With pressure from the media, NGOs and the general public, the actions of banks in the trade finance space are under intense scrutiny. But more than ever before, green business means big business, reports Finbarr Bermingham.
Late last year in the face of pressure from NGOs, the French bank BNP Paribas stepped away from the potential funding of the Rosatom nuclear power plant in the Russian enclave of Kaliningrad. Since its conception in 2008, Rosatom has been beset with environmental and social issues. It stands to destroy much of the agricultural industry which has traditionally been the local economy’s bread and butter, despite the fact that neither Kaliningrad nor its neighbours require additional power capacity. The plant’s contingency testing isn’t thought to have been sufficiently rigorous, nor has there been any concrete indication as to how any nuclear waste will be disposed of.
In 2011, Deutsche Bank cancelled its interest in the Jaitapur nuclear project in India. If completed, Jaitapur would be the largest nuclear facility in the world, but its development has faced vociferous opposition, given its proximity to a region that’s prone to “damaging” earthquake activity. In June of this year, local residents wrote to other European banks urging them not to finance a project that’s been billed “the next Fukushima”.
These two incidents show the scrutiny under which banks’ activities are placed in 2013. In ‘the age of information’, there are few places to hide for those that fail to adhere to environmental and social expectations and standards. For those that flout them, the level of media and public awareness means that transactions can be literally and metaphorically toxic. In the grand scheme of things, the actions of BNP Paribas and Deutsche may be no more than a footnote, but they’re evidence that generally, banks are now willing to think long-term when it comes to green issues; to maintain their reputation, rather than pursue a quick buck.
Bloomberg New Energy Finance reports that in 2012, US$244bn, across 40,000 projects and 37,400 transactions, was invested in the global renewable power and fuel sectors. While the volume was down 12% on 2011, it’s still the second highest on record (the number of projects and transactions, however has risen). In emerging markets, investment rose by 19% and for the first time, China was top of the green energy class: its investment grew by 22% to US$67bn. Worldwide investment in the renewable energy sector in 2012 was 70% higher than 2007’s pre-global financial crisis total. In fact, contrary to most sectors, there’s evidence to suggest that renewable energy has benefitted from the credit crunch, partly due to the structural changes that occurred in the lending market.
“Export credit agencies [ECAs] and multilaterals set the pace,” Peter Field, executive director of origination and portfolio management at Australia’s ECA, Efic tells GTR. “They set standards and banks tend to follow. In a way, it’s been good practice. During the global financial crisis, banks weren’t doing so much. All these big projects that have been done since have been pretty heavily reliant on agency credit, be it from international financial institutions (IFIs) or ECAs. Because we’re applying those principles, banks that have participated have had to be drawn in – I presume happily. We’re the guys that push the sponsors to a higher standard, but banks are generally more selective about the transactions they undertake.”
The €1.4bn Butendiek offshore wind farm transaction closed in February of this year is a case in point. It was led by the European Investment Bank (EIB), which contributed €450mn from its own book. The German development bank KfW added €200mn to the kitty, with the rest picked up by a syndicate of European commercial lenders, including UniCredit, ING, Rabobank, BayernLB and Bremer Landesbank, at an average ticket size of €30mn. “It has a very bank-friendly structure,” the EIB’s senior project finance specialist Melchior Karigl told GTR at the time. While the commercial portion of the debt was uncovered, the reassuring presence of the IFIs and the conservative ratios of the deal made it much more attractive to private lenders.
Last year, Landesbank Berlin provided a loan of €107.1mn for the construction of the Botievo wind farm in Ukraine. The finance was covered by EKF, the Danish ECA. The bank should be (and, indeed, has been) applauded for being the sole lender to a large, green project. But the presence of an ECA is, again, telling. While the financial crisis has led to greater commercial involvement in the renewables sector, for European banks, the slow recovery has often restricted the extent to which they get involved.
The fall in renewable energy investment from 2011 to 2012 can be partly attributed to the actions of certain governments. Spain has long since been a hub for renewables projects. It’s the world’s largest per capita producer of wind energy and features in the top 10 for solar power too. It has traditionally offered favourable feed-in tariff rates for solar projects, meaning that investors in such initiatives have earned a higher return, since the projects are almost always funded on a non-recourse basis.
In recent years, however, successive beleaguered Spanish governments have spooked the solar investing community with the threat of retroactive changes to the feed-in tariff systems. In 2010 and again in February of this year, parliament carried through with the threat. It’s predicted that the latest cuts will save the government up to €500mn a year, but at the cost of paralysing a solar industry that was once the fastest-growing in the world.
More recently, the European Commission imposed a tariff of 11.8% on the import of solar panels from China, accusing the Chinese government of flooding the European market with state-subsidised, unfairly-priced products. In retaliation, Beijing slapped an anti-dumping tariff on the import of European wine, which it claims is similarly subsidised. It’s unclear how much mileage such quid pro quo politicking has, but it’s certainly not doing anything to encourage commercial sector investment in solar projects.
Contrast this with the actions of the South African government, whose Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) is described by Daniel Zinman of Rand Merchant Bank (RMB)’s infrastructure finance team as “a model” from which other countries can learn. REIPPPP is working towards the ambitious target of generating 10,000GW of renewable energy a year by 2030. Already, a spate of projects have been tendered for, financed and signed off – with the commercial banking sector generally leading the way.
In June, RMB reached financial close for the Jasper Project. As sole mandated lead arranger and underwriter, it provided around US$107mn for the project, with the rest of the transaction coming in the form of equity. There was no ECA involvement – the only guarantee is that if Eskom, the South African public electricity company, defaults, the government will step in as offtaker. The bank has been heavily involved in a number of REIPPPP transactions to date, and expects to continue financing further rounds of projects.
“In the South African context,” Zinman tells GTR, “the vast majority of the renewable energy deals have been led or co-led by commercial banks. It’s probably also the result of the level of government support for the programme and a very well thought out risk allocation.” South African banks, Zinman contends, will experience less of the fallout from Basel III and are less likely to be hamstrung by the legislative obtrusion we see in Spain – the country is in dire need of additional energy capacity and the government is looking to REIPPPP to eradicate shortages.
Got a light?
Ajay Narayanan is head of sustainability at the IFC, an organisation with a climate-friendly trade finance programme that’s worth more than US$2bn. Roughly half of that figure is disbursed through other financial institutions, with the rest going directly to sustainable infrastructure, manufacturing and agribusiness projects. A large part of the IFC’s work is convincing financial institutions that the development and renewable work it does can be profitable. It’s what Narayanan calls a “chicken and egg” scenario.
An example he likes to discuss is the IFI’s Lighting Africa programme, an initiative that utilises the sustainable banking market to provide lighting solutions for “off-grid” businesses and households across the continent. Often, it involves replacing unhealthy, unsustainable kerosene lamps with solar photovoltaic (PV) systems which, while being costly upfront, have significantly lower operating costs. The issue is getting the finance for PV systems’ manufacturers and retailers to roll them out across Africa.
“It’s an area with tremendous potential,” says Narayanan. “But getting the first structure is often challenging. Some of the companies are growing at 200% annually; quadrupling their sales every year. But most of the manufacturing doesn’t take place in Africa – most of the systems are put together somewhere else: in China or India, for instance. You’re looking for a bank that would finance the working capital needs for the Chinese stock, as well as some of the stock in African warehouses.
“It’s not that the amount of money they need is huge: you’re talking ticket sizes of US$5mn to US$10mn. These sorts of structures may be unfamiliar to local banks, within whose appetite the ticket size may be. They also tend to be too small for the global banks that may have a presence across all the countries. This kind of project often falls through the cracks.”
Narayanan is confident that once the banking sector picks it up, the market for small-scale PV will take off in earnest, and it’s the IFC’s job to convince them of its commercial viability. “Commercial banks are understandably risk-averse,” he tells GTR. “They’re looking to see if there’s enough business in the market to open a product line. They’re always the last movers because more than any other financial institutions, they’re actually custodians of public money.”
But awareness is building. Narayanan believes that in recent years, there’s been a substantive shift towards environmentally and socially positive projects and he points to the various forms of voluntary standards adopted around the world as proof. “There’s been a shift in the west, but also in emerging markets,” he explains. “The fact that regulators from China to Brazil to Bangladesh are taking an active stance on pollution and climate issues, making sure that projects don’t have adverse environmental and social impact, is an indicator that the awareness has shifted. There’s clearly going to be a shift in the financing that goes with that.”
But despite the anecdotal and statistical evidence that points towards convalescence, there’s still a long way to go. A recent report authored by the Rainforest Action Network (RAN) outlines the involvement of US banks in the funding of coal-fired plants and mountaintop removal mining. While the statistics show that year-on-year these volumes are falling, the deals remain, in the eyes of many, multi-billion dollar blots on the banks’ copybooks. “The biggest challenge is that there’s so little transparency around trade deals,” the RAN’s Amanda Starbuck tells GTR. “We don’t even know the degree to which banks are involved in some of the most – or least – ethical sectors.” It’s an issue which the updated Equator Principles, relaunched in June of this year, set out to address.
With the lack of any binding regulation, the Equator Principles is the closest thing the project finance industry has to a moral compass. They’re a voluntary set of guidelines based on the IFC’s Performance Standards, used to determine, assess and manage social and environmental risk in project financing transactions worth more than US$10mn. To date, 80 banks, export ECAs and development financial institutions (DFIs) have signed up.
“The decision to adopt is voluntary,” Leonie Schreve chair of the Equator Principles Association and head of sustainable lending at ING explains to GTR. “Once banks have adopted, they commit to only provide financing or advice to projects that are willing to comply with the principles.”
Perhaps the most significant changes to 2013’s edition (version three) are the broadening of transactions covered and the pursuit of increased transparency. “We’ve changed the principles to cover more high-grade transactions which aren’t officially project finance, but which are similar, such as certain export finance transactions and corporate loans, generally known as buyer’s credit,” says Schreve.
“Also in terms of transparency, there’s more disclosure required, from both the lender and on the project side. For all the deals financed by Equator Principles members, the name and the banks financing it will be disclosed on our website. There are more enhanced requirements for the banks themselves to explain how the principles have been implemented in the transaction.”
But the update hasn’t been greeted so warmly by everyone. RAN’s Starbuck describes it as “hugely underwhelming”. She talks of a tension between some of the banks who would like to strengthen the principles further and the organisation’s desire to engage as many institutions as possible, which, she suggests, weakens them to a “lowest common denominator”. Some praise is reserved for the efforts of HSBC, which Starbuck says is beginning to responsibly address its funding of coal-fired plants, but there’s clear frustration at what she considers an opportunity missed. “The banking sector is moving in the direction of having improved due diligence around environmental and social responsibility issues,” she acknowledges – even if it’s moving at a pace below what RAN would consider ideal.
Green: the colour of money
In 1989, local conservationists halted the proposed construction of the Wesley Vale pulp mill in Tasmania. World Heritage protected sites account for around 40% of the Australian state’s land mass. While the forestry industry contributes around A$1bn to the local economy every year, locals were concerned over the waste the mill would create and how it would be disposed of. “The banks were very shy about it,” recalls Efic’s Peter Field. “The public was disenfranchised by it. There have been several attempts to make pulp mills since and they’ve always been heavily resisted. Part of the reason it hasn’t happened is because banks thought getting involved in something like this was, from a broad business perspective, value-destroying rather than value-adding. They do it for commercial reasons, as they should. I don’t know if you could say they’re driven by moral standards, but I think boards adopt business ethics because that’s what society demands.”
Herein lays the crux of environmental – or any other form of – financing: if there’s enough of a marketplace, banks will fund it. As profit-making organisations, it would be naive to expect financiers to adopt an altruistic about turn, but ethical business has never held more currency than it does now.
Annual investment in renewable technologies such as wind turbines and solar panels is set to triple by 2030. Line graphs plotted on the websites of banks across the world show that funding for renewable energy is overtaking that of coal-fired plants as a matter of course. There’s a long way to go and the next step must be for wholly commercially-led transactions to become the rule, rather than the exception. But for most, the penny has dropped. The economic success versus environmental performance debate became redundant a long time ago and as the effects of climate change continue to manifest, the two will converge further still. Those that fail to move with the times will almost certainly be left behind, relics of the past.