By Jan Hommen, CEO and Chairman of ING Group


This year we celebrate the 5th anniversary of our successful partnership with the Bank of Beijing. This celebration takes place against the background of a growing worldwide awareness of the problem caused by the increasing emission of Green House Gasses (GHG). In China as well as in the Netherlands the call for action is taken seriously. In March 2010 the low carbon economy and environmental protection became one of the main themes during the Chinese People's Congress. Many provinces and cities are drafting proposals to become green cities. The year 2010 seems to be the “low carbon policy year” in China. Together with our partners in Beijing, ING tries to play an important role in advising and arranging funding for projects that help to reduce GHG emissions. We are confident that this partnership will play an even more important role in this field in future.

I. Executive summary

It is not necessary to highlight the need for action to contain further climate change, nor do we have to indicate at what speed measures should be taken. We assume action is required as soon as possible. In this paper we would like to indicate what role financial institutions can play to help economies to develop towards low carbon economies, what are the impediments to increase this role and what are the possibilities to remove the hurdles. Finally we will focus on best practices that might be applicable in China and Beijing. As many experts indicated, it is a global problem that needs a broad range of measures to be taken. We also have to realise that for decennia we will still depend on fossil energy sources and the transition to sustainable energy sources will take a long period. During this whole transition period it is highly likely new inventions will influence the future of the global energy supply. Investments by governments and the private sector in the development in new technologies are crucial. The reduction of CO₂ caused by fossil fuels and sequestration techniques, the development of renewable energy sources and the increase in efficiency of the use of energy will help us realise the required reduction of GHG. It is often stated that due to the recent economic downturn, tighter budgets and restricted access to credit there will lead to a decrease in R&D activities. Robert Solow, the distinguished economist, stated that technical change actually accelerated after the great depression, in 1929. We see the same trend happening after the 2008 downturn. Pressure on margins and costs creates incentives for firms to diminish waste and invest in waste- and cost-reducing innovations. Companies address the economy and environmental issues together, aiming to reap a “double dividend” of greater economic efficiency combined with less waste and fewer negative externalities. United States President Barack Obama has placed the double dividend technologies at the centre of his policy agenda. If authorities succeed to agree upon common goals, targets and regulations internationally we are optimistic about the chances to channel substantial funds to projects focused on the development towards a low carbon economy.

II. The problem and required investments

The reduction of carbon emission is a tremendous task during the next decennia. Currently the GHG emission in the world increases by1.6% per annum. According to the IPCC Assessment Report 4 (2007) the energy supply sector delivers the largest contribution followed by the manufacturing industry and forestry. Increased efficiency in generation energy, the use of renewable energy sources and lower energy consumption will help to reduce the GHG emission. It is obvious that huge amounts of monies are required to invest in projects in these fields. The IEA calculated in 2009 to fight the emission of GHG USD 10 trillion of Euro's is required in a period of 20 years. To finance these projects several sources have to cooperate and contribute. Such as governments, multilateral institutions, corporates (including financial institutions), institutional investors, sovereign wealth funds, private equity funds and consumers.

III. Prerequisites for success

To smoothen the channelling of funds governments and international government bodies will play a crucial role. If authorities succeed to agree upon common goals, targets and regulations internationally we are optimistic about the chances to channel substantial funds to projects focused on the development towards a low carbon economy.

1.Clear targets for the reduction of GHG to be achieved within a certain timeframe, regulations accepted at UN level on how to achieve the required reduction are absolute necessary to stimulate massive investment flows to the projects. The current lack of policy predictability, the absence of transparent rules and procedures do not create the long lasting stable regulatory environment which is a prerequisite for channeling required funds to the projects to reduce GHG emission. As a consequence the current low pricing of carbon does not support the process of making cleaner technologies a more viable choice also from an economic point of view. Several governments stimulate the development towards a low carbon economy by investing in projects for the development of new technologies and by the application of fiscal measures to stimulate investments by the private sector. The combined effort of governments and corporates in so called public private partnerships reduces the project risk and makes it possible to leverage on the allocation of public funds. If multilaterals are involved this may even mitigate the country risk.

2.It is important that governments make clear choices on the role renewable energy sources will play in their countries in the future. Not doing so has a negative impact on new investments in research and development of renewable energy.

3.The application of feed-in tariffs has a strong track record. Feed in tariffs are tariffs energy consumers (households and corporate) receive when they deliver electricity back to the grid due to the fact they produce more renewable electricity than they can use at a certain moment. In countries like Germany the strong support from the government to apply attractive feed- in tariffs stimulated the installation of solar panels and reduced the growth of energy consumption by households and companies.

4.Favourable regulations stimulating investments in renewable energy and energy saving are the systems introduced in Italy, the US and the Netherlands (Groenregeling).

5.Governments and international institutions should address externalities, information asymmetries, path dependency on sub-optimal technologies, which hinder new technologies from getting through the demonstration stage.

6.One important contribution to the reduction of GHG emission that is working already quite successfully is the Emission Trading Scheme (ETS). The current ETS system is based on the so called Kyoto protocol agreed upon under UN supervision in 1997 specifically called for developed countries to reduce emissions between 2008 and 2012 to levels that are at least lower than in 1990. It was expected that in the last UN meeting on climate change in Copenhagen a new agreement would be signed for the years after 2013. Since no agreement was reached the ETS will face much uncertainty whether it will continue to exists and limit the trading of CER’s. This uncertainty is reflected in the current low pricing of carbon, which reduces the appetite to invest in cleaner technologies.

IV. The role of financial institutions

The challenge will be to channel huge flow of monies to projects that help to achieve the common goals. Financial institutions are well positioned in several roles to contribute to this development.

Our role as a responsible company is first of all to make sure our own operation meets the targets. As of 2007 ING Group is carbon neutral. By lowering our energy consumption, using green energy and offsetting carbon emissions by investing in certified projects, we have zero net CO2 emissions. Much of the electricity we purchase worldwide (62%) comes from wind, solar and water power. We encourage our employees to use public transport for commuting. We also promote video conferencing to reduce business travel by air, and make energy efficient cars available to those of our employees entitled to a company car.

We continue to take on the environmental challenge in the way we manage our operations. In 2009, 60% of our business units took action to reduce their own energy usage as part of our ongoing commitment to increasing energy efficiency. We believe it is part of our corporate responsibility to contribute to the wider decarbonisation of the economy. That is why, as well as working at many levels to reduce our direct impact, we also work to better understand our indirect impact.

At a global level, we signed the Copenhagen Communiqué and Investor Statement that appealed to the participants of the 2009 COP15 climate conference in Copenhagen to adopt a strong global climate agreement. Together with other Dutch banks, we called on the Dutch government to create favorable conditions for a swift transition to sustainable energy sources.
Furthermore, we are integrating climate change into an increasing number of aspects of our business model, from product development to risk management. Recent dialogues with sustainable entrepreneurs have made us realise that we can drive our sustainable development strategy further by supporting environmentally responsible business concepts. In 2010, we will develop a programme to further stimulate sustainable entrepreneurship and sustainable innovation. We are building a repository of knowledge and developing new approaches to disclosing the potential financial impacts of climate change in our financing and investment activities. Within the framework of the Equator Principles, for example, we are searching for more ways to incorporate carbon-related issues into our financing activities and to calculate the carbon dioxide emissions of our customers. The former headquarters of ING Bank in Amsterdam, built in the beginning of the 1980’s was one of the first buildings which included energy saving systems and a system to recycle waste water. All our new buildings constructed since then have had to comply with new energy efficiency requirements.

1.But just as important is our role as financial intermediary to channel funds to projects that help the development towards a low carbon economy. We do this as advisor/arranger, lender and investor. We like to refer to some examples of projects we played a role in. We are restricted in the risks we can take. Projects and business proposals presented to us always have to meet a certain rate of return on investment, taking amongst others the environmental and social aspects into account. Since the number of projects focussed on the reduction of GHG emission is rapidly increasing we expanded our capacity to increase our knowledge of all aspects related to these projects.

2.In order to apply the same standards for determining, assessing and managing social and environmental risks in project financing across all sectors of industry globally 77 financial institutions, including ING, signed the so called Equator Principles. It was launched in 2003 by the banks and the World Bank. Since its start it became one of the most important tools in establishing a golden standard in evaluating projects. So far one Chinese bank has already signed the Equator Principles, which is an important achievement. Adoption of more banks globally of these international standards will increase the financing options of projects and strengthen the efforts to strive towards a low carbon economy.

3.As an advisor and arranger we can use our expertise and reputation to attract other financial institutions and institutional investors to participate in projects. Often we can extend this cooperation to multilateral banks with extensive knowledge of these projects. Since projects often need long term funding the increasing appetite of institutional investors is very important. Financial solutions in which banks provide funding for a large part of the short end of the project and institutional investors the longer tenor of the project is more and more common. This has also something to do with the crisis on the financial markets. The interest in projects with a long tenor and a stable cash flow are much more appreciated than several years ago. With our knowledge built up in last ten years we have experts who can evaluate projects in a proper way and advise institutional investors on the individual projects. Apart from direct participations it is also possible to invest in climate funds managed by investment managers. Investment managers all over the world have introduced special funds for investments in water, renewable energy and low carbon technologies.

4.The government in the Netherlands uses a fiscal instrument (Green financing) to stimulate green savings. This Green financing was introduced in 1995 and since the start EUR 6.8 billion has been invested in green projects. Retail depositors receive a lower interest rate from the bank but are not taxed on the interest received. The net interest received is more or less the same. These deposits are used in our Green bank to fund projects that meet certain criteria as agreed upon with government. Eligible projects of our Green bank are hot and cold water storage for housing and utility buildings, town heating systems using waste water of a power plants, windmill parks and solar panel projects.

5.Project Finance: Most promising on the short run are fossil energy projects, like coal to gas and coal to liquid projects using improved technology to reduce the GHG emission. The total investments for these projects are often over EUR 1 billion.

6.Lease: Projects of renewable energy usually require investments between EUR 30 and EUR 100 million. Arranging tailor made financing for these projects are not cost efficient. More standard products solutions like leasing are more appropriate. For investors the combined project of a windmill park and a small power plant offer very attractive investment opportunities. As long as there is enough wind turbines will generate electricity. As soon as there is a temporary lull, the power plant will switch to gas. For the period the power plant is in a standby mode there will be a fixed payment covering all the costs. If the plant is actually used an additional fee has to be paid. In total this provides the investor an attractive return on his investment.
7.To mitigate the risk of projects or investments in these fields we can draw on existi
ng experience with various debt and equity instruments backed up by targeted export guarantees and political risk insurance. Bonds guaranteed by OECD governments offer an attractive way to raise large sums from capital markets.

V. Some examples

Project 1. Luz Verde programme

Luz Verde is a mass scale energy efficiency programme, owned and developed by the Australian company Cool nrg. It will distribute 30 million energy saving light bulbs through 30 projects over the next 3 years in Mexico. As part of one of the first projects in this programme energy saving light bulbs will be distributed for free to 250,000 households (4 per household in exchange for 4 traditional light bulbs) in the Puebla region in Mexico. As part of the Kyoto Protocol projects can be identified as energy saving and thus GHG emission reduction projects. Based on the energy saved and the reduction of GHG emission credits are issued representing the reduction of GHG emission. These credits represents value for money and can be traded in a market. The buyers are companies that need compensation for their GHG emission still surpassing the targets as agreed upon in Kyoto. The Luz Verde project is the first of its kind to be registered by the United Nations under the Clean Development Mechanism of the Kyoto Protocol. Philips has supplied 1 million energy saving light bulbs, Eneco has committed to purchase all of the carbon credits and ING has committed to provide a project loan of US$1.25 million based on commercial terms but without the usual additional fees. The three companies and the Mexican authorities have partnered to make the project work commercially while bringing a significant social and environmental return. Similar projects are proposed in the plans of the city of Beijing.

Project 2. Wind energy project

DK WindSupply Limited is a special purpose company for the construction, ownership, operation, maintenance of the first wind farm (82MW) in Cyprus, located on the Orites mountain ridge near Paphos on the south west part. It will start operating in Dec 2010. Once operational, the project will constitute 8% of the island's electricity generation capacity. The project is the first to benefit from the new 20-year fixed rate tariff of EUR 166/MW that has recently been approved by the Government of the Republic of Cyprus and the European Commission. ING acted as joint mandated lead arranger and hedge coordinator of the EUR 128 million 19 year project financing and had a final hold of EUR 30 million. The 20 year fixed rate tariff will help to reduce project risks and increases the attractiveness of wind energy projects. China has already huge wind mill parks installed. There is scope for a substantial further expansion and gained a lot experience and knowledge. Knowledge that can be applied in more domestic projects but also in China’s projects overseas.

Project 3. Electrified Vehicles

Since vehicles produce approximately 27% of GHG in urban areas a lot attention is paid to the development of cars that produce less GHG emission. Cars equipped with electric engines produce substantially less GHG emission. Plans to introduce electrified vehicles gain momentum. Electric power is technologically proven, flexible, reliable and scaleable. As a financial institution we have identified many business opportunities by supporting this new development in the car industry. A whole infrastructure with charge spots and service providers will be established, users will need to pay for the services. The automotive sector and its suppliers (especially producers of batteries) have to invest heavily which requires financing. In several countries pilot projects with electrified vehicles are successfully operating. It is interesting to mention that China is also making its first inroads into the electrified vehicles. It is highly likely that China will be among the first countries with a huge number of electrified vehicles on the road. In the long run China is expected to export these vehicles to Europe and other countries.

VI. China

•For China and the rest of the world it is important all governments agree on regulations and goals to reduce the risks in business proposals. Local regulation should be compliant with the international regulations.

•China is already a front runner in many issues related to the reduction of carbon emission. For instance in the development and application of new technologies China is the largest producer of windmills and solar panels in the world. But also advanced in the development of electric cars.

•The sources of funding for projects to reduce GHG emission may differ between Europe and China. Huge financial balances in Europe can be found with the institutional investors. In China large sums of monies are under the guidance of the government. Allocation of funds towards low carbon projects can be indicated from the top in China.

•It is highly likely that products with a low GHG emission but also technological innovations will be exported increasingly from China. Good examples are the small power plants, windmills, solar panels and the electric car.

VII. Best practices for Beijing

1)In March 2010 a “Green Beijing Action Plan (2010-2012) was published. It aims to build Beijing into a green, modern and more international city. It contains projects in the areas of energy generation, construction, transportation, air, solid waste, water purification. As indicated earlier it is very important for authorities to present ambitious and clear plans for the future on environmental protection.

2)It is a misunderstanding that striving towards a low carbon economy only implies costs. On the contrary technological innovation can reduce costs and improve the competitive position of sectors of industry and generate economic growth.

3)Energy use in buildings accounts for 33% of man-made GHG emissions globally. Both residential and commercial buildings are large consumers of energy through heating and cooling. High levels of energy consumption also mean high levels of carbon emission. New buildings have to be environmentally sustainable with low emissions. Integrated new energy systems, combined heat and power systems make buildings self-sustaining or even net producers of energy. The largest improvement of energy efficiency can be achieved with existing high-rise buildings. Significant levels of refurbishment will have a substantial impact on GHG emissions. In many countries governments offer owners or tenants of houses tax breaks to invest in energy saving measures. So called “Green buildings” have a potential and market advantage. They are more appealing, healthier buildings with lower operating costs.

4)Carbon credits is just one of the successful market driven instruments to reduce GHG emission. China is likely to become the world’s biggest supplier of carbon credit and has by far the largest pipeline of potential projects. But there is still a lot more potential to develop CDM (clean development mechanism) projects in China. ING helps to set up CDM centers that will help to identify and develop projects and draw up necessary documentation such as blueprints for greenhouse gas emissions reduction projects. ING will be sponsoring the information centers in five provinces: Chongqing, Heilongjiang, Jiangxi, Fujian and Guangdong.

5)A successful stimulative industrial policy was carried out in Denmark. The government supported the development and production of windmills. As a consequence Denmark is the leading European country in this sector. The same happened in Germany with the solar panel industry. Thanks to government support Germany is leading in this industry in Europe.

6)The Green bank concept certainly offers China more opportunities to invest in environmental projects. In China the household savings ratio is already comparatively high and interest rates on savings accounts is rather low. Nevertheless a tax incentive could help to further reduce funding costs for the banks while the interest rate for the depositor could be lower than the usual rates. This lower interest payment can be used to offer funding for environmental projects at lower rates and make these projects economic profitable within a shorter period. An additional advantage of the Green bank concept is that it helps to concentrate the knowledge on environmental issues in one unit.

7)Savings with pension funds and insurance companies are rather low when compared with other countries. Pension funds and insurance companies are still in a build up phase. Instead of investing these savings in government bonds it could be invested in projects that will help to reduce the GHG emission. Since most projects will have a long tenor these assets “Green bonds” could be very attractive for both investor groups. This serves several purposes. First it generates funding for environmental projects. Second it is a secure asset with a long tenor. Third it helps to develop the bond market in China. China will profit from a growing interest of foreign institutional investors for infrastructural projects, including projects focused on a contribution to the reduction of GHG emission.

8)Bank of Beijing advocates green credits and an improved awareness of environmental protection. The bank established a loan facility especially for projects and companies saving energy and reducing GHG emission. In 2008 the bank was awarded “the 2008 Green Financing Innovation Bank”, because of its performance in environment protection. Combining the knowledge of Bank of Beijing, ING creates huge pool of knowledge which can be used for the evaluation of environmental projects in China.

9)We are convinced that thanks to a close cooperation with all parties involved, especially with our partners in China we will be able to contribute to the development of the economy of China towards a low carbon economy.