Green transformation
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Leveraging diversified financing tools to deliver a greener future
Green transformation
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The green transformation across industries will be crucial to facilitate the sustainable transition. But the cost of upgrading or replacing existing production sites and infrastructure is often proving an obstacle within traditional financing models.
In a roundtable discussion, Commerzbank examines how the financial industry is adapting and working together to deliver the necessary funding. At the table: Christine Rademacher, Divisional Head Financial Engineering; Kathrin Eich, Global Head of Structured Export and Trade Finance; Ina Kreissl, ESG Sector Advisory.
How are financial institutions approaching the green transition within the energy sector? Are banks having to change their approach as funding requirements increase?
Ina Kreissl: Since the 2016 Paris Agreement, companies across all industries have made a concerted effort to meet changing climate objectives. The green transition is certainly underway, and effective change cannot be realised without major infrastructural investment.
However, given the exorbitant amount of investment needed to upgrade or replace existing assets, traditional forms of financing are so far proving insufficient. With hard-to-abate sectors such as the steel or energy industry, bank balance sheets simply cannot offer enough capacity. The speed at which the investment is needed outweighs the cash generation from new assets, with negative implications for credit footprints, meaning that newer approaches are necessary.
Banks and other financial institutions are becoming more creative, leveraging collaborative financing deals to overcome the immense capital requirements associated with handling the green transitionIn terms of the future financing mix for the required transformation of the asset base, we see a diversified approach of various financing instruments rather than the uniform use of financing instruments that many companies might be accustomed to.
How are banks supporting what are very different sustainability journeys for their clients, across different sectors and geographies?
Christine Rademacher: Financial institutions need to recognise the individuality of their clients’ sustainability journeys and avoid offering a ‘one-size-fits-all’ approach.
How can they achieve this? Banks will be increasingly called upon to leverage their regional and sectoral expertise to provide effective, tailored solutions that meet their clients’ specific requirements. This support must encompass all dimensions of the green transition, covering contextual knowledge of the landscape and specific operational insight for individual projects.
As trusted advisors for corporates, banks will be distinguished by their sector-specific transformation expertise, supply-chain knowledge and awareness of regulatory environments.
In terms of operations, banks will be expected to advise their clients on best-practice sharing, new products, and the expectations of investors and banks concerning transition planning. When it comes to ironing out the finer details of projects, financial institutions must also advise on reporting formats, science-based target setting and respective KPIs.
The demand is there. Looking at midcap corporates and their supply chains, for example, there has been increasing pressure from original equipment manufacturers (OEMs) to decarbonise, leading to growing capex in electrifying production processes and implementing energy efficiency programmes.
At Commerzbank we are very familiar with this process. Through our dedicated ESG and transformation experts as well as the Centre of Competence for Green Infrastructure Finance in Hamburg, the bank has worked to position itself as a leading international financier of renewable energy.
IK: Large projects need large financing efforts, usually only achievable with a collection of financial institutions coming together on large deals. Recently, Commerzbank played a role in the EnBW He Dreiht Offshore wind park, in which a number of financiers leveraged a blended finance deal to provide a syndicated loan of EUR 500 million to go toward 64 wind turbines.
If financial institutions must now advise on product details, supply chain, regulations, reporting, KPIs and industry collaboration, amongst other things, what challenges does this multi-faceted approach bring?
Kathrin Eich: There are definitely some challenges – not least the regulatory discrepancies between different jurisdictions. It is becoming increasingly clear that cross-border deals will be a popular way of providing funding for green infrastructure. To streamline these ventures, there must be a global set of standards to provide a level playing field for corporates and banks.
Financial institutions and project managers need more clarity here, which would add stability and provide planning security for investors.
Traditionally, export credit agencies (ECAs) have largely supported deals in emerging markets, with the aim of encouraging exports to somewhat riskier jurisdictions. How does ECA involvement differ when it comes to the green transition?
KE: There has been a clear change here, and we have seen some recent deals that have involved cross-border trade between two developed markets. We saw the benefits of ECA involvement in a recent deal with Salzgitter in which Commerzbank, in partnership with a collection of financial institutions, provided an ECA-covered green loan of EUR 200 million to make large-scale transformations to Salzgitter’s green steel production. The loan is an important step in financing the company’s Salcos programme with the objective of reducing CO2 emissions by 95%.
The unique feature of the financing structure is the inclusion of ECA export credit cover from Oesterreichische Kontrollbank (OeKB), the Austrian export credit agency. The involvement of the ECA was significant in attracting wider financial support due to risk sharing, underscoring the benefits of cross-border collaboration in achieving shared climate goals.
It could well be a phenomenon that grows in popularity. This style of ECA deal benefits borrowers in developed markets, acting as a valuable addition to their funding mix for their capital-intensive transformation process. Furthermore, for the borrower, it gives access to a broader lender base able and willing to provide larger amounts of long-term financing.
There are also benefits for lenders, who can share the risk burden with these ECAs, encouraging heightened investment in necessary projects.
This deal was facilitated by the Austrian ECA and involved suppliers from Austria. How important is the role of ECAs in promoting national exporters even within the single market?
KE: Of course, it is normal for ECAs to promote national manufacturers’ exports of capital goods. In doing so, they not only support their domestic economies but also act as facilitators of the green transformation and help to foster a collaborative environment.
The climate crisis will affect people across the world, so parties across various jurisdictions must collaborate to meet shared climate objectives. ECAs can encourage cross-border investment to meet the extensive capital requirements for the green transition.
We’ve learnt that collaborative financing deals can work in the steel sector. Will this model be applied to other hard-to-abate sectors, and are any such projects already underway?
IK: Those operating in hard-to-abate sectors could stand to benefit hugely from this sort of financing. Just like steel, sectors like energy and special chemicals face a daunting challenge in transitioning their productive infrastructure for a greener future, so collaborative financing can serve as a vital tool.
A good example is electric power networks in Germany, where the annual capex required to prepare for the future has multiplied compared to the volumes in the past. Transmission system operators (TSOs) will require significant funds to finance the expansion of the asset base, and diversification to capital market instruments is a prudent way of achieving this. In this instance, ECA-covered financing could play an important role within TSOs’ financing mix.
KE: Green hydrogen production facilities could also require an ECA financing approach. The relative infancy of this technology compared to other renewables necessitates extensive research and testing, both of which will require resilient and supportive financing.
What is Commerzbank’s broader transition finance strategy?
CR: Commerzbank has committed to achieving Net Zero in its own banking operations by 2040 and Net Zero within its overall portfolio by 2050. With its sector expertise, deep sustainable finance market know-how and internal classification system of sustainable activities (as defined in the ESG Framework and approved by Sustainalytics), Commerzbank has established itself as a reliable partner by the side of its customers.
In actively seeking to drive and finance the sustainable transformation of the economy, Commerzbank offers a wide range of sustainable products and has developed a strong reputation in the industry. Climate-related risks are pivotal to its credit decisions and its portfolio steering is based on SBTi standards.
Commerzbank offers support and advice to all clients, regardless of their progress along their green transition journeys. The bank acts as a promoter, facilitator and financier of the transformation journey of all our clients, leveraging our industry-leading expertise to help meet shared international goals.