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The concept of "sustainable banking" used to be mainly a public relations ploy on Wall Street, a way to show that while putting away billions in profits, investment firms were also trying, at least a little, to make the world a better place.
Now it is much more a business imperative as companies in developing nations increasingly look to raise capital while "clean technology" industries such as solar and wind power producers capitalise on the energy crisis by listing on public markets.
"The investor base has become a lot more sophisticated in the past couple of years" says Bryce Lee, co-head of the alternative energy group at Credit Suisse. "It's less about the politics of clean technology now, and much more about the business model."
In fact, while initial public offerings are not possible for many businesses in the current environment, alternative energy companies are a rare hot spot.
Credit Suisse this year led an initial public offering for Renesola, a solar power company, that raised $130 million. Credit Suisse is also lead book runner on a number of other alternative energy IPOs that have been filed with the Securities and Exchange Commission, including Codexis, GT Solar and Noble Environmental Power.
Lee says Credit Suisse also focuses on assisting alternative energy companies in developing economies that are demanding ever more power. The bank is doing significant business in China and is working on a big solar power project in India that has not been made public.
Other banks are capitalising on the growing sophistication and needs of businesses in developing countries in South America, Asia and elsewhere.
Citigroup, for instance, began working in 2006 with Banrural, a Guate-malan bank that needed to raise capital for mortgage loans to citizens who speak a range of languages and dialects and have not had access to traditional banking services in the past.
"Banrural has always focused on the underserved community of the country," says Valentino Gallo, a Citi banker who worked on the deal. "Guatemala is still composed of various indigenous tribes that speak several languages. Banrural is really reaching out to these communities."
But the bank found as it tried to grow and provide mortgage and other loans it needed more capital to satisfy local regulators. "They were growing at a speed that they weren't going to be able to keep up if they didn't get some capital injection to meet local requirements," says Aaron Neus, a Citi banker who worked on the deal.
Citi put together a fairly complex capital-raising transaction that provided $450 million for Banrural at the end of last year and allowed it to start making home loans to a highly underserved population.
Underwriting
Merrill Lynch, for its part, says it ranked number two last year in the Clean Energy underwriting league tables based on a number of big deals including the Iberdrola Renovables IPO in December 2007, which Merrill says was the largest to date in the sector.
Merrill also focuses on hydro, biofuels, geothermal, solar, biomass, clean coal, energy efficiency and environmental technologies, says Colbert Narcisse, chief operating officer of Americas Origination at Merrill Lynch.
"As we embed our global environmental sustainability strategy into all of our businesses, we intend to position Merrill Lynch as the leading global investment bank in the area of environmental risk management," he says.
"Clients are increasingly becoming aware that issues affecting the environment, such as climate change, deforestation, pollution, resource utilisation and water scarcity, generate risks and opportunities."
Kevin Keyes, a managing director in Merrill's equity capital markets business, says Merrill has five clean energy IPOs expected to price this year and are talking to a number of other companies. "Given that there was approximately $10 billion invested in private clean energy companies in 2007, the number of companies looking to access the public markets should increase rapidly in the coming years," he says.
Sustainable banking, of course, also entails investment banks looking after their own environmental footprints.
Citigroup, for instance, has been engaged in a broad review of how it uses energy in its 90 million square feet of office and branch space, all the way down to how much power is used by automated teller machines.
The bank has made a long-term commitment to apply $50 billion in capital to environmental initiatives and in the past year deployed about $6.5 billion to help fund efforts as far-flung as a biomass project in China and an attempt to help a local New York-area dry cleaner use safer products.
Banks are also looking to capitalise on what could be a market in the US for companies to comply with possible environmental rules by trading carbon credits.
"The size of the global carbon trading market is in excess of $30 billion, and the opportunity for us to work with the US as it develops its own compliance programme is quite significant," says Parker Weil, a managing director at Merrill.
"The success of this effort over the next few years will provide the framework for investment return from renewable energy sources, and technologies to assist in the reduction of greenhouse gases."
All for a better world
Every year the money flowing into "sustainable" investment funds in one form or other breaks records.
In the first seven months of 2007, 15.2 per cent of net investments in equity funds in Europe went into environmental funds, against 2.6 per cent during the whole of 2006, according to Watson Wyatt, the investment consultants.
Market estimates suggest about $4,000 billion is invested globally in strategies incorporating environmental, social responsible investment and governance factors, all with the overarching goal of managing risk and enhancing returns.
Watson Wyatt is convinced that "sustainability, and, in particular, environmental issues, will influence and shape the economic landscape and equity markets over the coming decades".
"A tipping point has been reached - with the pursuit of sustainability firmly on the political and public agenda, the investment community response is now rapidly evolving," says Jane Goodland, consultant at Watson Wyatt.
Increasingly, stock markets and investors are giving weight to issues such as a governance, sustainability and the environment. The move has been helped by government-led initiatives to use taxes, financial penalties and tradeable permits to bring home to companies their impact on the environment.
- Kate Burgess, Financial Times
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