></ul></ul><ul><ul><li>Demonstration </li></ul></ul><ul><ul><li>Deployment </li></ul></ul><ul><li>Collaborations between key stakeholders </li></ul><ul><ul><li>Developers </li></ul></ul><ul><ul><li>Early stage finance providers </li></ul></ul><ul><ul><li>Offtakers and suppliers </li></ul></ul><ul><ul><li>Commercial banks </li></ul></ul>
  19. 19. Interaction with the academic sector <ul><li>Awareness and education – Cambridge Programme for Industry </li></ul><ul><li>Sustainability-related research – EABIS </li></ul><ul><li>Specific projects – Internship programmes & projects </li></ul>
  20. 20. Conclusion <ul><li>Sustainability strategies for banks require management across a wide range of issues and stakeholders </li></ul><ul><li>The transition to a low carbon economy adds complexity to risk assessment and development of opportunities </li></ul><ul><li>Commercial banks have a particular role to play in financing low carbon technologies as they become commercially viable </li></ul><ul><li>Products include lending, traded market activities and advisory </li></ul><ul><li>Collaboration between a number of stakeholders helps to accelerate low carbon technologies move to commercial viability </li></ul>