Green weighting factor scores as need for action soars
Sustainable finance leaders are increasingly focused on delivering meaningful decarbonisation targets in a timespan measured in months rather than years or decades. Natixis CIB laid the groundwork with the introduction of its green weighting factor, which gives it a measurement tool and a means of starting conversations with clients about their climate impact and transition trajectory.
After almost two years of intense methodological development, Natixis CIB became the first financial institution worldwide to launch a green weighting factor (GWF) in its operations, in 2019.
The GWF is directed at driving climate and environmental transition of the whole balance sheet. It is an in-house mechanism that links analytical capital allocation to the sustainability of each financing.
By using this mechanism, Natixis CIB allocates a degree of sustainability to each financing by considering its climate benefits and climate risk exposure. The tool helps incentivise transactions that support the transition toward a low-carbon economy and penalise financings with a strong negative impact on climate and the environment. As such, the GWF adjusts its perception of expected profitability of each transaction in line with its impact on the environment.
The GWF applies to Natixis CIB’s financing across all business sectors worldwide, with the exception of the financial sector, ahead of credit decisions. It has balance sheet consequences: under the mechanism, Natixis reduces analytical risk-weighted assets (RWA) by up to 50 per cent for green deals, while facilities that have a negative environmental and climate impact see their analytical RWA increased by up to 24 per cent.
The adjustment of expected rate of return of each financing deal based on its environmental and climate impact provides a strong incentive for Natixis CIB’s teams to favour green financing when assessing transactions with equivalent credit risk.
First and foremost, the GWF is a measurement tool. As Laurent Mignon, chairman of the management board of Natixis CIB’s parent, Groupe BPCE, says in the group’s 2021 Task-force on Climate Related Financial Disclosures-aligned climate report: “Our ability to measure the impact of our financing and investment activities is one of our most important projects.”
Natixis CIB’s systems and credit processes have been transformed since the implementation of the GWF. A major milestone this year was the addition of quantitative, granular, and ambitious temperature reduction targets. The GWF went from an innovative, operational, deal-by-deal decision-making tool to a transition steering mechanism.
Janie Wittey, chief executive and senior country manager at Natixis CIB in Sydney, explains: “The GWF is an internal capital allocation mechanism and our climate impact operational steering tool. But, more importantly, it is a strategic dialogue tool with our clients, helping us support them in their transition and sustainability journeys.”
Quantifiable, science-based metrics are more important than ever as the need for action on climate transition becomes critical. The Intergovernmental Panel on Climate Change (IPCC) describes its latest report, published in February this year, as “a dire warning about the consequences of inaction”.
IPCC notes: “To avoid mounting loss of life, biodiversity and infrastructure, ambitious, accelerated action is required to adapt to climate change, at the same time as making rapid, deep cuts in greenhouse gas emissions. So far, progress on adaptation is uneven and there are increasing gaps between action taken and what is needed to deal with the increasing risks.”
Natixis CIB has committed to aligning its loan book with a 2.5 degree trajectory by 2024 and 2.2 degrees by 2030, before a longer-term commitment to 1.5 degrees by 2050 – consistent with the objectives of the 2015 Paris Agreement. BPCE has signed up to the Net Zero Banking Alliance and has a net zero by 2050 target.
The role of the GWF is to facilitate measurement of the climate impact of the portfolio and thus bring interim targets to life. The group acknowledges it has work to do: as the business line that finances the most emission-intensive sectors, Natixis CIB has a climate-change profile of more than 3 degrees.
Committing to the 2050 target involves “taking immediate action to use the measurement tools at [Natixis CIB’s] disposal to establish milestones for the short-, medium- and long-term alignment of its balance sheet with this target”.
Olivier Menard, Hong Kong-based head of the APAC green and sustainable hub at Natixis CIB, adds: “Having a net zero commitment is important, but even more important is for its trajectory to begin from today – not just be a goal for 2050. There is a long way to go for many businesses, but there is no way they will achieve it without a trajectory that will take them to that point. Companies need to know what their 2050 strategy will mean for 2025 and 2030.”
Natixis CIB’s green and sustainable hub centralises expertise in sustainable finance solutions in a global, cross-asset centre. It provides content, frameworks and expertise to clients across the entire transition process.
Natixis CIB is actively seeking opportunities to dedicate capital to green assets, including investment in new technology and R&D (see box). As well as finding new green assets, it is also committed to working with clients on their own transition targets.
These commitments are now backed by transaction and client level modelling, which requires business lines, platforms and industry groups to deliver on a target GWF mix and temperature, leading to the deployment of a clear and documented action plan. This involves prospective scenario analysis and transformation of Natixis CIB’s capital allocation, and client and business mix, as well as designing products to support transition.
Direct investment and the Energy Observer
Technological development will play a huge role in any successful response to climate change. By investing in projects like the Energy Observer, Groupe BPCE hopes to evolve a knowledge base it can also use to assist clients across the group – particularly corporate and institutional customers served by Natixis CIB.
The Energy Observer is the world’s first hydrogen powered, zero emission vessel to be energy self-sufficient. Launched in Paris in July 2017, it is on a global Odyssey to explore, learn about and search for new ways of improving humans’ way of life. BPCE is one of four main partners.
Janie Wittey, chief executive and senior country manager at Natixis CIB in Australia, visited Energy Observer at its latest port of call, Singapore, where it docked in March-April 2022. She explains that the project is about more than the boat itself. “The idea is that we can learn from the technology and R&D but also the funding side, with the goal of embedding the knowledge gained into our credit risk policies and financing operations.”
Hydrogen power is just one of the technological innovations that could be a game-changer in the transition to net zero. Even some of the most emissions-intensive industries can have transition hopes with the right commitment to investment in technology.
The starting point in conversations with clients is to demonstrate Natixis CIB’s own commitment. “The technology we have developed means we are – rightly – viewed as credible,” Menard continues. “We are accompanying clients on their transition journey by showing what we have done and thus demonstrating the value of having a credible net zero commitment.”
Natixis shares colour ratings with clients that request them. But the GWF initiated discussion even before the calculation of individual scores. To calculate the GWF of its exposures, Natixis CIB naturally needed to source underlying information. Menard says: “By collecting data from our clients we open an exchange and a dialogue. The purpose of this discussion is almost always to find an ambitious but achievable transition trajectory for each client.”
There are, of course, some areas where such transition may be impossible even in the relatively long term. Natixis CIB committed to ceasing to finance coal industries worldwide as long ago as 2015, for instance.
Menard explains: “Science, for instance through successive IPCC reports, is very clear that we need to stop using coal because there is no technology that will allow the coal industry to transition. We have an exclusion policy on coal.”
Elsewhere, divestment may eventually become inevitable but Natixis CIB’s preference is to support urgent transition. “As an industry, we have a responsibility not to leave massive stranded assets,” Wittey explains. “Avoiding this comes down to having early and open conversations with clients today. We know which of our clients come up as dark brown on our balance sheet. We are in discussion with them about how we can help with their energy transition goals and get them working toward our collective aspirations.”
Menard says Natixis CIB’s clients clearly understand that, if they are scored dark brown, ultimately it will be challenging to continue to finance them in the long run.
But he adds: “We are a responsible organisation and we will not just cut financing even to dark brown companies. We strongly believe green and brown companies need to be part of the effort if we are to achieve the goals of the Paris Agreement, and it is our duty to accompany our clients in their own energy transition”
This story is not unusual, at least in concept. Most banks are aware of the negative societal consequences of stranded assets and want to work with their clients on credible transition in an ambitious timeframe.
But there is a lot of grey between green and brown. Some companies may have a genuine desire to decarbonise but have to rely on technological developments that are not yet economic to do so. Others may be making the right noises about transition but do not have the stakeholder buy-in to deliver it in time to play their part in achieving Paris Agreement targets. Deciding what constitutes a credible transition plan may be the biggest challenge in sustainable finance.
The GWF is helping Natixis CIB make these calls. “It is more sophisticated than a financial institution saying ‘we don’t want to do anything in oil and gas’,” explains Sander Mutsaers, head of real assets at Natixis CIB in Sydney. “In fact, this is not our goal – we want to work out whether a client has a transition story or even the potential for one. These are the sorts of businesses we want to work with, and the GWF facilitates a more nuanced approach than simply withdrawing from sectors.”
Sustainable financing options are increasingly sophisticated and in some cases reflect a dramatic change in corporate structure and strategy. The GWF lends itself to this evolving market by prioritising a whole-of-business understanding of climate impact that aligns well with the increasing prevalence of company-level sustainable financing frameworks (see box).
Mutsears adds: “The GWF is certainly not the only thing we are focused on but I can definitely say getting the temperature outlook of my business’s portfolio down is a major priority. It does not mean, however, that we cannot continue to support good clients we have worked with for a long time. We likely have to overlay that business with a transition plan and a sustainability-linked product on top of it.”
Structuring finance to fund environmental transition
Two structures Natixis CIB has worked on – for Spanish energy company Repsol and Brookfield Asset Management-owned Australian data centre owner and operator DCI Data Centers – demonstrate the value of a whole-of-business approach to sustainable finance.
As a company with primary operations in the oil and gas sector, Repsol is a challenging prospect for sustainable finance and is scored brown in Natixis CIB’s green weighting factor. But the company has a clear and credible plan for low-carbon transition in place.
Repsol published its transition financing framework in July 2021, which laid the foundations for it to issue use-of-proceeds (UOP) and sustainability-linked debt instruments to fund its plans.
The framework was the first in the oil and gas sector to incorporate applicable recommendations from the International Capital Market Association Climate Transition Finance Handbook.
Australia is at a crossroads when it comes to environmental transition. The IPCC report highlights the country’s vulnerability to climate change and its – to date – lagging commitment to decarbonisation. Awareness and commitment is clearly growing fast in the corporate space, however – and there is a raft of opportunities for sustainable finance investment. Natixis CIB is actively seeking to improve the green profile of its balance sheet by investing in such opportunities.
“The GWF is not just about reducing brown exposures but making sure green ones increase,” Mutsaers explains. “Real estate, for instance, is not a sector we have any exposure to in Australia. But we are setting up a business in this space now – in part because there is a lot of capacity in real estate and we believe we can add value, but also because a lot of these deals look very positive from a GWF perspective.”
Australia is also one of the world’s largest project finance markets, at a time when this sector is increasingly tying major financing facilities to sustainability. Natixis CIB was a lender in major sustainability-linked or use-of-proceeds style debt facilities for Reliance Rail and Royal Adelaide Hospital, for instance.
Across the board, Menard says transition finance is a huge growth opportunity at corporate level – because even companies without ready-made green or social assets are increasingly confronting the reality that they have no other choice but to transition. Businesses of all types will have to define their sustainability strategy and embed it into their funding approach.
Then there is the renewables space. “Australia has a natural abundance of renewable energy and the potential to transition into an exporter of hydrogen and other key commodities in future,” Wittey comments. “The need to change the traditional mix of energy supply is why we see a lot of scope in this market right now.”
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