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For ABN AMRO, Sustainability Means Business

Christopher Wright

As part of a series about the world's biggest banks, the Ecosystem Marketplace surveys ABN-AMRO's approach to environmental risk and opportunity.

As part of a series about the world's biggest banks, the Ecosystem Marketplace surveys ABN-AMRO's approach to environmental risk and opportunity. Rijkman Groenink's visit to Washington D.C earlier this year was surely a mixed bag. On the upside, Groenink, the chairman of ABN AMRO, accepted the Gold Medal Award from the World Environment Center in recognition of his bank's demonstrated leadership in sustainability. Just one day earlier, however, Groenink saw his bank slammed in a full-page ad in the Washington Post. NGOs were unhappy with the institution for placing a bid to finance Phase II of the controversial Sakhalin oil project in the Russian Far East. In many respects, Groenink's trip to the U.S. capitol summarizes ABN AMRO's current position when it comes to engaging with environmental issues. The bank has been at the forefront in drafting new social and environmental standards for project finance (known as the Equator Principles), but on contentious projects, it must now determine how it plans to walk the talk. "ABN AMRO…continues to be among the leaders of the [environmental] debate," says Johan Frijns, the coordinator of Banktrack, a transnational NGO network monitoring the project finance decisions of the world's largest financial institutions. "But its pending decision on whether or not to finance the Sakhalin II project has become the biggest test it has faced." Banktrack argues that financing the project would violate the Equator Principles. ABN AMRO declined to comment on the pending decision. "Increasingly, our clients have to engage in projects in difficult geographies, with higher levels of political, environmental and social risks," explains Richard Burrett, global head of sustainable development at ABN AMRO. "The banks that have better expertise in dealing with those risks will be better positioned in the market." ABN-AMRO, it seems, is bent on converting environmental risk into economic opportunity. To wit, Banco ABN AMRO Real, its Brazilian affilitate, collected an FT Sustainability Award for integrating environmental and social issues into its business just last week.

Praise and Scrutiny

"For complex, high-risk projects, we only want to work with leading project sponsors with high capacity," says Burrett. "We will only do those projects with clients that we consider to meet the highest standard." To support its due diligence process, ABN AMRO initiated the use of a Client Diagnostic Tool in the oil, gas, metals and mining sectors last year. According to Burrett, it facilitates a more systematic evaluation of a client's capacity and commitment to managing environmental and social risk. Clearly, ABN AMRO has learned that standing out from the crowd by developing strong risk assessment and environmental management policies will give it plaudits. But praise generally comes with a dose of scrutiny. Critics, for instance, find it difficult to square ABN AMRO's commitment to mitigating climate change with its large investment portfolio in the oil and gas sector. ABN AMRO purchases 100 percent green energy for its Dutch facilities, and has committed to a 10 percent cut in its group-wide energy consumption by 2008 (relative to 2004), but it has largely avoided the issue of the "indirect" emissions resulting from its financing and investment activities. "To begin with, ABN AMRO should issue a policy statement that explains the relevance of climate change to its business, recognizes how its investments contribute to the problem, and outlines its role and responsibility in helping to solve it," says Donald Pols, leader of the Climate and Energy Campaign of Friends of the Earth (FOE) Netherlands. "This would provide the basis for setting reduction targets for indirect emissions." Movement on the issue of indirect emissions (i.e. those resulting from its financing and investment activities) may be on the horizon. According to ABN AMRO, it is currently undertaking a review of its energy business in recognition of its "indirect footprint," with an eye towards expanding and deepening its engagement with the climate issue. For Burrett, the significant greenhouse gas emissions associated with its clients in the energy sector represent an opportunity for ABN AMRO, not a problem.

More Than Risk

"For us, sustainability is more than risk," says Burrett. "A number of our clients in the energy sector are changing their focus towards sustainability. So if there are factors that will impact their business, we see an opportunity for us." As an example, Burrett alludes to the E.U Emissions Trading Scheme (ETS) that became active on its doorstep just last year. The initial growth in the trade of emissions allowances in the E.U. fueled a ten-fold increase in the global carbon market, now worth over US $10 billion. Many of ABN AMRO's clients have been allocated a significant number of emissions allowances, and it has already used allowances as security to underpin funding for some. It is also contemplating a syndicated debt facility for a client underpinned carbon credit business, which it predicts to be one of the first in the market. For ABN AMRO, then, climate change means business. Burrett, with an operational background in project finance, is working very closely with business units in his current role as global head of sustainable development. Pols is not surprised. "Dutch companies realized early on that you can make money from sustainability," he says. "They are front runners in developing commercial products in the climate and energy business." Last year, ABN AMRO arranged the world's first bank intermediated carbon credit transaction between two private sector organizations under the Kyoto Protocol's Clean Development Mechanism (CDM). The bank purchased Certified Emission Reductions (CERs) from two hydroelectric projects in Fiji and sold them on to a British buyer. In addition, ABN AMRO has identified viable business opportunities associated with the launch of the E.U Emissions Trading Scheme, by offering carbon trading and clearing services through two units, ABN AMRO Futures and Commodity Derivatives. "People are just getting used to how this market trades," says Burrett. "But as our clients become more comfortable and sophisticated, they will use liquidity embedded in the EU allowances they have been provided as collateral to get financing." ABN AMRO's global client base in the energy sector places it in a strong position to facilitate transactions in carbon markets. With a sustainability strategy geared towards serving the commercial needs of clients, however, environmental business growth is contingent on market development. "The development of the carbon market has been too slow, which is quite frustrating for those of us participating in it," says Burrett. "We still have a large number of clients looking to develop business in this area as investors in CDM projects." Ben Vitale, senior director for ecosystem markets and finance at Conservation International, sees great potential in these markets, and hopes ABN AMRO can help develop them further. "There is currently a huge financing gap with regards to CDM projects in developing countries," he says. "In addition to responding to client demand, it is important that banks and other large financial investors become more involved in supporting accepted standards for emerging environmental markets, and providing some initial capital for projects."

Angel Investors?

As part of the current review, ABN AMRO is also assessing the potential for investment opportunities in the sustainable energy market during the next 10-15 years, with an eye towards expanding its participation. By most measures, it would be a wise business decision. According to a report released by the Renewable Energy Policy Network for the 21st Century (REN21), recent growth in renewable energy capacity has been impressive, with grid-connected solar photovoltaics (PV) leading the pack of renewable energy technologies with a 60 percent average annual growth rate between 2000 and 2004, followed by wind (28 percent) and biodiesel (25 percent). "Banks continue to actively seek investments in the fossil fuel market," says Pols. "We think they should invest the same amount of resources in identifying and financing renewable energy projects." Perhaps heeding the call, ABN AMRO will activate a new global private equity fund for investments in renewable energy and clean technology later this year. It aims to catalyze financing to these markets by leveraging its own funding contribution as a cornerstone investor with investments from its clients. At this stage, Burrett is cautiously optimistic. "If you look at the numbers in the market, we do see investment opportunities in wind and solar," he says. "But developing individual projects can be tough in certain areas." As an example, he alludes to the fact that rapid growth in the wind power market has resulted in a shortage of wind turbines, which is putting a squeeze on profitability. As a result of such market imperfections, Burrett says it is difficult to identify investment opportunities in renewable energy markets at a satisfactory price. Furthermore, as markets mature and competition grows, he expects current profit margins to decrease. Vitale agrees that sustainable investment projects in low-income countries are generally smaller in scale, produce lower financial returns and involve different risks than most large-scale investments in developed countries. "When considering these projects, banks need to be prepared to accept a level of profitability and investment risk commonly associated with micro-financing in developing countries," says Vitale. "But combined with the good intentions and multiple benefits of such projects, they still offer a compelling opportunity for investors."

From Following to Leading

ABN AMRO is not alone in moving with caution. A perception of excessive risk in renewable energy markets is also preventing other commercial banks from taking the plunge. At this stage, most banks have barely dipped their toes in and are instead eagerly awaiting the maturation of the market. There is an expectation that government should provide the necessary long-term commercial incentives to make renewable energy investments financially viable. According to the REN 21 report, at least 48 countries already have some kind of renewable energy promotion policy in place, including China and India. "Banks should not simply wait for favorable regulatory structures to emerge and for environmental markets to mature," says Vitale, using the challenge of sustainable water and energy resource management in China as an example. "By participating in integrated resource planning together with public agencies and civil society groups, financial institutions can take part in forming solutions by providing their unique expertise and gaining first-mover advantages in relation to future business opportunities." Pols argues that banks should go further than this, by aggressively lobbying for the greening of regulatory frameworks. "They are putting strong pressure on government to provide favorable policy environments for financial services," he says. "They should do the same for renewable energy." For its part, ABN AMRO has advocated a transition to a low-carbon economy as a member of the Corporate Leaders Group convened by the University of Cambridge Programme for Industry under the auspices of the HRH The Prince of Wales's Business and the Environment Programme (BEP). Last May, the group issued a policy statement ahead of the G8 Summit advocating the business case for long-term government action on climate change. But as long as the demand for energy financing persists, ABN AMRO will likely continue to bid for oil and gas projects, armed with a strong commitment to the Equator Principles and a variety of sector-specific risk policies. Consequently, the scale and pace at which ABN AMRO addresses climate change will likely be decided by changes in client demand, the development of environmental markets, and the investment opportunities presented by them. "Identifying a business case is critical to mobilizing internal support for the sustainability agenda," says Burrett. "Therefore, as markets are changing and new risks are emerging, the question for us is how we can better safeguard the interests of our investors while generating new business for ourselves." Christopher Wright is a London-based contributor to the Ecosystem Marketplace. He may be reached at c.m.wright@lse.ac.uk. First published: June 20, 2006 Please see our Reprint Guidelines for details on republishing our articles.

Please see our Reprint Guidelines for details on republishing our articles.