The roles, responsibilities and reticence of banks

SA EU-topia a low-carbon economy?

This morning, Nedbank and UNEPFI hosted a very informative discussion with some high-level delegates that resulted in a lively discussion and great feedback.

For me personally, I had the pleasure of having our Minister in the Presidency, who heads up South Africa’s National Planning Commission, answer some long-asked questions, unanswered during South Africa’s recent NPC Jam. Heads up to Minister Manuel for his honest and thorough responses – and especially for his devotion to the youth… as we need to hand over the climate torch to these generations to follow – not necessarily in our footsteps.

For a rundown of the esteemed panellists and their stimulating rhetoric, see below…

The orators:

Richard Calland - public finance legal expert and enthusiast, who says green jobs and bank lending to green entrepreneurs are mutually dependent on each other.

Thabani Jali, previously judge investigating bank charges back in 2008, now actually heading up Nedbank's Governance / Sustainability area, who says the world's problems today cannot be solved by the same manner of thinking that created them (with thanks to Mr Albert Einstein).

Paul Clements-Hunt who heads up UNEPFI and says the UN, 200 banks, insurers and asset managers have been scratching their heads for 20 years now about how to put their collective $60 trillion to best use - if we're to overcome the systemic, political, financial crises facing the world's citizens today, we must do it NOW.

“A low-carbon economy, underpinned by technological advances unthought-of to date, is a non-negotiable,” he says. “The Occupy Wall Street movement is rejuvenating how our systems are governed and viewed. I challenge banks to be at the epicentre of this transformation.”

Being a UN representative means extensive world travel. Paul says whether in Tokyo, Brazil or Washington, you can see flickers of change made possible by supportive banks. “The buzz word? Responsible investment,” he says. “In the US, a ridiculous amount of public assets can be re-invested to lower the carbon footprint.”

What are the disconnects in the financing mechanisms?

The troika of public policy - private financing - low carbon supply chain.

The IEA calls 2 degrees "catastrophic"!

In 2005, the $150 billion loss predicted from environmental tragedies affecting the poorest communities in 2000 was surpassed.

“Deforestation and floods, mud slides and other natural disasters are by now proven and bagged - banks need to take this into consideration and act accordingly,” says Paul. “Less than $10 per ton of carbon on the market today, whereas the damage is worth at least $85 per ton - this needs to be corrected.

He mentions that the world market for non-essential goods (think jewellery and other human consumption accessories) is worth $250bn a year, whereas the renewable energy / carbon market needs $234bn: the need for a change in our value systems thus becomes obvious – oi weh…

Banks are the transmission mechanisms that take the engine of the investment market to the place and assets that the high net worth markets do (and want to) control. The conversation needs to change and in a sustainable way:

To illustrate the progress, it was in 2007that Finance Ministers of the world for the first time organised a meetings to discuss the finances of climate change at COPs. By 2010, 150 institutional investors worth $9 trillion sent messages to COP representatives with requests for clarification. And this year, it has grown: the role of finance is now central to the debate.

COP (the term itself) can be confusing but is fundamentally about people and brave political leadership. President Jacob Zuma’s presence is vital to the global sustainability panel, but who is leading the rest?

Incidentally, even Gordon Brown presented to President Zuma's panel in October, for it is fundamental that for banking to succeed in 21st century, values and behaviour need to adapt to the direst needs of the day.

A different kettle of fish

UNEPFI “soft launched” its Renewable Energy Finance Report today. Innovatively, they left the Executive Summary page blank – forcing you to read th whole report! They generated this report to open a 6-week period of dialogue and negotiation to finalise the report with inputs from everyone at COP - another very unique way of thinking banks could do well to follow! The report looks at: What hasn't worked in the past, and why? What does the private financial sector do wrong?

Minister Trevor Manuel, also the global Co-Chair on Transitional Committee on design of a Green Climate Plan, encourages all South Africans to read the National Development Plan (launched on November 1^st) thoroughly..

His intro: "What we know needs to be done and what we need in the negotiations are worlds apart! Why do Governments send people who are not serious about this change? I feel I should take up a position at Speakers Corner today.” WOW

"We need $100 billion dollars a year to be transferred from the rich to the poor, and we need a mechanism to transfer this money,” Minister Manuel says. “We don't need perfection and we don't need ideology because we know the outcomes if we don't do this.”

He cited the Philippines as a prime example: the number of harsh climate incidents in the island state has increased dramatically, each time taking out every piece of development put in place and every time it has to re-built, which impoverishes every citizen all over again... a vicious way for a developing nation to adapt to climate change!

"Debating punctuation in communiqué’s, instead of substance will be our downfall,” he says. “The science is now unimpeachable; choices in leadership and finance shouldn't be so tough. Fast-start finance to 2013, with no ramp-up past that, just boggles the mind.”

Key issues raised by Minister Manuel:

- The pricing of carbon; examples include: a) world trade, b) tax (think Australia's $24 per ton, and c) China’s informal method (already netting $29 per ton).

- But these prices are insufficient to address governments' full responsibilities.

- The transition is the major challenge, which will produce winners and losers. It is up to Governments and the private sector to deal with what the impacts and timelines will be.

Why will carbon markets fail (according to Minister Manuel)?

a) Low carbon technologies are exceedingly costly in the early phases, the battle on feeding tariffs.

b) Payoff lines are longer because of time to build up the capital loan period with realistic returns.

c) National cash flow to support R&D and innovation.

d) People in banks are shy to talk. The regulatory environment (Basel III) has made it difficult for banks to reflect lending in R&D on their balance sheets - how to resolve the issue?

e) A more appropriate price on carbon will only be devised once governments commit to assist in capitalisation of projects with finance organisations: cooperation.

“We need to develop together a predictable place for COP,” he says. “GDP per capita is a pretty good indication of carbon already emitted and added to the stockpile by every nation over the decades. Developing countries now need to help make their development forecasts more predictable too.”

Minister Manuel did an excellent job of connecting the dots between green climate fund, technology transfer, finance, carbon pricing and infrastructure in layman’s terms.

A selection of the panellists:

Dennis Dykes (Nedbank economist), who says that governments, having lost reserves through the European and US financial implosion, need private sector's money to get ahead. Banks' lending appetite should be encouraged by:

-       The regulatory environment (looking at case studies from esp. Kenya where mitigation projects are working, and even in SA where 53 projects worth R70 billion have been granted in the 1st phase of renewable tenders),

-       Criteria of power purchasers: need government backing),

-       Environmental and social principles,

-       Governments can reduce the risk by keeping the process transparent and predictable. Banks can leverage funds from the green Climate Fund (really?)

Prof Wikus van Niekerk (who is Director at the Centre for Renewable and Sustainable Energy Studies at Stellenbosch University) : As a scientist, working on calculating the megawatts that can be generated from renewable energy is what it's about for him. Looking at the calculations – against other countries leading in this field (Netherlands, Spain and the US) – we have much higher wind, solar and wave capacity, so for South Africa, it should be far quicker to recoup the costs than in other countries that have already engaged with renewables meaningfully. Economies of scale for renewables have halved prices already and industry stimulation will only bring costs down.

Professor van Niekerk says the argument that renewable energy must be competitive with the fossil fuels argument does not hold ground. “Governments the world over heavily subsidised fossil fuels for decades to make it the attractive purchasing option to the market.”

Robert Hunt (of HSBC) says the biggest growth will be in energy-efficiency among developing countries – but $10 trillion is needed to build this capacity. Clean energy and energy development bond markets can generate millions of retrofit loans in the debt market. Showing value for money for the taxpayer will be crucial to boosting acceptance of banks' lending policies, Mr Hunt Believes. “Korea and China are leading in terms of funding green manufacture.”

It was mentioned that a key issue in Africa is under-powering: per capita consumption of electricity is a tenth of world average and 1 hundredth of developed world average.

A first for Africa

Power sector reform is not liberalised – private sector investment is still only at 4% in Africa. However, investment in utility-scale renewables in other parts of the developing world (mostly China, India, Kenya, Tanzania, Uganda) has surpassed the developed world, up from $1bn to $4bn. The REFIT programme has mobilised SA's industrial industry and challenged financial innovation.

The Q&A session yielded these little nuggets from the panelists:

- “Risks and policies for renewable energy have to be re-written and a Venture Capitalist mind set needs to be engendered in private institutions.”

- “Occupy Wall Street IS the youth's voice! But banks need to be honest about where they have been promiscuous in the past in terms of derivatives – why can't renewables become an ‘arivative’ structure?”

- “Banks need to scale up by for instance offering consumers financial reward for investing in renewable technology in their homes; startups by rewriting policy and training staff to lend to green entrepreneurial ventures.”

- “The South African Government’s White Paper is a policy document, while the National Development Plan has not been agreed to by all 26 Commissioners.”

By conclusion, I would personally like to challenge the likes of NERSA and passionate folk like Chris Yelland at EE Publishers to step up to the NDP and ask for assistance in clarifying the drivers of change between banks and start-up finance versus government energy pricing policy versus negotiating renewable tariffs with ESKOM. I rest my case at this late hour…

More tomorrow from the World Climate Summit at the Southern Sun Elangeni!