BANKS SUPPORTING ENERGY TRANSITION
International Banks committed to Grow Sustainable Finance for a Positive impact on Societies and Economies
Layal Nabhan, IBEF 2019, The Future of Green Financing Sept 27th FINANCE IS AT THE VERY HEART OF AN ESSENTIAL SHIFT TO MORE SUSTAINABLE DEVELOPMENT, BASED ON A MORE INCLUSIVE AND SUSTAINABLE ECONOMY.
$2.5 trillion annual The social & green funding Gap bond Market
Developing countries…
4.5 1.2 Global bond market 1 EUR 90 trillion
2.5
Green & Social Bond Market EUR 511bn Investment needs Public flows Private flows Financing gap
Not to scale
…of which US$1.3 trillion in Africa only (2.5bn population in 2050 +108%) Still a drop in the ocean… TODAY BANKS ARE FACING INCREASING E&S RISKS & NEED TO MEET SUSTAINABILE BUSINESS DEVELOPMENT CHALLENGES
MANAGE E&S RISKS DEVELOP SUSTAINABLE & ENERGY Incl. CLIMATE RISK TRANSITION OPPORTUNITIES
• Creditworthiness of borrowers • Capture growth in a capital intensive sector • Optimal allocation of capital to green and brown assets • Financing energy transition • Alignment with 2°C scenario • Fund emerging technologies & new bankable business models • Reputation issues • Innovate financial solutions structures BANKS TODAY ARE COMMITTED TO MAKE A POSITIVE IMPACT ON SOCIETIES AND ECONOMIES
ENGAGE FOR THE CLIMATE & SUSTAINABILITY
INNOVATE SATISFY SUSTAINABLE INVESTORS FINANCING NEEDS SOLUTIONS
MEET MANAGE REGULATIONS E&S RISKS A POSITIVE REGULATORY PUSH IS ENCOURAGING GREEN AND SUSTAINABLE FINANCE PRODUCTS SPECIALLY IN THE EU
POSITIVE REGULATORY PUSH TOWARDS GROWTH OF SUSTAINABLE BANKING
• French Article 173 – Law on Energy Transition and for Green Growth • FSB‐ TCFD Task Force on Climate related financial disclosures (June 17) • The European Comission’s Action plan on sustainable finance including a taxonomy classification tool for sustainable economic activities (Mar 18) A HISTORY OF COMMITMENTS…
ENGAGED FOR THE CLIMATE AND SUSTAINABILITY
1999 2000 2001 2003 2007 2014 2015 2018 OECD Wolfsberg UNEP Global impact Equator Green bond PARIS COP21 PRINCIPLES principles principles FOR RESPONSIBLE Founding member & UN-PRI BANKING WHAT ARE THE « BANKING PRINCIPLES » OF THE UNEP-FI ? SIGNATURE DURING NYC CLIMATE WEEK WITH MORE THAN 130 BANKS
ENGAGED FOR THE CLIMATE AND SUSTAINABILITY
• Principles for Responsible Banking launched this week during UN Climate change summit (Sept 24th‐30th) • More than 45 CEOs together with the UN Secretary‐General attended the ceremony • With 130 signatory banks representing $47 trillion of assets
To learn more about Banking Principles: https://www.unepfi.org/banking/bankingprinciples BANKS WITH COMMITMENTS TO REDUCE FOSSIL FUEL EXPOSURE
ENGAGED FOR THE CLIMATE AND SUSTAINABILITY
No new coal mines ALIGNMENT WITH 2°C TRAJECTORY No coal‐fired power plants Phase out of coal roadmap in line with COP21 HSBC Societe Generale Bank of America BNP Paribas JP Morgan ING Group Morgan Stanley Credit Agricole Oil from Tar Sands Citi Santander BNP Paribas, ING Group, Credit Agricole UniCredit Natixis UBS Deutsche Bank (No pipeline projects), HSBC (reduction of Commerzbank exposure), Natixis,Commerzbank, BBVA BBVA (partial exclusion of certain tar sands UBS (only Asset Mangement) projects), Rabobank
No Yes Oil & Gas exploration in the Arctic BNP Paribas, ING Group, Credit Agricole, Natixis, Commerzbank, BBVA,
Shale natural gas BNP Paribas, Commerzbank, Rabobank
Source: Company Registration Documents and Annual Reports (2018) COMMITMENTS ARE ALSO FINANCIAL TO STEER ENERGY TRANSITION
ENGAGED FOR THE CLIMATE AND SUSTAINABILITY
$100bn sustainable financing by 2025 €100bn Green financing $250bn commitment to arrangement by 2020 and finance finance low carbon 1/3 of France’s renewable energy Steer €600bn of portfolio economy by 2030 towards 2°C scenario transition by end of 2019 Double climate finance portfolio from €16.5bn to $100bn €33bn by 2022 $200bn commitment commitment to to sustainable finance energy financing transition activities
EUR 100bn in financing for the energy transition from 2016 to 2020 Societe Generale has almost €15bn financing of $300bn commitment achieved this target and now €168bn finance SDG’s* to renewable energy to finance low‐ carbon committed to 120bn by 2023 date by 2020 by 2030 Commitment to finance €15Bn Renewable Energy by 2020
Source: Company Registration Documents and Annual Reports (2018) BANKS TODAY ARE COMMITTED TO MAKE A POSITIVE IMPACT ON SOCIETIES AND ECONOMIES
ENGAGE FOR THE CLIMATE & SUSTAINABILITY
INNOVATE SATISFY ESG SUSTAINABLE INVESTORS FINANCING NEEDS SOLUTIONS
MEET MANAGE REGULATIONS E&S RISKS GREEN BONDS: A FAST GROWING MARKET COVERING AN ARRAY OF ISSUERS
INNOVATE SUSTAINABLE FINANCING SOLUTIONS The year 2019 will witness the passing of the $200bn threshold mark compared to ~$170bn with an aim to reach $1tn in the medium term • Non-financial corporates lead with 26% of volume, followed by financial corporates at 19% of H1 issuance • Emerging markets make up nearly a fifth (19%) of issuance with China’s lead • Sovereign green bond issuance growing: 3 new issuers enter the market bringing total to 12. The Dutch and Chilean governments issue Certified Climate Bonds
Sources: Climate Bond Initiative 2019 OPPORTUNITIES – GREEN BONDS: GREEN BOND PRINCIPLES
INNOVATE SUSTAINABLE FINANCING SOLUTIONS
Process for Project Use of proceeds for Management of 1 2 Evaluation and 3 4 Reporting green projects Selection Proceeds
Green & Social Bond market
STRUCTURING, PRICING AND ISSUANCE PROCESS SIMILAR TO STANDARD SENIOR BOND IN ADDITION TO ESG* EVALUATION AND REPORTING TO RESPONSIBLE INVESTORS
*ESG : Environnemental, Social and investment factors analysed by SRI (socially responsible investors) in addition to classical financial features BUT GREEN BONDS ARE NOT THE ONLY SUSTAINABLE PRODUCTS, INNOVATIVE SUSTAINABLE FINANCE PRODUCTS & SERVICES
INNOVATE SUSTAINABLE FINANCIAL SOLUTIONS
SUSTAINABLE LINKED LOANS SUSTAINABLE BONDS
Usually General Corporate Purpose expenditures Aims at financing clearly earmarked projects generating environmental or social benefits Include green/social objectives along the maturity of the loan -ESG targets reflecting Client’s CSR strategy Structuring articulated on the Green/Social Bond Principles(2) -Monitoring Client’s achievement of the ESG targets through KPIs - Use of Proceeds -Banks pool engagement along Corporate CSR strategy - Project Evaluation & Selection - Management of Proceeds - Reporting
GREEN LOANS
Aligned with the Green Loan Principles (1) :
-The proceeds are dedicated to the financing of « Green projects » -The Green projects are selected and evaluated through predefined ESG Client Advisory eligibility criteria Enhancing the Client management of its E&S -Reporting covering proceeds allocation and impacts of the projects impacts Improving the extra-financial communication Accessing to tailormade E&S products to support the E&S strategy IS ESG RATING THE FUTURE OF CREDIT PRICING OF LOANS?
INNOVATE SUSTAINABLE FINANCIAL SOLUTIONS
Sustainable linked syndicated loan VERBUND successfully placed the first ESG (Environmental Social Governance) linked syndicated loan in the amount of 500 million euros with 12 banks on 10 December 2018.
Source : Verbund website (Austrian utility) 14 FROM CORPORATES TO INVESTORS: THE SUSTAINBLE INVESTMENT VALUE-CHAIN
SATISFY INVESTORS FACTORING IN ENVIRONMENT, SOCIAL & GOVERNANCE (ESG)
Engagement
CORPORATE SOCIAL ESG RATINGS & SUSTAINABLE RESPONSIBILITY Company RESEARCH INVESTING Data provision disclosures Tns waiting to be Managing a corporation’s Rating issuers’ environmental & social environmental, social & deployed impacts. governance performance. Identifying financially Negative screening: Norms‐ based or activity‐based (SRI). Questions & material ESG factors and Study requests Media watch strategies. Positive selection: ”best‐in‐ class” screening, thematic investing.
BANKS ARE AT THE CROSSROADS BETWEEN FINANCING NEEDS AND INVESTORS SEEKING TO MAKE A POSITIVE IMAPCT AMBITION TO HARNESS GLOBAL ECONOMY TOWARDS SUSTAINABLE SOLUTIONS
Banks have the financial solutions Investors are more than willing to shift their capital towards a sustainable and low carbon economy The political will of governments is shifting progressively from brown to green The private sector must have audacious ambitions to grow economically without depleting earth’s resources OPPORTUNITIES – GREEN BONDS: GREEN BOND PRINCIPLES
Use of proceeds for Description of sustainable theme or category of projects to be financed 1 green projects Indication on whether the bond will fund new projects and/or refinance existing projects/investments
Description of the decision-making process to determine the eligibility of projects to be financed Process for Project Eligibility criteria may combine on one hand points specific to the industry and sustainability theme and on the other hand general elements covering human rights, labour, governance, anti-corruption, health & safety, 2 Evaluation and responsible relationships with suppliers and local stakeholders Selection ESG rating agency may assist the company to define criteria reflecting CSR policy and objectives to ensure optimal understanding and acceptance by the SRI community (meeting also main international norms)
SRI market participants have accepted different levels of tracking and segregation processes
Management of Best-in- class structures include proceeds tracking, allocation to a sub portfolio before being invested in the 3 Proceeds projects and an annual reporting from auditors
Fund segregation does not prevent the company to temporarily invest in money markets
Reporting is key for SRI community as it guarantees issuer's transparency on use of proceeds and sustainability performance of investment until notes redemption Green bond issuers are encouraged to report on both the use of proceeds and expected sustainability impacts The use of proceeds reporting should provide, on an annual basis: the list of projects allocated 4 Reporting the allocated amount per projects or on a portfolio basis the investment of unallocated proceeds The impact reporting should provide quantitative and qualitative information about the environmental or social results of projects, based on key performance indicators, per project or on a portfolio basis Auditors are well placed to produce the reports which may be included in the sustainability report Reports should be good occasion to reinitiate communication on the ESG policy
CONFIDENTIAL MAY 2019 STRUCTURE SUMMARY COMPARISON
STANDARD SENIOR BOND GREEN BOND
PRICING & Pricing and duration dictated by relative value, market Pricing in line with standard bond DURATION environment and investor sentiment
DOCUMENTATION Documentation similar to previous Euro transaction Additionally, includes the ESG agency second opinion
Strong demand currently present for non-rated Potential for some incremental demand from SRI LIQUIDITY issuance accounts looking specifically for green bonds Vestas will be allocated into SRI portfolios
Additional attendance from SRI analysts (credit and 1-team over 3-days visiting large institutional investors equity) ROADSHOW Large institutional credit analysts expected to attend The presentation would largely focus on your ESG policy
Broaden coverage in mainstream media and SRI Focused on established bond market participants, MARKETING publications bond specific publications and local press Greater focus on ESG credentials
7-8 weeks, but parallel process with ESG agency TIMELINE 7-8 weeks creates some additional work
USE OF Dedicated to capex, operations or acquisitions of General corporate purpose (full flexibility) PROCEEDS green activities
Additional cost is limited to ESG agency validation and COST Cost similar to previous Euro transaction opinion (~€50K)
File Annual and Interim Financial Statements with Additional annual reporting on use of proceeds until all ONGOING stock exchange along with any material development funds are invested in the sustainability report or REPORTING via press release specific letter
CONFIDENTIAL 43 MAY 2019 ALD SA
Inaugural Positive Impact bond – EUR 500m 4-year due October 2022 Issuer: ALD SA Nominal: EUR 500m Issuer rating: BBB / A- (S&P / Fitch) Maturity: 11 October 2022 Type: Senior Unsecured Positive Impact Bond Coupon: 1.250% Launch: 4 October 2018 Spread: MS+100bp Inaugural Senior Unsecured PIB SGCIB Sole Structuring Advisor and bookrunner 1.250% 11-Oct-22
EUR 500,000,000 Key features of the transaction “Eligible vehicles” that contribute to the development of SoleBookrunner clean transportation and the transition to a low carbon ALD SA is the holding company of ALD Automotive, a leading global player in fleet management and mobility solutions, 80% owned by Société FRANCE 04/10/2018 future: USE OF Electric vehicles (EV) and fuel cell vehicles Générale. The leasing group is ranked #2 worldwide with a presence in 43 PROCEEDS Hybrid electric vehicle (HEV) and Plug-In Hybrids countries and 1.59 million vehicles under management Vehicles (PHEV) with tailpipe CO2 emissions below 85 ALD has established a Positive Impact Bond Framework, aligned with both grams of CO2 per kilometer travelled the UN Environment Finance Initiative’s Principles for Positive Impact Finance (2017) and the Green Bond Principles (2018) Finance Department monitors financial eligibility After a few volatile sessions due to Italian budget news, ALD decided to CSR department identifies eligible vehicles based on the take advantage of a supportive market window to issue its inaugural SELECTION & above categories; selects based on greatest net positive Positive Impact Bond – the first ever benchmark Positive Impact Bond from EVALUATION contribution to climate an European issuer in the automotive sector Dedicated Committee validates the selected portfolio Outcome MANAGEMENT Tracking of the net proceeds through internal system OF PROCEEDS Unallocated proceeds held in cash ALD successfully managed to price its EUR 500m 4Y Positive Impact Bond, tightening the spread by 15bp from IPTs to final price: IPTs: MS+115p area Annual reporting on: MS+100bp ● Allocation of the proceeds Final spread : ● Annual GHG emissions in tons of CO2 equivalent (Scope 1) The transaction has attracted a high-quality orderbook in excess of EUR REPORTING ● Annual GHG emissions reduction in tons of CO2 equivalent 1.2bn with more than 75 investors involved (Scope 3) using the Life Cycle Assessment (LCA) methodology developed with the external expert Quantis
External Consultant Quantis for the Life Cycle Assessment (GHG, NOx and PM emissions) EXTERNAL Second Party Opinion from Vigeo Eiris on the Framework, REVIEW confirming alignment with ICMA GBP and UNEP FI Positive Impact Principles Climate Bond Initiative certification
CONFIDENTIAL MAY 2019 TRENDS AND MARKET OUTLOOK
Green Bonds have caught policy attention as a means to Sovereigns issuing green bonds address climate change Issuance has been from both developing and emerging The European Commission published the first set of legislative markets with small but important symbolic issues from proposals which notably aims at defining a unified EU countries like Fiji and Nigeria classification system ('taxonomy’) to determine sustainable Sovereign issuance will grow as governments seek to activities. The text will also form the basis of an EU Green promote sustainable policy agendas, and encourage Bond Standard private capital into low-carbon and climate-resilient In China, India, Japan, Hong Kong, authorities have adopted infrastructure guidelines or standards to develop green bonds Green & Social Bond market
Growing number of mainstream investors are interested in Impact measurement and reporting is increasingly adding green bonds to their portfolios expected by investors Increasingly, investors are using ESG analysis in portfolio Article 173 of the Energy Transition Law in France sets out construction. This take a variety of forms, ranging from negative climate change reporting requirements for investors screening to dedicated Green/Social Bond funds The FSB’s Task Force on Climate-related Financial Rise of initiatives on the labelling of funds Disclosures (TCFD) prompts banks to focus on In France, Label ISR, label TEEC quantitative reporting on green finance Morningstar integrated Sustainalytics data to grant ESG ratings European Commision legislative package includes a to funds directive on Investors' duties and disclosures
CONFIDENTIAL MAY 2019 IMPACT & GREEN LOANS – SETTING THE SCENE
On March 20, 2019, LMA(1), and LSTA(2), jointly announced the release of the Sustainable Linked Loan Principles (SLLP), complementing the Green loan Principles (GLP) defining a set of “Sustainable loan guidelines”.
Sustainability-linked loan = IMPACT LOAN GREEN LOAN
Usually finances General Corporate Purpose expenditures and include Aims at financing clearly earmarked projects generating environmental green/social features along the maturity of the loan benefits.
• ESG(3) targets reflecting Client’s CSR(4) strategy The Green Loan Principles focus on transparency of the investments and their • Monitoring Client’s achievement of the ESG targets through KPIs benefits: • Banks pool engagement along Corporate CSR strategy • The proceeds are dedicated to the financing of « Green projects » • The Green projects are selected and evaluated through predefined eligibility The Sustainable Linked Loan Principles (SLLP) apply to any type of loan criteria instrument with the aim to incentivize the sustainability performance of the • Reporting covering proceeds allocation and impacts of the projects borrower. The SLLP are voluntary recommended guidelines intended by a broad use of the The GLP constitute voluntary recommended guidelines to be applied to any form market to be applied by the market participants on deal by deal basis depending of loan instrument that may be categorized as “green”. The fundamental on the underlying characteristics of the transaction. determinant of a green loan is the utilization of loan proceeds for Green Projects.
Here is the publication on Impact Loans Here is the publication on Green Loans
(1) Loan Market Association covering EMEA markets (2) The Loan Syndication and Trading Association – the US industry body (3) Environmental, Social and Governance (4) Corporate Social Responsibility
INTERNAL PRESENTATION │ MARCH 2019 │ 21 IMPACT LOANS – MARKET OUTLOOK
67 large deals have incorporated a sustainable feature since 2017 representing more than €66bn amount raised in the market
Yet, Impact loans are very recent. They remain a small contributor to the European syndicated loans market overall. It represented €343bn in 2017, €417bn in 2018 and €110bn YTD April 2019 The sustainability features can be based on: ESG score assessed by an extra-financial agency - Sustainalytics, Vigeo Eiris, GRESB, EcoVadis, Ethifinance,… Internal Key Performance Indicators (KPIs) based on the CSR strategy of the borrower Or a mix of both
IMPACT RCF MECHANISM IN THE SYNDICATED LOAN MARKET GEOGRAPHICAL SPLIT OF IMPACT RCF
20,000 18,000 37% 16,000 ESG 14,000 ESG + KPI 12,000 10,000 59% KPI 8,000 6,000 4% 4,000 2,000 -
Source: Public Domain
INTERNAL PRESENTATION │ MARCH 2019 │ 22 SUSTAINABLE INVESTMENT A RAPIDLY EXPANDING MARKET
+25% globally since 2014, with a significant growth in the US Europe Growth of SRI assets by region Regulatory developments mid‐2010’s sparked the growth, proof of financial 2014‐2016 materiality led to surge in last 3/4 yrs + 33% US From $6.57 tn to $8.72 tn + 12% Europe From $10.77 tn to $12.4 tn
North America Retail Share as of 2018 Total US AUM using SRI in % of total SRI AUM 2018 strategies, represent $12tn in 2018 (1 in 4 dollars) US Europe 25 % 30.7%
ESG = Environment, Social Governance, aka SRI = Socially Responsible Investment Source: Global Sustainable Investment Alliance “2016 Global Sustainable Investment Review” Source: The US SIF 2018 Report on US Sustainable, Responsible and Impact Investing Trends DOING GOOD AND DOING WELL: EMPIRICAL EVIDENCE FOR ESG PERFORMANCE
CEO VALUE SRI BEYOND INTEGRATION INVESTORS VOICE
Strategy: Value stocks with « sound » Strategy: Quantitative selection of Financial materiality drives 2/3 of the corporate governance practices «best‐in‐class » ESG stocks demand for sustainable investment (Eurosif Track‐record: 11 years Track‐record: 5 years 2018) Outperformance: +54.5% vs. Stoxx Outperformance: +27.7% vs. Stoxx 82% use ESG because it is financially 600 (31/12/2018) 600 material to performance (CFA, 2018) More than two‐thirds say that integration of ESG has significantly improved returns and helped with managing volatility (Statestreet 2017)
REGULATORS VIEWS
A fiduciary duty for PF to integrate material ESG factors
Source: Societe Generale Cross Asset Research/ESG 31/12/2018 Source: Societe Generale Cross Asset Research/ESG 15/10/2018 SUSTAINABLE INVESTMENT SOLUTIONS: The impulse comes from all sides
INCREASED AND DIVERSIFIED DEMAND Demonstrated financial materiality mitigate risks | seize growth opportunities New end‐investors political commitments |global awareness | millennial | retail New themes 2° alignment | diversity | EM | UN SDGs New asset classes Fixed Income | Impact investing MOUNTING REGULATORY PRESSURE Product standards Labels | ESG Benchmarks | Disclosures Investor protection Product governance | Suitability tests FINANCIAL INDUSTRY COMMITMENTS Insurers PSI | No more investing or underwriting of coal business Pension Funds GPIF ESG benchmarks | Dutch PF’s UN SDG support CEOs of major Global Banks making Banks Principles for Responsible Banking commitments at the Paris Climate Finance Day in Nov 2018 BANKS HAVE SET UP ENVIRONMENTAL & SOCIAL RISK MANAGEMENT FRAMEWORK
MANAGE ENVIRONNEMENTAL & SOCIAL RISKS The E&S evaluation framework aims at: E&S Evaluation Framework includes 2 process: IDENTIFYING • Client Process • Transaction Process
EVALUATING
MITIGATING Each process consists of 3 steps: E&S risks of: 1 IDENTIFICATION Identify the existence or not of E&S risks OUR CORPORATE CLIENTS
We do business with, both current clients and new clients 2 EVALUATION Analyze E&S risks identified and give a positive or negative evaluation of E&S risks or opportunities OUR TRANSACTIONS
Mainly Transactions dedicated to finance a 3 ACTIONS specific Asset / project Define, if necessary, an action plan to mitigate E&S risks AND COMMITTED TO EVALUATE, MITIGATE AND DISCLOSE IMPACT OF CLIMATE CHANGE ON FINANCIAL RISKS
MANAGE ENVIRONNEMENTAL & SOCIAL RISKS
Depending on the corrective response, several climate scenarios can unfold over the next years and decades Source: Oliver Wyman – Climate change managing a new financial risk ‐ 2019