Memorandum submitted by Royal Bank of
Scotland Group
EXECUTIVE SUMMARY
— RBS welcomes the opportunity to contribute
to this enquiry on the role we can play in financing the transition
to a low carbon society.
— We support the ongoing international
negotiations to put in place a binding global framework to address
climate change by capping annual emissions at a level deemed to
be acceptable by the Intergovernmental Panel on Climate Change.
We believe that climate change can only be addressed by concerted
multi-stakeholder action, involving national governments, local
authorities, NGOs, businesses and consumers.
— Through our existing business, we provide
a wide variety of services in support of low carbon sectors and
RBS has historically been the leading UK bank in arranging finance
for renewable power projects globally. Our appetite in this sector
remains strong, as demonstrated by our participation in the recently
announced £1.4 billion EIB wind power lending scheme.
— Due to the higher credit risks involved,
we are generally unable to lend to clients and low-carbon technologies
at the experimental or earliest stages of development. However,
we would welcome further discussion with the UK Government on
how the finance sector could mitigate or share these credit risks
with other parties.
— As a major bank to the energy sector,
we have a broad range of clients whose operations are currently
focussed on hydrocarbon extraction and power generation. Given
the current energy dependency of the UK and other countries on
hydrocarbons, and the current technology, planning consent and
other limitations on the realistic projected growth rate of viable
alternatives, we do not believe that RBS should unilaterally scale
back its involvement with these clients, but instead should engage
with the energy sector to support the development of cleaner technologies
and increased investment in renewable energy.
— Whilst we recognise that UKFI can play
a role in tackling these issues, we believe that focussing additional
initiatives through UKFI risks being ineffectual by excluding
the rest of the financial services industry and by only being
a short term arrangement or policy.
INTRODUCTION
The Environmental Audit Committee's objective
for this enquiry is to "examine what scope exists for UK
Financial Investments to support the transition to a low-carbon
economy within the rules that govern what it does, what could
be done if these rules were changed and what would need to happen
to make this possible" (Clerk of Committee Announcement,
4 February).
To assist the Committee with this enquiry, this
submission provides:
1. A brief overview of RBS businesses.
2. Information about RBS' current work to address
environmental challenges and opportunities through the RBS Environment
Programme.
3. Information on reporting and disclosure and
RBS' ratings with sustainable investment indices.
4. Commentary on the options for further support
of the low carbon transition.
SECTION 1: OVERVIEW
OF RBS BUSINESS
The RBS group is a large international banking
and financial services company, headquartered in Edinburgh. The
Group operates in the United Kingdom, Europe, the Americas and
Asia, serving more than 40 million customers worldwide, including
25 million in the UK.
RBS Group's banking network in the UK includes
a comprehensive range of services for personal customers including
current accounts, mortgages, loans, savings and investments. Through
our corporate and commercial arms, RBS caters for small, medium
and large enterprises and can provide the full range of finance,
investment and advisory services for these organisations as well
as asset finance services through Lombard. RBS is also the UK's
second largest insurance provider, offering home, motor, travel
and pet insurance though brands such as Direct Line, Churchill
and NIG. Finally, through its Global Banking and Markets division,
RBS offers an extensive range of investment banking services including
risk management, debt advisory, debt capital markets, interest
rate, currency, credit, equities, foreign exchange, commodities,
treasury and investment products, M&A and advisory services.
SECTION 2: THE
RBS ENVIRONMENT PROGRAMME
2.1 RBS position on climate change and the
transition to a low carbon economy
RBS supports a binding international legal framework
to address climate change. Such a framework would help give renewable
energy developers, and by extension banks, the confidence to make
long term investment decisions. With or without a framework, only
co-ordinated multi-stakeholder action will be sufficient to bring
about the structural changes that are required to stabilise carbon
dioxide emissions at the 450 ppm level recommended by the IPCC.
To communicate our support for binding international targets to
policymakers, RBS was a signatory of the Copenhagen Communique,
an open letter from businesses co-ordinated by the Prince of Wales'
Corporate Leaders Group on Climate Change.
Alongside collaborative initiatives such as
this, we also proactively engage with NGOs and other organisations
to discuss environmental issues. We hold several meetings per
year with environmental groups and take part in multilateral round-table
discussions and consultations on the solutions to the climate
change challenge.
In July 2008 we organised the UK Low Carbon
Economy Summit in London in partnership with the UK Government
at which Prime Minister Gordon Brown addressed a large audience
on the decarbonisation of the economy. We have also taken part
in a number of UK Government consultations and are currently one
of the sponsors of a Royal Society of Edinburgh enquiry into mitigation
of climate change.
2.2 Governance and Policy
Within RBS, environmental issues are overseen
by the Environment Working Group (EWG), an executive-led forum
with representation from across the company that meets four times
per year. The EWG reports into the Board-level Group Corporate
Sustainability Committee (GCSC) chaired by our most senior Independent
Director, Sir Sandy Crombie. The GCSC is comprised of some of
the most senior executives in the organisation, and has a remit
to oversee the full range of sustainable business issues including
fair banking, diversity and environmental impacts. The EWG and
GCSC have the ability to set overall strategy for the Group.
RBS has had a Group Environment Policy in place
since 1997 and this policy was most recently updated in 2009.
We have also adopted a number of external principles and are adopters
of the Equator Principles for Project Finance, the UN Global Compact,
and the UN Environment Programme for Financial Institutions.
2.3 Development of environmentally tailored
products and services
2.3.1 Financing for renewable energy
Our financing of renewable power projects and
clients operating in this area is perhaps the most obvious example
of our pro-active engagement with the low-carbon transition. Within
Structured Finance, RBS has a specialist renewables team who are
actively engaged with governments and other key stakeholders to
ensure that this sector makes the necessary contribution to the
long-term transition to sustainable energy sources.
Because of our strength in this area, RBS was
recently confirmed as one of three banks participating in a wind
financing scheme backed by the European Investment Bank (EIB).
The scheme will make up to £1.4 billion available to qualifying
onshore wind power projects over the next three years and its
introduction was supported by HM Treasury and the Department of
Energy and Climate Change. The EIB will provide up to £700
million for up to 50% of total eligible project costs, with the
remainder coming from a mix of sponsor equity and commercial debt
from the participating banks (RBS alongside Lloyds Banking Group
and BNP Paribas Fortis). The loans will be available to eligible
onshore wind projects with a total project cost of between £20
million and £100 million. RBS is extremely pleased to have
been selected to take part in this initiative, a decision which
was based on our expertise and strength in this field.
Our Lombard asset financing businesses is also
increasingly active in the smaller renewable energy market, and
has recently been involved in a deal to retain wind turbine manufacturing
capabilities in Scotland.
In the three years prior to 2009, RBS was typically
arranging c. US$1.5 billion worth of renewable energy transactions
per year, and in 2006 was ranked as the world's leading arranger
of finance for the renewable energy sector by Environmental Finance
magazine. To put this in context, RBS has been amongst the industry
leaders globally in this respect during a period when no other
UK bank has been consistently in the top 15 list. RBS designed
the financing techniques for many of the market's earliest transactions
and continues to innovate.
With regard to the different renewable energy
technologies available, RBS is best positioned to assist with
the more `proven' projects where risks are lower and cash-flows
more robust and predictable. This means our current focus is predominantly
on on-shore and off-shore wind, offshore transmission, selected
biomass technologies, and certain solar PV projects.
Technologies that are still largely at the developmental
stage, such as wave and tidal power, some geothermal applications
and some types of solar, represent a higher credit risk. These
projects are therefore typically more suited to equity investors
who will demand higher returns to compensate for the additional
risks that they are taking. RBS does not typically offer this
type of finance and is unlikely to in the future due to the higher
risks involved. However, to the extent that any of the emerging
technologies becomes more proven, and with appropriate regulatory
support, it is probable that senior debt might begin to become
available for it.
Another related technology which at present
falls into this higher risk category is carbon capture and sequestration
(CCS). The technology remains unproven on a commercial scale however
we are monitoring developments closely and engage in discussions
with clients over potential funding solutions. In March 2007 we
provided grant funding for a project with BG Group and Scottish
Power to evaluate the potential of using CO2/flue-gas injection
in Scotland as a way of enhancing methane recovery and storing
CO2 within coal beds.
2.3.2 Financing for energy efficiency
Alongside renewable power, energy efficiency
represents another important part of the transition to a low carbon
economy. Advances in energy efficiency tend, however, to be more
incremental and less capital intensive than renewable power developments,
so we find there is currently less need for large scale financial
products as with renewable power.
We are, however, working to develop innovative
financing mechanisms for large organisations such as local authorities
that will allow them to install the necessary energy efficiency
technologies without initial capital expenditure. This will be
achieved by essentially securing the loan against future savings
to utility bills.
We have also investigated the potential to provide
tailored loans to homeowners and landlords to install energy efficiency
measures. At present, however, the various grant mechanisms available
and access to conventional bank loans mean we are not actively
pursuing this area. This also appears to be the approach taken
by most other UK banks.
2.3.3 Business and commercial banking
Environmental issues are becoming a major strategic
driver for many of our business and commercial customers. We offer
paperless banking options and have also developed a specific service
for our small and medium-sized enterprise (SME) customers that
is an extension of our "Business Mentor" service. Business
Mentor Environmental provides businesses with expertise, advice
and tools from our qualified environmental consultants to help
them address environmental issues in their businesses.
2.3.4 Public and not-for-profit sectors
RBS is the leading relationship bank to UK Local
Authorities, has banking relationships with over 60% of the higher
education sector and is also the largest charity banker in the
UK. An example of our work in engaging with these clients on climate
issues is the creation of the UK's first structured finance solution
for Energy Performance contacts in partnership with the London
Development Agency and Greater London Authority. The resultant
Building Energy Efficiency Programme was launched in December
and provides a model for large scale energy efficiency retrofits
to public buildings. In partnership with the LDA and the GLA,
RBS has also led the development of the London Green Fund model,
which will provide a source of finance to a wide range of smaller
scale environmental projects and businesses in London.
RBS also holds a leading market share in the
funding of regeneration projects and investment in areas of inner
city deprivation. By making use of existing "brown field"
or high-density inner city sites, these developments ease pressure
on surrounding "green field" sites and reduce traffic
congestion and emissions caused by commuting.
2.3.5 Personal customers
We have several initiatives in this area. To
reduce the impact of our conventional banking services, we have
so far encouraged c. 6 million of our UK customers to switch to
paperless banking and in the US have launched our Citizens Bank
Green$ense account. This account rewards customers 10 cents for
every paperless transaction they make and so far over 65 million
paper transactions have been avoided.
In 2008-09 we launched our Green Edition Combi-Saver
Products for personal investors, which produces returns linked
to the RBS Green Index—a "basket" of green technology
and renewable energy companies. These products were very popular,
with over £500 million taken in deposits, and we have gone
on to develop more eco-themed investment products.
In 2008 we launched a pilot Solar Mortgage product
in Northern Ireland through Ulster Bank in partnership with a
leading solar panel installer, Solar Century. The product enabled
homeowners to incorporate the cost of a discounted solar PV installation
into their mortgage, effectively borrowing at a very low rate.
Unfortunately the product was not successful, partly due to a
sharp decline in Northern Ireland's property market. Our subsequent
research showed that homeowners who were considering solar panels
often either had the money already or preferred to arrange their
own installation and take out a conventional loan for part of
the cost. We are however continuing to research ways of further
developing an offer of this sort, particularly in light of the
micro-renewables feed-in tariff.
2.3.6 Reducing the environmental impact of our
own operations
Because of our size, the environmental impacts
from our properties—primarily caused by energy consumption,
travel, water and paper use—are significant. In the UK and
Ireland, we currently procure 92.2% of our contracted electricity
from renewable sources and our standard office paper has 80% recycled
content. We have many other initiatives in this area, although
as this is not within the scope of the EAC's investigation, we
would direct interested parties to the sustainability pages of
our website for more information.
2.4 Dealing with environmental risks in our
lending and client relationships
2.4.1 Our wider role as an energy financier
RBS provides financial services to several of
the world's leading energy companies, many of whom have operations
that are predominantly fossil-fuel based. Fossil fuels still account
for at least 80% of total global energy provision and the rapid
growth of alternative sources of energy will take at least a decade
to start replacing fossil fuels on a large scale. Many of these
clients are themselves also major investors in renewables, although
this part of their business is often on a smaller scale than their
fossil fuel and/or nuclear operations at present.
The majority of the financing we provide to
such companies is in the form of general corporate credit facilities
that are not tied to any particular project or operation. Much
like the provision of an overdraft facility to a personal customer,
such credit facilities are negotiated on the basis of a client's
ability to pay the money back and the overall strength of their
business. We have policies and procedures in place which aim to
ensure that we only provide services to companies whose activities
meet all relevant standards applicable to their business and area
operations. We will also take steps to proactively engage relevant
clients on specific Environmental, Social and Ethical (ESE) issues
should they arise.
The provision of financing tied to a specific
project, such as an individual power station is dealt with by
our structured finance teams using agreed processes and procedures
to assess environmental and social risk factors alongside legal
and financial issues. RBS was one of the ten initial signatories
of the Equator Principles, which were launched in 2003 and are
the leading voluntary social and environmental risk assessment
mechanism for project finance transactions.
2.4.2 Our risk mitigation processes
RBS is currently in the process of updating
its ESE risk policies for the Group, including further development
and implementation of ESE sector policy standards and risk decision
support tools. These policies are aimed at higher risk industry
sectors in which the bank conducts business, such as oil and gas
and mining and metals. The ESE Risk Policy Framework to be applied
internally will further strengthen the process of ensuring ESE
issues are taken into consideration in lending and credit provision
decisions.
Training and awareness-raising programmes on
the enhanced ESE risk policy framework will be employed once this
updating process is complete (Q3-4 2010) to ensure users of the
policies and tools can effectively assess and manage these ESE
risks for RBS.
SECTION 3: RBS REPORTING
AND DISCLOSURE
AND RATING
BY EXTERNAL
BENCHMARKS AND
INDICES
3.1 Public reporting and disclosure
RBS has been reporting on our approach to sustainability
since 2003, and since 2004 our reports have been externally verified
by Deloitte. Our most recent report was accredited to the new
AA1000 2008 reporting standard for openness and transparency—the
first bank globally to receive this. We have also supported and
responded to the Carbon Disclosure Project (CDP) since its inception
and over the last six months RBS has been involved in a pilot
project to develop a new CDP initiative. Our annual submission
to the CDP is openly available online and we were included in
the CDP's FTSE 350 Leadership Index in 2009.
3.2 RBS rating with external benchmarks and
indices
RBS has been included in the Dow Jones Sustainability
Index since its inception in 1999, placing us amongst the best
performing 15% of companies who take part in the DJSI. This index
is used by investors to assess performance on sustainability issues.
We have also been consistently included in a range of other indices,
such as the FTSE4GOOD in the UK, where we have also been a member
since inception in 1999.
SECTION 4: OPTIONS
FOR FURTHER
SUPPORT OF
THE LOW
CARBON TRANSITION
RBS welcomes further dialogue about the role
that we can play to support the transition to a low carbon economy.
With or without the public stake in RBS via UKFI, this would continue
to be an important area of focus for RBS, as it is for our peers
in the financial services sector. We are currently financing as
many commercially-viable renewable power projects as we can, provided
they meet our criteria and our offers are attractive to clients.
Our partnership in the £1.4 billion European Investment Bank
onshore wind scheme is a clear example of our commitment in this
area.
However in our experience the growth of this
market for finance is driven by other factors than the perceived
availability of bank funding, including planning permission, connections
to the grid and the number of active developers. Beyond the commercially-proven
renewable energy technologies, we are generally not currently
able to invest significantly in technologies at an early stage
of development due to the various risks involved such as technology
and infrastructure uncertainties, fluctuating energy prices and
pending regulatory approvals. These types of hurdles are not insurmountable,
but if RBS were to significantly increase its involvement in such
projects a solution would need to be found to mitigate the credit
risks to us.
This raises a fundamental question about whether
RBS should be expected to subsidise the growth and development
of a particular sector—and consequently the success of private
companies that operate within it. This question is brought into
even sharper focus by the financial situation that RBS finds itself
in, which has been serious enough to warrant the assistance of
the UK Government and the subsequent capital injection and shareholding
by UKFI. UKFI's key responsibility is to maximise sustainable
value for the taxpayer by reducing its stake in RBS and other
banks in a timely and ordered way. In order for that to happen,
RBS must return to financial health as soon as is practicable
and possible, which to some extent restricts our ability to support
other policy objectives. A significant change of our investment
mandate would also require approval from RBS's minority shareholders.
The Environmental Audit Committee is considering
whether the creation of additional rules for UKFI could help accelerate
the transition to a low carbon economy. As one of the world's
largest existing financiers of renewable energy generation, RBS
would be very willing to support the development of new approaches
for funding renewable energy generation and other lower carbon
technologies. However, we have some concerns that a UKFI solution
would only be a short-term one and would not affect the majority
of the finance sector that is not UKFI-owned. This would also
introduce a distortion in the market, since not all banks would
be operating in a consistent manner.
A more viable alternative may be for the Government
to support the development of a sector-wide fund to lend to newly
established developers and emerging technologies. The UK Government
could potentially provide some form of risk guarantee which would
be activated in the event of projects failing in order to address
the banks' credit risk concerns with such ventures.
At the domestic and householder level, we believe
the Government is already adopting the right approach through
the introduction of the feed-in tariff scheme for micro-generation
which has worked so effectively in Germany and other countries.
This move will transform the attractiveness of micro-renewables
for homeowners and importantly puts the emphasis of financial
support on actual generation of power rather than just the installation
of equipment.
We are already involved in dialogue with Parliamentarians
and relevant Government Departments on these and other issues
and would welcome further interaction, including a broader debate
about mechanisms to incorporate the environmental costs of fossil
fuel use into energy prices, and our disclosure of enhanced information
to investors and other stakeholders on carbon risks and opportunities.
26 February 2010
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