Andrew Voysey, CPSL Development Director – Finance Sector, presenting the model at the conference
The organisers of GTR’s Asia Trade Finance Week – the largest trade finance conference for companies, trading houses, banks and insurers in Asia – asked CPSL and the banks of the Banking Environment Initiative to present the concept we have been developing for a ‘Sustainable Shipment’ model that would offer financial incentives for the trade of sustainably produced commodities, including agricultural commodities like palm oil, soy, timber products and beef. After the model was presented by CPSL’s Andrew Voysey, the conference in Singapore heard perspectives from Heads of Trade Finance at Barclays, Westpac and the International Finance Corporation as well as Unilever’s Procurement Operations Director for Sustainable Sourcing of Tropical Materials. The concept was well received by a knowledgeable audience.
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The BEI has decided to postpone its next Forum until early next year.
The BEI member banks want to be sure that the Forum is attended by the very highest levels of leadership and a date early in 2014 will allow us to achieve this based on relationships with the banking and corporate sectors, regulators and governments that have been developing through our work on the Forum to-date.
We remain committed to running the event in China, working closely with regional partners, and feel that this is a great opportunity to develop the work of the BEI in the Asia Pacific region.
Daniel Schmand, Advisory Board Member, ICC Banking Commission Head of Trade Finance & Cash Management Corporates EMEA, Deutsche Bank and Sabrina Borlini, Global Manager, Business Development, Global Trade & Supply Chain Solutions, International Finance Corporation
The BEI’s inaugural Forum in London in November 2012 inspired an idea for integrating commodity-specific sustainability standards into the documentary trade finance process. This could prove to be a key enabler in the emergence of verifiably sustainable commodities on traded markets.
The BEI has nurtured the idea since then, working with commodity buyers, trading houses, major trade finance banks and multi-lateral development banks to develop a specific proposal.
In the last three months, BEI banks have been hosted at a number of influential trade finance summits to test industry interest in the proposal. These have included:
At every stage, the BEI has been encouraged to develop the concept further and BAFT-IFSA and the ICC Banking Commission and have both committed to supporting this process. In addition, at the ICC Banking Commission meeting in Lisbon in April 2013, the IFC announced that it is prepared to support the initiative by giving preferential treatment to sustainable LC business with its partner banks through its flagship programme, the ‘Global Trade Finance Program’. This would be similar to the benefits that IFC extends through its ‘Climate Smart Trade' initiative, which targets trade that has clearly defined climate change benefits.
The BEI will now be taking forward the next step of the development of this concept by convening a ‘deep dive’ process to explore and agree how the BEI’s ‘Sustainable Shipment Letter of Credit’ would work in practice with one case-study commodity . It is hoped that this will serve as a blueprint for other commodities.
At a private dinner at The Harvard Club in New York City on 22 April 2013, the BEI and Bloomberg New Energy Finance convened executives from major US, European and Chinese electric utilities with senior energy bankers to advance its collaboration on clean energy investment.
At the heart of the conversation was whether the portfolio value of clean energy power generation is being sufficiently reflected by the capital markets, given the policy and market uncertainty that utilities face.
The IEA’s Chief Economist, Fatih Birol, has said “the future of energy has never been so uncertain”. It is not surprising that navigating regulatory and market uncertainties is one of the top challenges for power companies; Boards must commit capital today to keep the lights on for the decades over which generation assets need to perform. Yet they also know that future operating environments will be very different. Capital allocation decisions that assume a relatively static operating environment will clearly not prove to be resilient, let alone outperform; failing to plan for change would be to misread the reality of the transition.
The group therefore discussed:
1. What factors contribute to creating a 'Fossil Fuel Diversification Premium'?
2. How would such a premium translate into the capital markets?
3. What can the BEI and this group uniquely contribute to developing this thinking?
The group agreed that there was merit in this unique coalition developing this thinking further to see whether it is possible to demonstrate the combination of factors and scenarios in which a 'Fossil Fuel Diversification Premium' would have impact, and to whom in particular, in the capital markets.
Jeremy Wilson, Chair of the BEI’s Working Group, was then invited to address Bloomberg New Energy Finance’s Annual Summit on the topic the next day.
BEI Forum 2012, Soft Commodities Panel: James Stacey, Senior Associate CPSL ; Sabine Miltner, Managing Director and Group Sustainability Officer, Deutsche Bank; Rogier Schulpen, Global Head of Structured Trade and Commodity Finance, Grupo Santander; Gavin Neath, CBE, Unilever
The first results of these innovative bank–corporate partnerships for sustainability were shared at the inaugural BEI Forum in London in November 2012.
More than 120 people attended, including the senior leadership of BEI banks and representatives of other banks from as far afield as China and the US. They were joined by the leaders of Consumer Goods Forum (CGF) companies and energy firms that are working with the BEI, such as Tom Albanese of Rio Tinto and Paul Polman of Unilever, as well as thought leaders such as WWF’s Jason Clay. Browse the tabs on this BEI page to find video excerpts from the Forum.
Read the official report of the BEI Forum 2012 online (requires Adobe Flash Player).
Download the report as a pdf.
One output launched at the Forum was a paper published by the BEI with six global energy companies. An Options Approach to Unlocking Investment in Clean Energy argues that using traditional investment valuation models is not always the best approach for valuing clean energy investments. The paper concludes that when uncertain future market or policy conditions would have unequal impacts on investment performance, valuation models that explicitly value the fact that clean energy investments give energy companies the option to adapt to changing market or policy conditions may be more appropriate.
The BEI will now be working with energy companies and other key influencers in the capital markets to ensure that this approach is widely understood and embedded into investment decision-making.
At the Forum, delegates heard from Unilever and Procter & Gamble as to why the membership of the Consumer Goods Forum is so focused on using its combined procurement power of over $3 trillion to transform soft commodity value chains that currently contribute the most to deforestation.
Experts representing a range of perspectives from across BEI banks, including Global Head of Structured Trade and Commodity Finance, Head of Trade Finance for Asia and Managing Director and Group Sustainability Officer, then explained why they have been collaborating with CGF companies through the BEI to establish how the banking industry can align itself with this powerful market trend.
BEI Forum participants gave strong endorsement for the BEI progressing both of these areas of focus, while adding a further area of enquiry into how the provision of trade finance specifically can be aligned with the BEI–Consumer Goods Forum collaboration, deepening the participation of banks in emerging markets and ensuring policymakers are well informed about the BEI’s activities.
For more information, please contact the BEI Secretariat.
The BEI collaborates with groups of major corporate clients that share strategic priorities for creating sustainable economic systems but face challenges in delivering them that could be addressed by banks. The BEI brings together banking experts to work closely with those corporates and identify new approaches through which the banks could support the corporate community in achieving its sustainability goals.
Independent expertise, ranging from academics like the University of Cambridge’s Judge Business School to civil society leaders such as WWF, is integrated into the process wherever appropriate.
The group currently comprises 10 global banking institutions stretching across Asia to Europe, the United States and Latin America: BNY Mellon, Barclays, China Construction Bank, Deutsche Bank, Lloyds Banking Group, Nomura, Northern Trust, Santander, Sumitomo Mitsui and Westpac. Antony Jenkins, Chief Executive, Barclays, chairs the CEO Panel. Jeremy Wilson, Vice Chairman, Corporate Banking, Barclays, chairs the Working Group.
The secretariat is provided by the University of Cambridge (CPSL).
At the heart of the group’s vision lies a simple thesis: banks work for their clients and an initiative like this will only work if it is aligned with their interests and vice versa. The BEI has laid the foundations for an exciting new approach to tackling key sustainability issues through innovative bank–corporate partnerships, bringing a range of banking experts from the BEI together to work with colleagues from corporate clients throughout 2012. The BEI is now focused on delivering the changes identified by these partnerships – change that will lead the banking industry in better supporting corporate action to create sustainable economic systems and that makes business sense.
In October 2011, the BEI held a small, initial multi-corporate, multi-bank meeting in Washington DC to explore whether groups of corporates shared strategic priorities for creating sustainable economic systems but faced challenges in delivering them that could be addressed by banks.
Two such groups were identified and prioritised initially: 400 companies operating in global consumer goods value chains working together through the Consumer Goods Forum (CGF) to eliminate deforestation from soft commodity supply chains and oil & gas and electric utility companies working to deliver clean energy strategies. Both of these work streams were taken forward into time-bound processes of enquiry and change (‘collaboratories’) to establish new ways in which the banking industry could support these client-led transformations:
In addition, the UK’s Department for International Development (DfID) is developing a concept on behalf of BEI members for a public–private facility to finance clean energy and sustainable agriculture. The work focuses on Kenya initially with a view to applying it elsewhere in the world if a successful model can be established.
A year later, in November 2012, the BEI hosted a major convening of banks and corporate clients from around the world at its inaugural BEI Forum to showcase the first results of these bank-corporate partnerships and to gather insights for its future programme.
Paul Polman, Chief Executive of Unilever, addresses the inaugural Banking Environment Initiative Forum 2012 to explain why he, and the Chief Executives of the Consumer Goods Forum, place so much value on the BEI’s Soft Commodities work.
The Consumer Goods Forum (CGF), comprising 400 global companies, is transforming the value chain for certain soft commodities in their attempt to achieve their shared goal of eliminating their contribution to deforestation in their supply chains by 2020.
This goal was agreed by the CEOs of the CGF Board in 2010 and, since then, CGF companies around the world have been working together and with independent experts to establish how to execute appropriate, mutually supportive procurement strategies that will achieve this goal. They have prioritised the soft commodities with the greatest deforestation potential and identified credible, multi-stakeholder stewardship standards that can be used to guide responsible procurement of each of them. WWF’s Jason Clay put the rationale for this firmly into context with his keynote presentation to the BEI Forum 2012.
BEI banks have been working closely with the CGF companies to determine how the banking industry can align with this new market trend. Heads of Commodity Finance, Trade Finance, Client Coverage, Environmental Risk Management and Sustainability have all come together from across a range of banks to understand the opportunities and practicalities of such alignment. Experts from WWF-US were invited to contribute independent advice throughout.
Specifically, BEI banks have been working with CGF companies to agree a ‘Compact’ that articulates best practices banking standards that support the CGF’s goal to eliminate deforestation from their supply chains by 2020. Two particular areas of mutual interest have been identified:
1. New opportunities to finance sustainable soft commodity production and supply enabled by changing consumer good company procurement practices. Rogier Schulpen, Global Head of Structured Trade and Commodity Finance for Santander, presented his thoughts on these opportunities at the BEI Forum 2012.
2. Alignment of banking standards to the CGF sustainable procurement standards for priority soft commodities (palm oil, timber, pulp and paper, soya and beef).
The group is aiming to launch the output of its collaboration in the coming months and is actively encouraging non BEI banks from around the world interested in adopting the Compact to engage in, and join, the Compact development process. In addition, the BEI Forum 2012 identified further specific ways in which the provision of trade finance can be aligned with the CGF-led market transformation, which the BEI is taking forward.
BEI Chairman John Varley summarises the discussion at the inaugural Banking Environment Initiative Forum 2012 on the banks’ collaboration with Consumer Goods Forum companies to eliminate deforestation from soft commodity value chains.
Deutsche Bank’s Martin Brough, Director of Utilities Research, discusses the launch of An Options Approach to Unlocking Investment in Clean Energy at the inaugural Banking Environment Initiative Forum 2012. The report, by six banks and six energy companies, shows how real options analysis can be an appropriate enhancement for clean energy investment analysis. Martin then discusses implications for investors and companies.
Whilst global investment into new renewables exceeded new fossil fuels in 2011, challenges for incumbent corporates in the sector are still significant. Clean energy delivers long-term value and resilience but decisions to invest are not rewarded by the perspectives of the 'funding market'. The need for transition is accepted, but the ‘how’ and the ‘when’ remain uncertain and are preventing action. Transition costs, institutional investor apathy and short-termism are cited as reasons for this.
In this context, a group of six BEI banks and six energy companies used the inaugural BEI Forum to launch their paper arguing that using traditional investment valuation models is not always the best approach for valuing clean energy investments.
Their report, An Options Approach to Unlocking Investment in Clean Energy, says that when uncertain future market or policy conditions would have unequal impacts on investment performance, traditional valuation models may fail to value clean energy investments properly. Too much value is placed on current assumptions about the future which history has proven frequently to be misplaced. Uncertainty about the future price of fossil fuels, the nature and timing of carbon legislation and energy policy in different markets are all examples that have been studied.
The group concludes that when this type of uncertainty prevails, valuation models that explicitly value the fact that clean energy investments give energy companies the option to adapt to changing market or policy conditions may be more appropriate. This conclusion has implications for equity investors, company boards, providers of debt and policymakers.
In launching this report, the BEI banks are seeking to trigger a much wider debate about when and how an options approach should be incorporated into investment valuations. They believe that making greater use of this thinking appropriately into standard investment decision-making would unlock further investment in clean energy today, given the nature of uncertainties in the energy sector.
The report draws on an evidence base of investment scenarios in three case studies: investments in Carbon Capture and Storage facing uncertainty around the European price for carbon, investments in onshore wind farms facing uncertainty around US gas prices and investments in offshore wind farms facing uncertainty around UK renewables policy.
The banks behind the report are Barclays, Deutsche Bank, Lloyds Banking Group, Nomura, Northern Trust and Westpac. They worked with the energy companies BG Group, DONG Energy, Duke Energy, EDF Energy, RWE npower and Shell and experts at the Judge Business School in Cambridge provided an independent evidence base.
Download the Full Report
Download the Executive Summary
Download the Technical Annex
Bank CEOs and Chairs review their highlights of the inaugural Banking Environment Initiative Forum 2012, along with leaders from WWF, Rio Tinto and the University of Cambridge.
HRH The Prince of Wales delivers his keynote address to the inaugural Banking Environment Initiative Forum 2012
The BEI is open to working with banks or corporates from anywhere in the world that have an interest in working together to advance sustainability.
For more information, please contact the BEI Secretariat:
Development Director – Finance System
T: +44 (0)20 7216 7530
M: +44(0)7595 106458
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