Banking on a green world

A roundup of news about environmentally linked investments and products on offer by financial institutions.
This week those of you who receive FinanceAsia magazine will also get our first ever supplement on the environment. We report on the green activities of financial institutions, from carbon trading to making sure they shut off the lights at night and recycle paper. On that note, we too printed the supplement on recycled paper and intentionally kept it short: just 40 pages. We decided to run other news on the web, in an effort to encourage conservation.

For a quick summary of a year's worth of finance and environmental news, check out the following news bites.

July 2007

HSBC offers eco-friendly financing in Hong Kong

HSBC launches its green equipment financing programme to encourage business customers to invest in environmentally friendly equipment.

The product gives customers interest rebates and a principal repayment moratorium when taking out a new loan for purchasing equipment that complies with environmental protection regulations. Plus, for every HK$2,000 ($256) of the loan amount, HSBC donates HK$1 to WWF Hong Kong, the environmental conservation organisation.

At the time of announcing this programme, Margaret Leung, HSBCÆs group general manager, global co-head of commercial banking, said: ôWe see huge potential in equipment financing with ChinaÆs rapidly developing economy. For the first half of 2007, the total loan amount for machinery was HK$6.7 billion, of which 90% was used in the mainland.ö

The deal stated that from its start until July 18, 2008, customers who apply for green equipment financing and complete the drawdown on or before October 31, 2008, will enjoy up to two months of interest rebate and an initial six-month loan principal repayment moratorium.

August 2007

Morgan Stanley launches its Carbon Bank

Morgan Stanley partners with Det Norske Veritas (DNV), which is an international provider of emissions data certification to launch this programme. It provides both integrated carbon verification and offsetting capabilities in the voluntary market that are billed to be underpinned by standards as rigorous as any in the regulated market.

ôAlthough the regulated carbon market is based on environmentally effective and standardised procedures, it has been difficult for companies to find a high-quality, standards-based service to offset their emissions in the voluntary market,ö explained David Yarnold, executive vice president for Environmental Defence.

Hence, Morgan Stanley sees an opportunity. HereÆs how the programme works. Clients can compile their emissions inventory and calculate their carbon footprint by applying the monitoring standards of the Greenhouse Gas Protocol Initiative, which provides the accounting framework for many mandatory greenhouse gas programmes globally, including the EU Emissions Trading Scheme. The next step is that DNV verifies these emissions inventories and calculated carbon footprints. Morgan StanleyÆs commodities group then procures and cancels carbon credits equivalent to a clientÆs verified carbon footprint, according to the standards of the Kyoto Protocol.

If youÆre inclined to stay active in the process, you can select your preferred sources of carbon credits, which can be procured from various sources including from Morgan StanleyÆs own direct investments in emission reductions as well as those of MGM International, one of the carbon marketÆs largest developers of emission reduction projects. (In 2006, Morgan Stanley acquired a 38% stake in MGM, so itÆs a logical partner.) However, Morgan Stanley doesnÆt invest in forestry products, due to outstanding technical and legal problems.

September 2007

HSBC launches a benchmark index that tracks the performance of companies likely to profit from climate change

HSBCÆs corporate and investment banking division launches a Global Climate Change Benchmark Index, together with a family of four global climate change sub-indices, which it bills as a comprehensive range of climate change indices.

The bank says the global reference index is designed to reflect and track the stockmarket performance of key companies that are best placed to profit from the challenges presented by climate change.

Based on this benchmark, HSBC has developed four investable climate change indices that can be used to create portfolios for the likes of long-only funds, hedge funds, exchange-traded funds, discretionary funds and structured products. The indices include: an HSBC climate change index; the HSBC low carbon energy production index (including solar, wind, biofuels and geothermals); the HSBC energy efficiency and energy management index (including fuel efficiency autos, energy efficient solutions and fuel cells); and the HSBC water, waste and pollution control index (including water recycling, waste technologies and environmental pollution control).

ôClimate change is set to be one of the defining investment opportunities in the years ahead,ö said Nick Robins, head of HSBCÆs climate change centre of excellence. ôThis index series captures both the imperative of reducing greenhouse gas emissions and the need to adapt to the physical impact of climate change.ö

Standard Chartered pledges between $8 billion and $10 billion to renewable energy at the Clinton Global Initiative

Standard Chartered commits to financing of new renewable and clean energy projects in Asia, Africa and the Middle East, with the biggest pledge in the bankÆs history at the Clinton Global Initiative.

The pledge, which amounts to $8 billion to $10 billion, will involve a five-year commitment, and will focus on energy projects such as wind, hydro, geothermal, solar, bio mass and coal bed methane in Asia, Africa and the Middle East. The development of renewable energy projects will help achieve the goal of containing the growth of greenhouse gas emissions û a stated objective of a number of countries in which Standard Chartered operates. Standard CharteredÆs role may be as lead arranger of debt, financial adviser, or as equity investor.

January 2008

Deutsche Bank gives the all clear

Deutsche Bank initiates a custody clearing and settlement service for carbon credits. The service facilitates the exchange of carbon credits among carbon investors and other participants in the carbon trading market and provides an integrated custody and safekeeping service. It will cover carbon credit instruments issued under both the European Union Emissions Trade scheme and the Clean Development Mechanism set up under the Kyoto Protocol.

Deutsche BankÆs service offers advantages for energy and industrial firms, financial institutions and others active in the carbon trading market. It significantly reduces the settlement risk associated with current carbon trading practices by settling carbon credits simultaneously against cash and relieves investors and traders of operational responsibility for the settlement process. It facilitates rapid settlement by providing a single platform for holdings across multiple currencies and markets. It manages the limit on credits that can be transferred from a country other than the clientÆs host country under the EU Emissions Trading Scheme by tracking a clientÆs carbon credit holdings and allocating them to the different national carbon registries. And it offers custody as well as settlement and clearing, thus providing clients with a streamlined process similar to that of more traditional asset classes.

ôWe believe the provision of a single professionally managed platform will significantly increase activity in this market and provide additional capacity for the expected growth in the trading and banking of carbon credit instruments,ö said Dinkar Jetley, global head of trust and securities services/cash management financial institutions at Deutsche Bank.

Hong KongÆs stock exchange and pollution

Hong KongÆs stock exchange announces it is planning to establish a market in one of the cityÆs most abundant commodities: pollution.

Following the recommendations of a team of consultants, the exchange will partner with an overseas exchange to set up a trading and clearing platform for emissions-related structured products and exchange-traded funds (ETFs). Paul Chow, chief executive of The Hong Kong Exchanges and Clearing (which operates he stock exchange), said he expects to reach an agreement before the end of the year. He also said that the exchange will consider setting up an auction for certified emissions reduction units, similar to the scheme already running in Europe.

The study û carried out by Mallesons Stephen Jaques, Climate Focus and International Environmental Trading Group û also considered the idea of trading derivatives, structured products and ETFs linked to gold. As a result, the exchange has said that it will send a proposal on trading cash-settled gold futures and options to the Securities and Futures Commission.

For the most part, the infrastructure needed to put these initiatives into practice is already in place. ôOur market systems can support the trading of the products that are part of these initiatives so any IT-related investment will be insignificant,ö said Chow. Even so, the chief executive clearly has no plans to rush things. ôInitiatives like these tend to have lengthy timeframes so we are taking a long-term view,ö he added.

HSBC launches climate change fund

HSBC kicks off its global investment funds (GIF) û climate change. Managed by Sinopia Asset Management, the bank's quantitative investment specialist, the fund, which calls for a minimum investment of $1,000, uses the HSBC Global Climate Change Benchmark Index to define the investment universe. The benchmark index represents 19 themes and three key sectors, namely low carbon energy production; energy efficiency and energy management; and waste, water and pollution control. (See: September 2007).

ôWe use our active quantitative stock selection models to select around 50-70 stocks out of the 300 plus from 34 countries covered in the benchmark index, based on a multi-criteria scoring methodology that takes momentum (price, sales or/and earnings), valuation and growth into consideration,ö explained Patrice Conxicoeur, chief executive of Sinopia Asset Management, Asia Pacific.

UBS unveils Greenhouse Index

UBS bills its Greenhouse Index as the first tradable investment benchmark tracking the greenhouse effect. It comprises a combination of weather and emissions asset classes and, as such, is the first integrated index that allows market participants to obtain an exposure to greenhouse gas emissions and their impact on the weather, recognised as the greenhouse effect.

The UBS-GHI is constructed using liquid, actively traded futures contracts. Weather exposure is derived from so-called heating degree day and cooling degree day futures contracts traded on the Chicago Mercantile Exchange. Emissions exposure is provided by carbon credits associated with the EU Emission Trading Scheme traded on the European Climate Exchange (and the Kyoto Clean Development Mechanism traded on Nord Pool).

The UBS-GHI governance committee will meet annually to determine the composition and the weighting of the UBS-GHI and its family of sub-indices. This currently comprises three sub-indices tracking the performance of a weighted average of EU Allowances and Certified Emission Reductions futures, reflecting the obligation of carbon dioxide (CO2) emitters to comply with their annual emission targets until 2012.February 2008

Wall Street banks devise a set of principles to guide them in evaluating carbon risks

Citi, JPMorgan Chase and Morgan Stanley form the Carbon Principles, which are a set of climate change guidelines aimed at advisers and lenders to power companies in the US.

ôThe need for these principles is driven by the risks faced by the power industry as utilities, independent producers, regulators, lenders and investors deal with the uncertainties around regional and national climate change policy,ö the banks said in a statement.

The principles were developed by the banks over a nine-month period and in consultation with leading power companies and non-governmental organisations.

According to the banks, the carbon principles recognise the benefits of a portfolio approach to meeting the power needs of consumers, without prescribing how power companies should act to meet these needs. However, if high CO2 emitting technologies are selected by power companies, the signatory banks have agreed to follow an ôenhanced diligenceö process and factor these risks into the final financing decision.

The three banks pledge their commitment to the principles and will use them as a framework when talking about these issues with clients. The aim is to create a ôconsistent approach among major lenders and advisors in evaluating climate change risks and opportunities in the US electric power industry,ö they stated. ôThe principles and associated enhanced diligence represent a first step in a process aimed at providing banks and their power industry clients with a consistent road map for reducing the regulatory and financial risks associated with greenhouse gas emissions.ö

Lehman Brothers begins trading physical Certified Emission Reductions (CERs) in Japan

Also in February, Lehman Brothers becomes the first global investment bank that can link the Japanese and European carbon markets, providing liquidity on both sides of the European and Asian carbon markets.

It also becomes the first foreign financial firm to open an account in JapanÆs National Registry System, which was developed in 2002 to help the Japanese government establish its domestic rules of emission trading systems, including CERs.

A CER is a carbon credit developed by carbon offset providers that is certified as being equivalent to one tonne of CO2 under the United NationsÆ Clean Development Mechanism, as defined by the Kyoto Protocol. Carbon offset schemes allow emitters of greenhouse gases to pay another party to undertake to remove the equivalent amount of CO2 from the atmosphere, through activities including renewable energy, energy efficiency and carbon capture projects, typically where it is more economical to do so.

Lehman BrothersÆ global carbon trading operations are led out of London and are part of its global commodities business which also encompasses oil, coal, natural gas, power, metals and structured investor products. The firm offers a comprehensive range of products and services across the carbon emissions credits markets, including sourcing and origination of CER, trading and structuring of CER-related products, and risk management advisory.

HSBC announces it will launch a green credit card

The bank announces it will be launching its first green credit card in early April in Hong Kong. The card is made of chlorine-free material and customers will be receiving e-statements to help cut down on paper consumption. They will also be contributing to the setting up of green roofs in a number of schools in Hong Kong, as HSBC says it will donate an equivalent sum of 0.1% of cardholder spending to the HSBC Green Roof for Schools programme.

The new card is billed as the first green credit card in the Hong Kong market and the first green card to be launched by the HSBC Group. It is made of PET G, which is an environmentally friendly material that has virtually eliminated chlorine and other toxic chemicals found in most standard PVC credit cards.

The HSBC Green Roof for Schools programme was initiated by the Hongkong Bank Foundation in collaboration with The University of Hong Kong to create green outdoor classrooms for teachers and students in selected schools in Hong Kong. The HK$5 million project will help reduce school building temperatures and help combat the ôurban heat island effectö (i.e., the phenomenon of urban temperatures being higher than temperatures in the surrounding rural areas). This should reduce air conditioning use. Green roofs will also increase green space in schools, which often lack ground level open space or gardens. The lawn surfaces can help filter and absorb dust particles and other harmful air pollutants to improve air quality in the city.

March 2008

UBS launches its Europe Carbon Optimised Index

Using the DJ Stoxx 600 as the benchmark, UBS's new Europe Carbon Optimised Index gives investors an option to adjust portfolio exposure to climate change reactions by focusing on the carbon footprints of the companies in the index.

The index is designed to track the DJ Stoxx 600, but with a 30% to 40% lower carbon footprint. It matches the sector weightings of the benchmark but achieves its main aim by over-weighting the lower-carbon companies and similarly under-weighting the companies with larger carbon footprints within each sector, based on data provided by environmental research organisation Trucost.

ôIn an environment where governments are increasingly taxing and regulating greenhouse gas emissions, which has a real financial impact on businesses, there is a growing investor appetite for products that can potentially capitalise on carbon-efficiency,ö said Julie Hudson, head of SRI Research.

To date, investment approaches to climate change investment have been largely thematic, focusing on companies that deliver solutions. Portfolios based on this approach tend to be concentrated in economically sensitive industrial sectors, which can be problematic in volatile markets. According to UBS, the new index differentiates itself by being all-encompassing and inclusive of the full sector spectrum.

SG works with Orbeo to launch a new index

SociTtT GTnTrale Index (SGI) and Orbeo launch the SGI-Orbeo Carbon Credit Index, designed to give institutional investors, asset managers and private banks direct access to the carbon underlying. Orbeo is among the leading buyers and sellers of CO2 products.

The index aims to maximise the performance through time of two underlying carbon credits: European emission allowances, allotted by the European Commission under the European Union Emission Trading Scheme; and certified emission reductions (CERs), issued under the Clean Development Mechanism governed by the Kyoto Protocol, which promotes emission reduction projects in emerging countries. The index will initially be based on 50% European emission allowances and 50% CERs.

The SGI-Orbeo Carbon Credit Index is overseen by an independent review committee comprised of six people, appointed by SociTtT GTnTrale, Orbeo and Standard & PoorÆs, the index calculation agent.

April 2008

MerrillÆs solutions

Merrill Lynch launches Merrill Lynch Green & Gold, an innovative full-service climate change solution with a strong focus on sustainability. It is intended for companies in the Americas, Asia and Europe that do not currently face a regulatory requirement to reduce carbon emissions, but wish to proactively develop a carbon strategy that identifies financial opportunities and enhances their brand in light of growing concerns about climate change. Its aim is to help companies identify potential win-win opportunities that simultaneously reduce emissions and costs.

ôOur view is that the carbon market, now worth $70 billion, has demonstrated that it provides the most cost-effective approach for companies to reduce and offset their emissions of greenhouse gases,ö said Abyd Karmali, Merrill LynchÆs global head of carbon emissions. ôThe market must, however, continue to grow on a foundation of environmental integrity. Demand in the rapidly growing voluntary carbon offsets market is shifting towards emission reductions that provide stakeholders with an independent guarantee of environmental sustainability and credibility.ö

Japan gets rolling with its CERs

Orbeo, a Paris-based emissions trading joint venture between SociTtT GTnTrale and Rhodia Energy, announce that along with Rhodia Japan it has concluded a new deal to provide 8 million tonnes of certified emission reductions (CERs) during 2008-2013.

The deal was struck with the New Energy and Industrial Technology Development Organisation, Japan (NEDO), which is the administrative agency in charge of the CER purchase program in order to meet the Japanese Kyoto commitment.

In 2007, Rhodia Japan and Orbeo sold to NEDO a total of 1.83 million tonnes of CERs from the Rhodia South Korea clean development mechanism project. In this current transaction, the CERs come from the Rhodia Brazil CDM project.

This transaction was arranged by Orbeo, which has been very active for more than one year now in the Japanese market, with the support of Rhodia Japan. Together, they were the first companies to deliver carbon credits to NEDO in 2007 to help it meet its Kyoto commitment.

SG launches a new index

SociTtT GTnTrale Index (SGI) launches SGI Global Carbon, an equity index offering exposure to stocks that exhibit the lowest carbon intensity among the worldwide industrial, utilities, energy, capital goods and materials sectors.

The index is invested mainly in North America, Europe and Asia. It offers a selection of 30 low-carbon intensive stocks, from an initial coverage of more than 1,500 companies.

The selection of stocks is carried out by a model jointly developed by Centre Info, a leading sustainable investment consulting and rating firm, and the socially responsible investment equity research team of SociTtT GTnTrale Corporate & Investment Banking. The selection process identifies companies with a very low level of carbon emissions, from the supply chain to production to product use, as well as limited exposure to carbon costs driven by emerging regulations and technological changes.

The SGI indices can be replicated using tracker funds such as exchange-traded funds (ETFs) and through SociTtT GTnTrale certificates. Investments can also be made using structured products. The index is calculated and published on a daily basis by Standard & PoorÆs.

May 2008

The ADB and Standard Chartered help fund private sector energy-efficient projects in China

The Asian Development Bank (ADB) is extending Rmb800 million ($114.5 million) in a partial credit guarantee programme to support small- and medium-sized private sector energy-efficient projects in the mainland.

The ADB says it has selected Standard Chartered Bank as the first partner financial institution in the pilot that will initially target energy efficiency programmes for buildings. The ADB will share the credit risk with Standard Chartered.

The energy efficiency multi-project financing programme is the ADBÆs first credit guarantee to mobilise commercial financing in the mainland. The logic behind this is that the energy demand in China, the worldÆs second-largest energy consumer and one of its largest emitters of greenhouse gasses, is growing rapidly to support its economic growth. The programme will support the retrofitting of existing buildings, typically leading to energy savings of 20%-40%. The programme will also support energy efficient ôgreen buildingsö.
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