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CARBON BAZAAR 2009

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Title: CARBON BAZAAR 2009


1
CARBON BAZAAR 2009 Buyers and Sellers Money for
Change
Role of Banks in Low Carbon Economy HSBC
Experience
Unmesh Brahme, Senior Vice President, Corporate
Sustainability
2
Themes we will see today
  • HSBC Journey
  • Our platforms
  • What research says
  • Capitalising on low carbon
  • CDM Continuum

3
Sustainability is in our DNA
4
Sustainability risk management
Minimising the indirect impact of our lending
People
  • Objectives
  • Develops policies and processes to ensure that
    the Group protects its reputation and brand from
    environmental and reputational risk
  • Ensures that these policies and processes are
    mainstreamed in the risk assessment and approval
    process through a programme of communication and
    training

Processes
Policies
5
Sustainability risk framework
Sustainability Risk Standard
Sustainability Risk Policy
Equator Principles
Sector Policies
Guidance Notes
6
Sector guidelines
Metals and Mining
Energy
Chemicals
Freshwater infrastructure
TIME
Forest land and forest products
RISK
7
We have a Corporate Sustainability Strategy..
Indirect Impacts
Direct Impacts
FOOTPRINT MANAGEMENT ADVISORY SERVICES
BUSINESS DEVELOPMENT
RISK MANAGEMENT
COMMUNITY INVESTMENT
COMMUNICATIONS REPORTING
8
Sustainable business development
  • Capturing the opportunities
  • Objectives
  • Focuses on key areas of business development in
  • Climate change and low-carbon technology
  • Sustainable forestry
  • Water infrastructure
  • Microfinance
  • Seeks to identify business development
    opportunities across all geographies, all
    customer groups, and all product groups and
    support business units in capturing them and to
    evaluate inbound business referrals

Carbon
Water
Micro
Forestry
Customer groups
Product groups
Countries
9
Forestry finance
  • Rapid and uncoordinated logging of the worlds
    forest is a serious and environmental issue
  • Contributes to deforestation, accounts for
    roughly 20 per cent of global carbon emissions, a
    greater contributor to climate change than even
    the transport sector
  • Opportunities
  • FAO estimates that global consumption of wood and
    wood-related products will rise by 60 per cent
    over the next 25 years
  • Global timber and forestry market, ready for
    investment, currently exceeds US300 billion
  • Alarming importance for sustainable forestry
    practices in order for us to meet todays needs
    without jeopardising tomorrows resources.
  • Particulary important for emerging markets in
    tropical regions, where deforestation of natural
    forests continues to be rapid.
  • Uptake of sustainable forestry practices slow due
    to poor forest governance systems and forest
    operators inability to access long-term,
    lower-cost capital from international markets
  • Traditionally, investors in forest assets require
    high returns, encouraging forestry operators to
    focus on the short-term exploitation of timber
    assets, which may not be to the benefit of the
    wider ecosystems affected or long-term production
  • HSBCs Strategy
  • HSBC is looking at ways to create access to the
    capital markets for forest operators and, in
    return, enable them to monetize future cash flows
  • This will provide an incentive to protect the
    longer term value of underlying forest assets
    through periodic and more sustainable harvests
  • Since timber growth and harvest cycles are less
    affected by the movement of financial markets,
    forestry investment could be structured to behave
    like traditional bonds
  • Work with certification schemes such as the
    Roundtable on Sustainable Palm Oil, Forest
    Stewardship Council and Round Table on
    Responsible Soy to promote a standard for
    sustainable agri-commodities and create
    structured supply chain finance solutions for
    clients

10
Waste finance
  • We generate 2 billion tonnes of municipal solid
    waste every year
  • Rapidly emerging is the disposal of 'e waste,'
    composed of computers, mobile phones, and general
    consumer electronics, amounting to 50 million
    tonnes in 2006 alone
  • Carbon emissions from waste arise from
    incineration (burning) and its landfill (burial).
  • Waste also emits methane, which is about 20 times
    more potent than carbon dioxide as a greenhouse
    gas and therefore much more harmful to our
    atmosphere.
  • Better waste management is clearly needed and
    would reduce landfill methane emissions,
    industrial energy usage and energy used in
    transporting waste across long-distances. It
    could also provide a valuable source of heat and
    power
  • Opportunity
  • Waste tends to be heavily regulated by developed
    countries and can be expected to undergo more
    stringent regulation by countries within emerging
    markets.
  • Aside from collection, recycling and treatment of
    waste, we believe that there are significant
    opportunities for
  • energy recovery via anaerobic digestion of
    organic waste
  • energy recovery through the capture and
    conversion of methane gas
  • energy recovery via combustion of waste woods
  • recycling of non-ferrous metals from E-waste
  • Enormous potential to use waste as a source of
    energy
  • Half of municipal solid waste is organic, namely
    from food and biodegradable packaging, and can be
    used as feedstock to produce biofuel.
  • According to the Royal Society, a developed city
    of one million people could provide enough
    feedstock to produce about 430,000 litres of
    biofuel per day, enough to meet the fuel needs of
    approximately 350,000 people.
  • HSBCs strategy
  • Understaning municipal solid waste problem and
    its impacts on climate change, assessment of
    viable waste management opportunities for more
    effective waste mitigation, commercial
    applications for using waste as a renewable
    source of energy

11
Water Finance
  • The impact of carbon emissions will largely be
    felt through the alteration of the planets water
    cycle
  • With rain and snowfall becoming more erratic and
    variable, the United Nations estimates that as
    many as 5.3 billion people - 66 per cent of the
    population - will face water shortages by 2025.
    Such water shortages not only directly affect the
    amount of water we have to drink but also general
    public health, the ability of our industries to
    properly function, and our capacity to grow food
  • According to the United Nations, inadequate
    water, sanitation and hygiene contribute to the
    deaths of 1.5 million children each year

12
Water Finance
  • Opportunity
  • Some 1.1 billion people - 18 per cent of the
    world's population - lack access to safe drinking
    water. Within the United Nations Millennium
    Development goals, participating countries aim to
    reduce this number by half.
  • According to central spending forecasts, from
    2006 to 2025, the world will need to spend
    between US1.8 trillion and US3 trillion on
    installing, operating, and maintaining water and
    sewage facilities.
  • Due to the potential lack of available funding,
    there will be a potential shortfall of between
    US1.3 trillion and US2.4 trillion, which
    creates enormous opportunities for private sector
    financing
  • HSBCs strategy
  • HSBC has a long track record in water finance. We
    are now looking at ways to integrate
    sustainability within our Water Finance Strategy
  • HSBC will continue to support dams for reservoirs
    and hydropower plants (within the parameters of
    the Equator Principles and our Freshwater
    Infrastructure Policy)
  • We also see significant opportunities in the
    financing of waste water treatment plants,
    infrastructural and agricultural efficiency
    projects, coastal flood defence systems, and
    desalination plants
  • These will not only include large scale
    investment from a project finance point of view
    but will also provide opportunity within several
    underlying technologies, such as filtration
    membranes, disinfection systems, information
    technology for water utilities, water pumps, and
    pipes

13
Microfinance
  • In addition to empowering individuals to take
    control of their financial situation,
    microfinance presents a range of commercial
    opportunities across our different customer
    groups and across several products.
  • It also provides an opportunity to incubate
    potential PFS (personal finance services) and SME
    (small to medium enterprise) customers.
  • Microfinance also acts as a business complement
    to our philanthropic involvement in the area of
    education.
  • HSBC's strategy
  • Our approach to microfinance is to capture
    opportunities which have a commercial rate of
    return and a high social impact.
  • The potential is enormous, as the global market
    is expected to grow from US 20 billion in 2008
    to US 300 billion by 2030
  • We are focusing on opportunities within the
    wholesale (non retail) market, where we believe
    there are significant unmet needs and where we
    have core competencies. These include
  • Innovative funding, including providing MFIs
    (microfinance institutions) with access to debt
    and equity capital markets, to reduce funding
    costs.
  • Local currency funding structures with associated
    risk management
  • Cash management, technology, outsourcing, and
    automation to decrease cash intensity and,
    ultimately, transaction costs.
  • Microfinance beyond simple credit, including
    savings, insurance, and remittance products.
    These are products which are typically not
    accessible to MFIs (microfinance institutions)
  • Climate Change Connect Rural communities
    utilising renewable energy and in the process
    gaining carbon credits

14
Rural Livelihoods and Climate Change Adaptation
  • A pilot project in partnership with Sadguru
    Foundation
  • Coverage 5 villages in Dahod, Gujarat
  • Key Components Agro-forestry, floriculture,
    vermi
  • composting and microfinance
  • Impact
  • Measurable increase in income for 400 households
    with multiplier effect on neighbouring villages.
  • 100 vermi-compost units will enhance soil
    fertility.
  • Carbon 106.7 ha of wastelands to be covered by
    1.6 lakh trees sequestering 195.73 tonnes
    CO2/annum. Fruit orchards will sequester an
    additional 36.7 tonnes of CO2/annum
  • Carbon Credits for Communities

Vermi-Composting
Agro-Forestry
Floriculture
15
Managing our footprintHSBC is the worlds first
carbon neutral bank
  • We have 813,000t CO2 to manage

REDUCE HSBC Mexico Headquarters The new US150
million headquarters building in Mexico City,
'Torre HSBC', has been designed and built to
benefit the local community economically and
environmentally, and to reflect local heritage.
The environmental initiatives applied to the new
building have resulted in 55 less water usage
and 40 less energy usage than comparable
structures.
BUY RENEWABLES We continue to buy electricity
from green or renewable sources Currently, we
purchase green elecrticity in the UK, the US,
Australia, Brazil,Ireland, Luxembourg, Sweden and
Switzerland.By purchasing green electricity or
paying green tariff, HSBC is helping to support
global investment in renewable energy
OFFSET
  • 1 carbon credit 1 ton of CO2 avoided
  • Additional
  • Credible
  • Cost effective

16
Stabilise and then reverse emissions
Billion of Tons of Carbon Emitted per Year
14
14 GtC/y
Currently projected path
Seven wedges
Historical emissions
7 GtC/y
7
Flat path
1.9
0
2105
2055
2005
1955
17
with commercially viable technologies
  • Wind, Solar PV
  • Biofuels
  • Energy and Transport Efficiency
  • Fuel Switching
  • Carbon Capture Storage
  • Landfill Gas/Methane Capture
  • Geothermal
  • Nuclear, Hydrogen

18
.deployed globally and at scale
20 trillion will be invested in global energy
infrastructure from 2005 to 2030
Source IEA/OECD World Energy Outlook 2006,
Reference Case
19
Our perception of opportunity
20
What next? The future of sustainable finance
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Climate change is a strategic issue for HSBC
  • The appointment of Lord Stern as Special Adviser
    on Economic Development and Climate Change to the
    Group Chairman reflects HSBCs view that climate
    change is the single greatest economic,
    environmental and social challenge we face this
    century
  • Attitude towards climate change
  • In 2007, we published the HSBC Climate Confidence
    Index, a survey of 9,000 people across nine major
    markets that explored consumer attitudes towards
    climate change
  • In 2008, we completed a second survey on a
    similar theme allowing us to map changes in
    consumer attitudes towards climate change

25
HSBC and carbon neutrality
  • In 2005, HSBC was the first major bank and FTSE
    100 company to become carbon neutral. Being
    carbon neutral means our worldwide operations
    contribute net zero carbon dioxide into the
    atmosphere, reflecting our commitment to be at
    the forefront of sustainable business practice
  • For us, being carbon neutral is, first and
    foremost, about reducing our carbon footprint. To
    do this, we measure and reduce energy consumption
    across the Group, source renewable energy where
    possible, and offset any remaining emissions by
    purchasing high quality verified emission
    reductions (VERs).
  • The projects producing the offsets meet the
    standards of such bodies as the United Nations
    Clean Development Mechanism Executive Board and
    the Voluntary Carbon Standard
  • The carbon offsets we buy must genuinely reduce
    the amount of carbon dioxide emitted, must be
    cost-effective and must satisfy long-term
    sustainable development criteria. The data and
    offsets of our carbon neutrality are verified and
    assured by an independent third party

26
HSBC and Carbon Neutrality
  • HSBC purchased 897,000 tonnes of emission
    reductions from projects that meet
    internationally recognised standards of best
    practice to offset the 897,000 tonnes of carbon
    dioxide it emitted in 2007
  • Since October 2005, HSBC has emitted 1,880,000
    tonnes of carbon dioxide and purchased the
    equivalent offsets to remain carbon neutral at a
    cost of US11.4 million
  • This cost is charged out to countries and
    territories around the Group based on their
    actual carbon dioxide emissions, thereby creating
    an additional financial incentive for them to
    reduce their emissions and energy usage
  • We expect the cost of carbon to increase as a
    result of regulation and carbon taxes, and we
    believe that financial institutions should and
    will play an important role in the shift to a
    low-carbon economy

27
Climate Change Research
  • The Climate Change Centre of Excellence
    established in Bangalore, India, in 2007 will
    work closely with HSBCs Global Research sector
    heads and analysts to assess the financial
    implications of climate change
  • The centre will also support the implementation
    of HSBCs Carbon Finance Strategy and work
    alongside a range of businesses throughout the
    world
  • Over time, the centre will help establish HSBC as
    a leader on the economic risks and opportunities
    associated with a lower carbon economy for the
    benefit of the Groups business and clients

28
HSBC Climate Change Indices
29
Carbon Markets How we see our role?
  • Linking buyers and sellers of carbon With our
    presence in the key emerging markets we are
    uniquely positioned to participate in the United
    Nations project Clean Development and Joint
    Implementation mechanisms. In addition to
    traditional project financing structures, we will
    increasingly look at new structures incorporating
    carbon as a stream of repayment.
  • Financing of renewable energy and efficiency
    technologies represents a major opportunity to
    work across all customer and product groups, both
    with new and existing clients, in terms of
    funding and ancillary business, such as trade
    services or hedging.
  • Opportunities will exist both at a large-scale
    project level for financing and advisory
    services, but also with the companies providing
    the underlying technologies, e.g. turbine
    manufacturers, solar PV suppliers etc. These are
    commercial relationships, and the Groups lending
    guidelines, including environmental guidelines
    will continue to apply.
  • In some markets/technologies the Group will have
    limited experience, and our preference will be to
    work with existing clients/ Corporate and
    Institutional Banking names
  • In the case of more mature technologies, a
    greater degree of flexibility will exist, taking
    a more proactive approach to involvement both on
    a commercial banking and individual level
    (product and investments).
  • At a product level, we will investigate the
    viability of sustainability oriented variations
    of product (such as environmental insurance,
    carbon trading and personal financial services
    targeted at the climate-conscious consumer)

30
Corporate, Institutional Banking
  • HSBC Project and Export Finance are closely
    following the development of the renewables
    industries covering both the power (biomass,
    landfill gas, wind etc) and biofuels sectors.
  • We feel that globally this will be an exciting
    new sector for financial institutions providing a
    attractive opportunities for not only project
    finance debt arranging and advisory expertise but
    also across equity, risk management and corporate
    finance disciplines
  • Project and Export Finance opportunities will
    exist for non-recourse financing (Senior debt)
    and project advisory for renewable energy
    projects, either for new clients or for existing
    clients e.g. BP/Shell.
  • Additionally, a number of clients in the Energy
    Utilities and Chemicals sector of will have
    compliance requirements to reduce their carbon
    dioxide emissions under the European Union
    Emissions Trading Scheme.
  • A potential role exists to linking short and long
    carbon positions on a back-to-back basis, as well
    as sourcing carbon from project financings to
    cover CIB clients short positions.
  • With the growing number of Corporates cutting
    emissions whether on a voluntary or compliance
    basis and declaring an intention to go carbon
    neutral, there is a role to play either in
    advising on this process, financing environmental
    upgrades, or sourcing carbon offsets for
    neutrality

31
Commercial Banking
  • The opportunity for Commercial Banking to develop
    book within the renewables/clean tech sector are
    significant
  • Not only does it give us the opportunity to align
    our client base with the Group strategy along
    several sectors but it also gives us access to an
    industry that is fast growing, has a high
    dependence on Bank products and has longevity
  • Renewables companies will have financing needs
    akin to those of traditional energy companies-
    loans/overdrafts/working capital/financial
    advisory/flotation
  • In addition they may be exposed to FX or interest
    rate risk- many renewables companies will source
    their products overseas, for example solar panel
    manufacturing in China, while selling their
    product elsewhere, thus exposing them to
    cross-border currency risk

32
Equity, Insurance, Retail Banking
  • Equity
  • HSBC Infrastructure is reviewing a number of
    investment opportunities in the environmental
    projects arena. The main source of opportunity is
    in the wind farm sector with growing
    opportunities in the bio-fuel and solar sectors
  • Opportunities are global with many countries
    having established targets for generation of
    green power
  • In order to meet these targets subsidy support
    mechanisms are being developed to attract
    investment. With the scale of investment required
    and the proving of technology, third party
    investors such as banks become involved
  • Insurance
  • Climate change will represent both a threat and
    an opportunity for the insurance sector
  • Opportunities to work in the renewables space
    will vary from traditional project insurance
    (Construction All-risks, Property Damage,
    Business Interruption etc.) to climate change
    specific products such as carbon credit delivery
    guarantee structures
  • PFS/Consumer Finance
  • Opportunities may arise to develop product,
    either personal loans/consumer finance targeting
    household environmental upgrades or personal
    financial services relating to minimising carbon
    footprints or carbon neutrality

33
Trade Finance
  • HSBC approach towards the environment, is moving
    from a risk-based approach to one based on
    opportunity, the main opportunities for Trade are
  • - Upstream financing of a retailer's supply chain
    (helping them to secure supplies of 'greener' or
    'accredited' products) e.g. vendors of equipment,
  • - Working capital funding for manufacturers/produc
    ers/exporters of 'environmentally friendly'
    products in selected countries (where the Group
    has local representation), e.g. solar companies
  • - Sourcing of agricultural feedstock for biofuel
    production e.g. a bioethanol company that
    require a feedstock of wheat, sugar cane or corn
  • - The pre-financing of a client's carbon credits
    (subject to the establishment of market
    standards, counterparties and pricing)
  • Trade finance packages will vary for each client,
    using a combination of trade products, from
    simple L/Cs to more complex structures (including
    structured trade finance or asset backed
    structures)

34
Responsible Lending Roaring 40s Wind Farms
  • Roaring 40s, a 5050 Joint Venture between the
    CLP Group and Hydro Tasmania of Australia, is
    developing a 50.4 MW wind farm at Khandke in the
    state of Maharashtra, India
  • Inspite of the very challenging facility tenor
    (11 yr DTD 7.5 yr average) and the sector, the
    transaction - which represented the first
    non-recourse cross-border facility for a wind
    farm in India - closed successfully in July 2007
  • The Project has a very positive overall impact as
    it
  • Contributes to meeting the electricity supply
    deficit in the state of Maharashtra
  • Contributes to improved electricity supply
    service delivery to a wide rural outreach
  • Improves microeconomic efficiency of the power
    sector through reduction in fossil fuel usage
  • Reduces greenhouse gas emissions from power
    generation and contribute to negligible emission,
    effluent, and solid waste intensity of power
    generation in the system
  • Conserves natural resources including land,
    forests, minerals, water, and ecosystems and
  • Develops the local economy and create jobs and
    employment, particularly in rural areas and in a
    district that is designated a backward area
  • Compliant with Equator Principles
  • The Project is expected to qualify for Clean
    Development Mechanism under United Nations
    Framework Convention on Climate Change
  • Roaring 40s has already appointed a consultant to
    assist in the certification process and is
    evaluating offers received from prospective buyers


Khandke wind farm Project
2007
50.4MW wind power project
HSBC Roles Sole MLA Hedge Counterparty Agent Secur
ity Trustee Account Bank
Financing demonstrates commercial viability of
renewable energy to meet rapidly growing energy
needs of the Indian economy and HSBC and
international markets commitment and support for
Indias rapidly growing renewable program and
power sector reforms
Underlines HSBCs confidence and commitment for
Indias renewable sector
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Carbon market risks
  • Given the lack of natural demand for carbon, the
    carbon market is driven by expectations of future
    policy and regulation, as well as the
    technological capacity of the private sector to
    deliver abatement
  • As a result, some of the major risks include
  • Regulation by multiple authorities
  • Politically determined allocations of underlying
    allowances
  • Lack of common standards for financial
    instruments
  • Uncertainty over the delivery of CERs
  • Insufficient interconnections between emissions
    markets
  • Inappropriate environmental claims,particularly
    in voluntary carbon markets

39
Beyond 2012 Some pointers
  • Created and driven by regulation, the carbon
    markets biggest risk today is caused,
    perversely, by the absence of market continuity
    beyond 2012
  • The agreement of a global deal in Copenhagen is
    crucial for underpinning future growth.
  • The EU 202020 vision as detailed in our March
    2008 Quarterly Climate Index Review, Europe has
    committed to achieving at least a 20 reduction
    in greenhouse gases from 1990 levels by 2020, and
    has set a conditional objective of a 30
    reduction by 2020, subject to a comprehensive
    international climate change agreement.
  • The scope of EU ETS in Phase III will be extended
    to new sectors (chemical sectors and ammonia
    producers), which would bring new gases (PFC and
    N2O) into the scheme.
  • Aviation may join earlier, towards the end of
    Phase II, and shipping maritime transport is
    tentatively next on the list

40
Last word
  • Low carbon pipe and connectedness to business
    process is as important as creating a standalone
    CDM project
  • CDM Financing cant be delinked from the broader
    goal of sustainability risk management and
    creation of sustainable finance products and
    services
  • Research becomes important
  • Adaptation technologies will assume prominent
    significance and will compete for attention with
    mitigation technologies
  • CDM / low carbon economy is a continuum, we need
    players across the spectrum converging and
    collaborating to create a stable market

41
Thank you
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