banks supporting energy transition · • fundemergingtechnologies & new bankable business...

BANKS SUPPORTING ENERGYTRANSITION

Layal Nabhan, IBEF 2019,The Future of Green FinancingSept 27th

International Banks committed to Grow Sustainable Finance for a Positive impact on Societies and Economies

FINANCE IS AT THE VERY HEART OF AN ESSENTIAL SHIFT TO MORE SUSTAINABLE DEVELOPMENT, BASED ON A MORE INCLUSIVE AND SUSTAINABLE ECONOMY.

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Investment needs Public flows Private flows Financing gap

Developing countries…

$2.5 trillion annual funding Gap

…of which US$1.3 trillion in Africa only(2.5bn population in 2050 +108%)

Not to scale

The social & green bond Market

Still a drop in the ocean…

Green & Social Bond MarketEUR 511bn

Global bond marketEUR 90 trillion

TODAY BANKS ARE FACING INCREASING E&S RISKS & NEED TO MEET SUSTAINABILEBUSINESS DEVELOPMENT CHALLENGES

MANAGE E&S RISKSIncl. CLIMATE RISK

DEVELOP SUSTAINABLE & ENERGY TRANSITION OPPORTUNITIES

• Creditworthiness of borrowers• Optimal allocation of capital to green and brown assets• Alignment with 2°C scenario• Reputation issues

• Capture growth in a capital intensive sector• Financing energy transition• Fund emerging technologies & new bankable business models• Innovate financial solutions structures

BANKS TODAY ARE COMMITTED TO MAKE A POSITIVE IMPACT ON SOCIETIES AND ECONOMIES

ENGAGEFOR THE CLIMATE &

SUSTAINABILITY

SATISFY INVESTORS NEEDS

INNOVATESUSTAINABLEFINANCINGSOLUTIONS

MEETREGULATIONS

MANAGEE&S RISKS

A POSITIVE REGULATORY PUSH IS ENCOURAGING GREEN AND SUSTAINABLE FINANCE PRODUCTS SPECIALLY IN THE EU

• 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)

POSITIVE REGULATORY PUSH TOWARDS GROWTH OF SUSTAINABLE BANKING

A HISTORY OF COMMITMENTS…

1999OECD

2000Wolfsberg

Founding member

2001UNEP

2003Global impact

2007Equator

principles

2015PARIS COP21

2014Green bond principles & UN-PRI

2018PRINCIPLES

FOR RESPONSIBLEBANKING

ENGAGED FOR THE CLIMATE AND SUSTAINABILITY

WHAT ARE THE « BANKING PRINCIPLES » OF THE UNEP-FI ?SIGNATURE DURING NYC CLIMATE WEEK WITH MORE THAN 130 BANKS

• 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


Oil from Tar SandsBNP Paribas, ING Group, Credit Agricole (No pipeline projects), HSBC (reduction of exposure), Natixis,Commerzbank, BBVA (partial exclusion of certain tar sands projects), Rabobank

Oil & Gas exploration in the ArcticBNP Paribas, ING Group, Credit Agricole, Natixis, Commerzbank, BBVA,

Shale natural gasBNP Paribas, Commerzbank, Rabobank

Source: Company Registration Documents and Annual Reports (2018)

ALIGNMENT WITH 2°C TRAJECTORY

YesNo

Societe GeneraleBNP ParibasING GroupCredit AgricoleSantander Natixis Deutsche BankCommerzbankBBVA UBS (only Asset Mangement)

HSBCBank of AmericaJP MorganMorgan Stanley CitiUniCreditUBS

BANKS WITH COMMITMENTS TO REDUCE FOSSIL FUEL EXPOSURE

No new coal minesNo coal‐fired power plants Phase out of coal roadmap in line with COP21


COMMITMENTS ARE ALSO FINANCIAL TO STEER ENERGY TRANSITION

$300bn commitment to finance low‐ carbon

by 2030

$200bn commitment to sustainable financing

$100bn sustainable financing by 2025

€168bn finance SDG’s* to date

Commitment to finance €15Bn Renewable Energy

by 2020

EUR 100bn in financing for the energy transition from 2016

to 2020Societe Generale has almost achieved this target and nowcommitted to 120bn by 2023

€15bn financing of renewable energy

by 2020

Steer €600bn of portfolio towards 2°C scenarioDouble climate finance

portfolio from €16.5bn to €33bn by 2022

$250bn commitment to finance low carbon economy by 2030

$100bn commitment to finance energy

transition activities

€100bn Green financing arrangement by 2020 and finance 1/3 of France’s renewable energy

transition by end of 2019

Source: Company Registration Documents and Annual Reports (2018)


BANKS TODAY ARE COMMITTED TO MAKE A POSITIVE IMPACT ON SOCIETIESAND ECONOMIES

ENGAGEFOR THE CLIMATE &

SUSTAINABILITY

SATISFY ESG INVESTORS NEEDS

INNOVATESUSTAINABLEFINANCINGSOLUTIONS

MEETREGULATIONS

MANAGEE&S RISKS

GREEN BONDS: A FAST GROWING MARKET COVERING AN ARRAY OF ISSUERS

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

INNOVATE SUSTAINABLE FINANCING SOLUTIONS

Use of proceeds for green projects

Process for Project Evaluation and

SelectionManagement of

Proceeds Reporting1 2 3 4

OPPORTUNITIES – GREEN BONDS: GREEN BOND PRINCIPLES

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

INNOVATE SUSTAINABLE FINANCING SOLUTIONS

Green &Social Bond

market

BUT GREEN BONDS ARE NOT THE ONLY SUSTAINABLE PRODUCTS, INNOVATIVE SUSTAINABLE FINANCE PRODUCTS & SERVICES

SUSTAINABLE LINKED LOANSUsually General Corporate Purpose expendituresInclude green/social objectives along the maturity of the loan-ESG targets reflecting Client’s CSR strategy-Monitoring Client’s achievement of the ESG targets through KPIs-Banks pool engagement along Corporate CSR strategy

SUSTAINABLE BONDSAims at financing clearly earmarked projectsgenerating environmental or social benefits

Structuring articulated on the Green/Social Bond Principles(2)

- Use of Proceeds- Project Evaluation & Selection- Management of Proceeds- Reporting

ESG Client AdvisoryEnhancing the Client management of its E&S impacts Improving the extra-financialcommunication

Accessing to tailormade E&S products to support the E&S strategy

GREEN LOANSAligned 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 eligibility criteria-Reporting covering proceeds allocation and impacts of the projects

INNOVATE SUSTAINABLE FINANCIAL SOLUTIONS

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Sustainable linked syndicated loanVERBUND 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.

IS ESG RATING THE FUTURE OF CREDIT PRICING OF LOANS?

Source : Verbund website (Austrian utility)

INNOVATE SUSTAINABLE FINANCIAL SOLUTIONS

SUSTAINABLE INVESTING

Tns waiting to be deployed

Negative screening: Norms‐based or activity‐based (SRI).

Positive selection: ”best‐in‐class” screening, thematic investing.

ESG RATINGS & RESEARCH

Rating issuers’environmental, social & governance performance.

Identifying financiallymaterial ESG factors and strategies.

CORPORATE SOCIAL RESPONSIBILITY

Managing a corporation’s environmental & socialimpacts.

Questions &Media watch

Data provision

Study requests

Companydisclosures

Engagement

FROM CORPORATES TO INVESTORS: THE SUSTAINBLE INVESTMENT VALUE-CHAIN

SATISFY INVESTORS FACTORING IN ENVIRONMENT, SOCIAL & GOVERNANCE (ESG)

BANKS ARE AT THE CROSSROADS BETWEEN FINANCING NEEDS AND INVESTORS SEEKING TO MAKE A POSITIVE IMAPCT

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 shiftingprogressively from brown to green

The private sectormust have audacious ambitions to grow economically without depleting earth’s resources

AMBITION TO HARNESS GLOBAL ECONOMYTOWARDS SUSTAINABLE SOLUTIONS

Use of proceeds for green projects

Description of sustainable theme or category of projects to be financed Indication on whether the bond will fund new projects and/or refinance existing projects/investments

Process for Project Evaluation and

Selection

Description of the decision-making process to determine the eligibility of projects to be financed 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,responsible relationships with suppliers and local stakeholders

ESG rating agency may assist the company to define criteria reflecting CSR policy and objectives to ensureoptimal understanding and acceptance by the SRI community (meeting also main international norms)

Management of Proceeds

SRI market participants have accepted different levels of tracking and segregation processes

Best-in- class structures include proceeds tracking, allocation to a sub portfolio before being invested in the projects and an annual reporting from auditors

Fund segregation does not prevent the company to temporarily invest in money markets

Reporting

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 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 portfoliobasis

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

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CONFIDENTIALMAY 2019

OPPORTUNITIES – GREEN BONDS: GREEN BOND PRINCIPLES

STANDARD SENIOR BOND GREEN BOND

PRICING & DURATION

Pricing and duration dictated by relative value, market environment and investor sentiment Pricing in line with standard bond

DOCUMENTATION Documentation similar to previous Euro transaction Additionally, includes the ESG agency second opinion

LIQUIDITY Strong demand currently present for non-rated

issuance Vestas will be allocated into SRI portfolios

Potential for some incremental demand from SRIaccounts looking specifically for green bonds

ROADSHOW 1-team over 3-days visiting large institutional investors Large institutional credit analysts expected to attend

Additional attendance from SRI analysts (credit and equity)

The presentation would largely focus on your ESG policy

MARKETING Focused on established bond market participants, bond specific publications and local press

Broaden coverage in mainstream media and SRI publications

Greater focus on ESG credentials

TIMELINE 7-8 weeks 7-8 weeks, but parallel process with ESG agency creates some additional work

USE OF PROCEEDS General corporate purpose (full flexibility) Dedicated to capex, operations or acquisitions of

green activities

COST Cost similar to previous Euro transaction Additional cost is limited to ESG agency validation and opinion (~€50K)

ONGOING REPORTING

File Annual and Interim Financial Statements with stock exchange along with any material development via press release

Additional annual reporting on use of proceeds until all funds are invested in the sustainability report or specific letter


STRUCTURE SUMMARY COMPARISON

Issuer: Issuer rating: Type: Launch:

ALD SABBB / A- (S&P / Fitch)Senior Unsecured Positive Impact Bond 4 October 2018

SGCIB Sole Structuring Advisor and bookrunner

ALD SA

Inaugural Positive Impact bond – EUR 500m 4-year due October 2022Nominal:Maturity:Coupon:Spread:

EUR 500m11 October 20221.250% MS+100bp

USE OF PROCEEDS

“Eligible vehicles” that contribute to the development of clean transportation and the transition to a low carbon future:Electric vehicles (EV) and fuel cell vehiclesHybrid electric vehicle (HEV) and Plug-In Hybrids

Vehicles (PHEV) with tailpipe CO2 emissions below 85 grams of CO2 per kilometer travelled

SELECTION &EVALUATION

Finance Department monitors financial eligibility CSR department identifies eligible vehicles based on the

above categories; selects based on greatest net positivecontribution to climate

Dedicated Committee validates the selected portfolio

MANAGEMENT OF PROCEEDS

Tracking of the net proceeds through internal system Unallocated proceeds held in cash

REPORTING

Annual reporting on:● Allocation of the proceeds● Annual GHG emissions in tons of CO2 equivalent (Scope 1)● Annual GHG emissions reduction in tons of CO2 equivalent

(Scope 3) using the Life Cycle Assessment (LCA) methodology developed with the external expert Quantis

EXTERNAL REVIEW

External Consultant Quantis for the Life Cycle Assessment (GHG, NOx and PM emissions)

Second Party Opinion from Vigeo Eiris on the Framework, confirming alignment with ICMA GBP and UNEP FI Positive Impact Principles

Climate Bond Initiative certification

IPTs: Final spread :

MS+115p area MS+100bp

The transaction has attracted a high-quality orderbook in excess of EUR 1.2bn with more than 75 investors involved

Key features of the transaction

ALD SA is the holding company of ALD Automotive, a leading globalplayer in fleet management and mobility solutions, 80% owned by SociétéGénérale. The leasing group is ranked #2 worldwide with a presence in 43countries and 1.59 million vehicles under management

ALD has established a Positive Impact Bond Framework, aligned with boththe UN Environment Finance Initiative’s Principles for Positive ImpactFinance (2017) and the Green Bond Principles (2018)

After a few volatile sessions due to Italian budget news, ALD decided totake advantage of a supportive market window to issue its inauguralPositive Impact Bond – the first ever benchmark Positive Impact Bond froman European issuer in the automotive sector

Outcome

ALD successfully managed to price its EUR 500m 4Y Positive Impact Bond, tightening the spread by 15bp from IPTs to final price:

Inaugural Senior Unsecured PIB

1.250% 11-Oct-22

EUR 500 ,000 ,000

Sole Bookrunner

FRANCE 04/10/2018


TRENDS AND MARKET OUTLOOK

Social Bond market

Green Bonds have caught policy attention as a means to address climate change

The European Commission published the first set of legislative proposals which notably aims at defining a unified EU classification system ('taxonomy’) to determine sustainable activities. The text will also form the basis of an EU Green Bond Standard

In China, India, Japan, Hong Kong, authorities have adopted guidelines or standards to develop green bonds

Green &

Growing number of mainstream investors are interested in adding green bonds to their portfolios

Increasingly, investors are using ESG analysis in portfolio construction. This take a variety of forms, ranging from negative screening to dedicated Green/Social Bond funds

Rise of initiatives on the labelling of funds In France, Label ISR, label TEEC Morningstar integrated Sustainalytics data to grant ESG ratings

to funds


Sovereigns issuing green bonds Issuance has been from both developing and emerging

markets with small but important symbolic issues from countries like Fiji and Nigeria

Sovereign issuance will grow as governments seek to promote sustainable policy agendas, and encourage private capital into low-carbon and climate-resilient infrastructure

Impact measurement and reporting is increasingly expected by investors

Article 173 of the Energy Transition Law in France sets out climate change reporting requirements for investors

The FSB’s Task Force on Climate-related Financial Disclosures (TCFD) prompts banks to focus on quantitative reporting on green finance

European Commision legislative package includes a directive on Investors' duties and disclosures

INTERNAL PRESENTATION │ MARCH 2019 │ 21

IMPACT & GREEN LOANS – SETTING THE SCENE

(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

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”.

Usually finances General Corporate Purpose expenditures and include green/social features along the maturity of the loan

• ESG(3) targets reflecting Client’s CSR(4) strategy• Monitoring Client’s achievement of the ESG targets through KPIs• Banks pool engagement along Corporate CSR strategy

The Sustainable Linked Loan Principles (SLLP) apply to any type of loan instrument with the aim to incentivize the sustainability performance of the borrower. The SLLP are voluntary recommended guidelines intended by a broad use of the market to be applied by the market participants on deal by deal basis depending on the underlying characteristics of the transaction.

Here is the publication on Impact Loans

Aims at financing clearly earmarked projects generating environmental benefits.

The Green Loan Principles focus on transparency of the investments and their benefits:• The proceeds are dedicated to the financing of « Green projects »• The Green projects are selected and evaluated through predefined eligibility

criteria• Reporting covering proceeds allocation and impacts of the projects

The GLP constitute voluntary recommended guidelines to be applied to any form of loan instrument that may be categorized as “green”. The fundamental determinant of a green loan is the utilization of loan proceeds for Green Projects.

Here is the publication on Green Loans

Sustainability-linked loan = IMPACT LOAN GREEN LOAN

INTERNAL PRESENTATION │ MARCH 2019 │ 22

IMPACT LOANS – MARKET OUTLOOK

Source: Public Domain

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

GEOGRAPHICAL SPLIT OF IMPACT RCF IMPACT RCF MECHANISM IN THE SYNDICATED LOAN MARKET

37%

4%

59%

ESG

ESG + KPI

KPI

- 2,000 4,000 6,000 8,000

10,000 12,000 14,000 16,000 18,000 20,000

SUSTAINABLE INVESTMENT A RAPIDLY EXPANDING MARKET

Total US AUM using SRI strategies, represent $12tn in 2018 (1 in 4 dollars)

North America

Regulatory developments mid‐2010’s sparked the growth, proof of financialmateriality led to surge in last 3/4 yrs

Europe

Source: The US SIF 2018 Report on US Sustainable, Responsible and Impact Investing TrendsSource: Global Sustainable Investment Alliance “2016 Global Sustainable Investment Review”

From $6.57 tn to $8.72 tn

+25% globally since 2014, with a significant growth in the US

Growth of SRI assets by region

Retail Share as of 2018

2014‐2016

US + 33%

From $10.77 tn to $12.4 tnEurope + 12%

in % of total SRI AUM 2018

25 %US

30.7%Europe

ESG = Environment, Social Governance, aka SRI = Socially Responsible Investment

DOING GOOD AND DOING WELL: EMPIRICAL EVIDENCE FOR ESG PERFORMANCE

SRI BEYOND INTEGRATIONStrategy: Quantitative selection of « best‐in‐class » ESG stocks

Track‐record: 5 years

Outperformance: +27.7% vs. Stoxx600

Source: Societe Generale Cross Asset Research/ESG 31/12/2018

CEO VALUEStrategy: Value stocks with « sound » corporate governance practices

Track‐record: 11 years

Outperformance: +54.5% vs. Stoxx600 (31/12/2018)

INVESTORS VOICE

Financial materiality drives 2/3 of the demand for sustainable investment (Eurosif2018)

82% use ESG because it is financially material to performance (CFA, 2018)

More than two‐thirds say that integration of ESG has significantly improved returns and helped with managing volatility (Statestreet2017)

REGULATORS VIEWS

A fiduciary duty for PF to integrate material ESG factors

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 materialitymitigate 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 investingMOUNTING REGULATORY PRESSURE

Product standards Labels | ESG Benchmarks | Disclosures

Investor protection Product governance | Suitability testsFINANCIAL INDUSTRY COMMITMENTS

Insurers PSI | No more investing or underwriting of coal business

Pension Funds GPIF ESG benchmarks | Dutch PF’s UN SDG support

Banks Principles for Responsible BankingCEOs of major Global Banks makingcommitments at the Paris Climate Finance Day in Nov 2018

BANKS HAVE SET UP ENVIRONMENTAL & SOCIAL RISK MANAGEMENT FRAMEWORK

The E&S evaluation framework aims at:

OUR CORPORATE CLIENTS

OUR TRANSACTIONS

We do business with, both current clients and new clients

Mainly Transactions dedicated to finance a specific Asset / project

I D E N T I F Y I N G

E V A L U A T I N G

M I T I G A T I N G

E&S risks of:

E&S Evaluation Framework includes 2 process:• Client Process• Transaction Process

Each process consists of 3 steps:

IDENTIFICATION

EVALUATION

ACTIONS

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Identify the existence or not of E&S risks

Analyze E&S risks identified and give a positive or negative evaluation of E&S risks or opportunities

Define, if necessary, an action plan to mitigate E&S risks

MANAGE ENVIRONNEMENTAL & SOCIAL RISKS

AND COMMITTED TO EVALUATE, MITIGATE AND DISCLOSE IMPACT OF CLIMATE CHANGE ON FINANCIAL RISKS

Source: Oliver Wyman – Climate change managing a new financial risk ‐ 2019

Depending on the corrective response, several climate scenarios can unfold over the next years and decades

MANAGE ENVIRONNEMENTAL & SOCIAL RISKS