Energy Financing Report 2012

Our ?nancing of the energy sector in 2012RBS Sustainability BriefingWorking with TrucostFor the second year running, we have useddata from Trucost to help us carry outanalysis of the activities of the energycompanies we lend to and their greenhousegas emissions. Trucost are one of the world’sforemost environmental data experts andproviders of this information. Note on dataWe have taken all reasonable steps to ensurethe accuracy and completeness of the datacontained within this report. However, insome cases there are gaps in the dataavailable which means we have had to makeuse of approximations and/or informationprovided on a voluntary basis that has notbeen independently veri?ed. RBS Sustainability BriefingOur financing of the energy sector in 2012This report is the third ‘Ourfinancing of the energy sector’briefing that we have producedsince 2010. The original aimremains unchanged: to provideadditional information on ourlending to the energy sectorand the activities of our energyclients in the context ofsustainable development. This report provides enhancedand updated information onour lending to the energysector up to the end of 2012.Our intention is to continue to set a benchmark forfinancial services disclosurearound this topic and we planto produce updated reports of this type each year in linewith our sustainabilityreporting process:www.rbs.com/sustainableWe continue to view climatechange and energy security astwo of the biggest challenges toensuring a safe, sustainablefuture for the world’s inhabitantsover the coming decades. Theuse of energy is the primarysource of man-made greenhousegas emissions worldwide –predominantly through theburning of fossil fuels – and istherefore of key importance totackling climate change.About this documentRBS Sustainability Briefing 1Our financing of the energy sector in 2012What’s in this reportRBS Sustainability Briefing 2Our financing of the energy sector in 2012 1. Key points 031. About RBS 042. The world’s use of energy 06 3. Energy lending as a 07proportion of our total lending 4. Lending to specific 08energy projects 5. General lending to the 09Power sector6. General lending to the Oil 10& Gas sector7. Mapping lending 12exposures with carbonintensity8. Our commitments 13• Across the whole of RBS, approximately 2.8% of our total lendingis committed to the energy sector (down from 3% in 2011) • Of this, 1.7% is to the Oil & Gas sector, and 1.1% is to the Powersector, which uses a mix of gas, nuclear, coal, oil and renewables • Our total lending to the energy sector has reduced by around60% since the end of 2008• Gas and electricity distribution are major activities for our top 25Power clientsKey points RBS Sustainability Briefing 3 Our financing of the energy sector in 2012Generallending• 68% of our 2012 structured financing in the energy sectorwas to renewable energy projects, with the remainder spiltbetween oil, gas and other electricity generation• Wind power projects accounted for over half our structuredfinancing in the energy sector in 2012• For the second year running, we loaned more than any otherbank to renewable energy projects in the UK. We were alsoranked third in US renewables power lendingStructured?nance • Using data from Trucost, we estimate that our top 25 Powerclients and top 25 Oil & Gas clients are on averagesubstantially less carbon intensive than the industry average • Among our top 25 Oil & Gas clients, there is a strongcorrelation between high lending exposures and lower-than-average carbon intensity• Among our top 25 Power clients, there is a reasonablecorrelation between high lending exposures and lower-than-average carbon intensityClientcarbonintensity1. About RBSRBS Sustainability Briefing 4RBS is changing to become a stronger,safer bank that is open, transparent andmakes a positive impact on thecommunities in which it operates. At the end of this process our businesswill look very different from the time ofthe ?nancial crisis in late 2008. Weexpect, however, to remain a large,international bank, providing personaland business banking services tocustomers in the UK, US and Ireland and large corporate clientsoperating globally.1.1 Our lending to the energy sectorRBS is predominantly a deposit andlending bank: we take money indeposits and other sources and lend itin the form of loans. For the energysector, as with other sectors, we provideloans and other banking services (suchas overdraft and money transmissionservices) but we do not usually ‘invest’in energy companies or take ownershipstakes in them. The money we have lentto the energy sector is continually beingrepaid and re-lent.The majority of our lending to theenergy sector is in the form of generalcorporate lending, which isn’t usuallytied to any speci?c use or project. Whenwe provide general corporate lending,the client will make use of it in a varietyof ways (for example by investing intheir facilities or operations, purchasingother businesses or paying othercosts). Much like the provision of a loanto a personal customer, a bank isrestricted under these circumstances in stipulating how the loan is used,provided the client meets itsrequirements for the credit risks they represent. We also offer structured ?nance forspeci?c energy projects in the UK,Ireland and the US where we know whatthe funds will be used for. These includewind farms, power stations and solarinstallations. This type of lending isusually done as part of a group of bankswho all lend to the same project. Therepayment terms of the loan tend to bemore closely de?ned, usually involving asource of cash-?ow identi?ed at theoutset (e.g. earnings from the sale ofelectricity), and the repayment period is generally longer, over 10 years insome cases.Our financing of the energy sector in 2012 RBS Sustainability Briefing 5 Our financing of the energy sector in 2012For both the Power and Oil & Gassectors, RBS has a range of policies and procedures in place to ensure weassess the social and environmentalrisks associated with speci?c clients and projects.More details of these polices can befound at: http://www.rbs.com/sustainability/governance-reporting-engagement/policies.html1.2 ‘Oil & Gas’ and ‘Power’ TerminologyThroughout this document, we refer tothe two main parts of the energy sectoras ‘Oil & Gas’ and ‘Power’. These twoterms are how most large banks(including RBS) classify their energysector clients. The Oil & Gas sectorprimarily focuses on hydrocarbonextraction, production and distribution,whereas the Power sector focuses onelectricity generation and transmission. Most renewables activity takes placewithin the Power sector, although someOil & Gas companies do have renewableenergy operations.2. The world’s use of energy6Our financing of the energy sector in 2012Around the world, the demand for energyremains strong as populations grow andliving standards improve. Electricity isprimarily obtained from coal, gas, nuclearand renewables (hydro, biomass, wind,solar etc.), whereas oil tends to be usedprimarily as a transport fuel, heating fueland in many industrial processes andproducts. Globally, total energyconsumption is roughly twice what it wasin 1970, with oil providing the largestproportion1.2.1 Global energy supplyGlobal energy supply is still heavilydependent on fossil fuels: over 80% oftotal primary energy supply comes fromcoal/peat, oil and gas. The remainder isfrom nuclear power, hydro andcombustible renewables (mostly woodand other biomass). Other forms ofenergy supply, such as wind, solar andgeothermal have seen rapid growth inrecent years but still make up a very smallproportion of the world’s primary energysupply. Within the electricity sector,however, their role is more signi?cant.Electricity and heat generation are thelargest man-made sources of greenhousegas emissions globally, producing over10Gt of CO2 per year2. 75% of theseemissions come from burning coal3. Thepower sector is also the one that has seenthe fastest growth in emissions in the last40 years. Transport and industry are thenext biggest sources of greenhouse gasemissions, with c.5Gt of CO2 per yeareach. World total primary energy supply 2010 by fuel(Mtoe)Oil 32.4%Coat/peat 27.3%Natural Gas 21.4%Biofuels and waste 10.0%Nuclear 5.7%Hydro 2.3%Other (wind, solar, geothermal etc.) 0.9%1 IEA, Key World Energy Statistics, 2012 (2010 figures)2 IPCC, Mitigation of Climate Change, Contribution of Working Group III to the Fourth Assessment Report, 2007.3 IEA, CO2 from Fossil Fuel Combustion, Paris, 2010.0 2 000 4 000 6 000 8 000 10 000 12 000 14 000 1971 1975 1980 1985 1990 1995 2000 2005 2010 RBS Sustainability BriefingWorld total primary energy supply from 1971 to 2010 by fuel (Mtoe)7Our financing of the energy sector in 20123. Energy lending as a proportion of our total lendingAround 2.8% of all our lending iscommitted to the energy sector (1.7% to Oil & Gas and 1.1% to Power).This compares to 29% of our lendingcommitted to personal customers and14% committed to the property sector,as the chart on the right shows.The total amount of lending we provide to the energy sector has droppedsubstantially since 2008 as a result ofchanges to our business, particularly in our International Banking division. Also,the amount we provide to the energysector has dropped in relation to ourtotal lending, meaning it is falling slightlyfaster than our overall lending.Total RBS lending to all sectors: Credit Risk Assets at December 2012 (£Millions)Personal 181,665Property 90,511Sovereigns & Quasi Sovereigns 83,284Banks 60,367Non Bank Financial Institutions 52,956Transport 34,555Retail & Leisure 29,459Services 27,788Manufacturing 25,644Power and Oil & Gas 17,572Telecoms, Media and Technology 13,759Other Natural Resources 7,518Changes in lending to the Power and Oil & Gassectors 2008-2012, Credit Risk Assets (£Millions)Oil & GasPowerRBS Sustainability Briefing Our structured ?nance teams in the UK,Ireland and the US provide loans tospeci?c energy projects such as windfarms and power stations. Often, agroup of banks will be involved in?nancing a project, each providing ashare of the loan and taking a share ofthe risk.We have categorised our lending todifferent types of energy projects overthe course of 2012. During this period,we provided more ?nance to windprojects than all other energy projectscombined. We retained our position asthe biggest lender to renewablesprojects in the UK4, and were alsoranked third for renewables projectlending in the US5.To understand and manage the socialand environmental risks inherent inproject ?nancing, we have anenvironmental, social and ethical (ESE)risk management framework in placeand have adhered to the EquatorPrinciples since their inception.More details of our approach can befound in our Sustainability Reportinginformation at http://www.rbs.com/sustainability/citizenship-and-environmental/ese-risk.html RBS energy structured financing in 2012 (by amount lent)Wind 53%Combined Cycle Gas Turbine (CCGT) 15%Oil 13%Solar 13%Short Term Operating Reserve (STOR) 4%Fuel Cell 2%RBS Sustainability Briefing 8 Our financing of the energy sector in 20124. Lending to speci?c energy projects 4 Infrastructure Journal 2012 renewables league tables.5 Dealogic US Renewable Power league Table 20125. General lending to the Power sector RBS Sustainability Briefing 9Our financing of the energy sector in 2012 In addition to structured ?nance forspeci?c projects, we also providegeneral lending to Power companies.These companies are primarily involvedin the generation and transmission ofelectricity.This lending is not tied to speci?cprojects, which means we are generallyunable to associate it directly withspeci?c forms of energy generation.However, using data from Trucost, andour own research, we have analysed thespread of activities that our top 25Power clients are involved in.Almost all of these Power companies areinvolved in a range of different activitiesand generation types, so we have used aweighting mechanism that gives moreweighting to the activities of those towhom we lend the most. The chart tothe right shows the results, revealingthat in ?nancing these top 25 Powercompanies, we are chie?y supportinggas and electricity distribution, followedby nuclear generation, and by coal andgas-?red generation.5.1 Power client carbon intensityWe have used Trucost’s PortfolioAnalyser Tool to calculate the carbonintensity of our top 25 Power clients.This tool calculates carbon intensityusing tonnes of CO2e emitted per$million of revenue. The results showthat our ‘portfolio’ (our top 25 Power clients) is signi?cantly lesscarbon intensive that the Trucostaverage for Power companies.Power sector activities supported by our generallending (top 25 Power clients)Distribution (gas and electricity) 34%Nuclear 23%Coal 18%Gas-power generation 12%Renewables 6%Other business activities 5%Petroleum-power generation 2%Power Client carbon intensity (tCO2e/$m revenue)Power companies averageRBS top 25 average377526754000300020001000RBS Sustainability Briefing10Our financing of the energy sector in 20126. General lending to the Oil & Gas sectorAs with Power companies, we alsoprovide general lending to Oil & Gascompanies. Again, this lending is not tiedto speci?c projects, which means we aregenerally unable to associate it directlywith speci?c activities.6.1 Oil & Gas client carbon intensityWe have used Trucost’s PortfolioAnalyser Tool to calculate the carbonintensity of our top 25 Oil & Gas clients.This tool calculates carbon intensityusing tonnes of CO2e emitted per$million of revenue. The results showthat our ‘portfolio’ (our top 25 Oil & Gasclients) is signi?cantly less carbonintensive that the Trucost average for Oil& Gas companies.6.2 Unconventional oil and gasproductionUnconventional oil technologies, includingthe oil sands developments in Alberta,Canada, have additional social andenvironmental impacts not normallyassociated with conventional oil extraction.These include increased CO2 emissionsfrom production and impacts on the locallandscape, ecosystems and communities.RBS does not provide project ?nance tooil sands projects, however we do providegeneral corporate lending to a number ofcompanies who have oil sands extractionand production operations. For some ofthese companies, oil sands forms arelatively small part of their activities butfor others it is a more signi?cant part oftheir operations and income. Over recent years, oil production inAlberta has increased and a growingnumber of Oil & Gas companies(including some of our clients) havebegun operating there. Overall,approximately 7.2% of our total Oil &Gas lending is to companies with signi?cant oil sands operations – i.e.those who derive more than 10% of theirincome from oil sands. We remain committed to understandingand managing the social andenvironmental risks associated withunconventional Oil & Gas technologiessuch as oil sands and shale gas, andmore details of our approach can befound in our environmental, social andethical risk management policiesavailable at http://www.rbs.com/sustainability/citizenship-and-environmental/ese-risk.htmlOil & Gas client carbon intensity (tCO2e/$m revenue)Oil & Gas companies averageRBS top 25 average59247260050040030020010011Our financing of the energy sector in 20127. Mapping lending exposureswith carbon intensityEnergy clients who have high CO2eemissions relative to their turnover (i.e. are carbon intensive) poseenhanced environmental, social andethical risks. The charts below show ourlending exposures to our top 25 Powerand Oil & Gas clients compared to theircarbon intensity.The data for both sectors shows that themajority of our high lending exposuresare to companies with lower carbonintensity compared to their peers. Bytracking this data over time we are ableto analyse the carbon risks in ourlending and trends in our clients’approach to managing their emissions.0 2000 4000 6000 8000 10000 12000Client carbon intensity (tonnes CO2e/$m) 0 500 1000 1500 2000Client carbon intensity (tonnes CO2e/$m) Dec 2012 Total committed lending exposure (£m)Dec 2012 Total committed lending exposure (£m)Carbon intensity vs. lending exposure: RBS Top 25 Power clientsCarbon intensity vs. lending exposure: RBS Top Oil & Gas clients RBS Sustainability Briefing12Our financing of the energy sector in 20128.1 DisclosureWe remain committed to providingenhanced disclosure on our ?nancing ofthe energy industry in the years tocome. As part of our GroupSustainability reporting, we plan toreport on our lending to the energysector each year. We also believe there issubstantial scope to provide furtheranalysis of the role RBS plays in?nancing the whole low carbontransition, including, but not limited to,the energy industry. Although the shape and focus of RBS asa business is likely to change over thecoming years (which may mean thatyear-on-year comparisons are notalways available or valid) we willcontinue to publicly disclose ourapproach to energy and climate changethrough initiatives such as the CDP.8.2 PoliciesIn addition to our long-standingadoption of the Equator Principles forproject ?nance, over recent years wehave introduced revised environmental,social and ethical (ESE) risk policies andposition statements governing ourlending to key sectors, including thePower and Oil & Gas sectors. Thesepolicies require that additional checksare made to ensure that clients haveadequate procedures in place tomitigate adverse environmental andsocial impacts. In certain circumstances,these policies also prevent the provisionof ?nance where the environmental orsocial impacts are considered too high.8.3 Sustainable energy financingWe are committed to supporting therenewable energy and energy efficiencyindustries through a variety of ?nancingand advisory services. With over 20years’ worth of expertise in this market,we are continuing to develop ways to?nance all sizes of installation, frommicro-generation projects to large-scalewind farms and commercial retro?ts. Weaim to remain the largest lender torenewable energy projects in the UK anddevelop further initiatives to supportcustomers such as our £200m CarbonReduction Fund which we launched inNovember 2012. 8.4 CollaborationThe most effective way of addressingthe energy ?nancing challenge isthrough cross-sector collaboration,because this moves the whole bankingsector forward as a whole. In this spirit,RBS will continue to participate inforums and initiatives such as the UNEPFI and the Equator Principles which arefocused on addressing climate changerisks in energy sector ?nancing. We willalso continue our non-lending supportfor the clean energy industry includingour sponsorship of events and hosting ofeducational learning events for thoseworking in the industry. More information on our overallapproach to Sustainability, including ourannual Sustainability Report, can befound on our website atwww.rbs.com/sustainable8. Our commitmentsRBS Sustainability BriefingMore information on our overall approach toSustainability, including our annual SustainabilityReport, can be found at www.rbs.com/sustainable