of the Paris Agreement on climate change, which include limiting global warming to well below 2°C, preferably to 1.5°C, compared to pre-industrial levels. Ultimately, every business will be on its own path to net-zero, with specific financing, strategic and operational priorities.
from technologies that are currently only at the demonstration or prototype phase. “This demands that governments quickly increase and reprioritise their spending on research and development – as well as on demonstrating and deploying clean energy technologies – putting them at the core of energy and climate policy,” said the IEA. However, the responsibility does not just fall to governments and policymakers: the corporate sector and banks will be key – with the role of banks being two-fold. On one hand, they will act as growth enablers, helping to redirect capital flows to a lower- carbon economy. On the other hand, they are risk managers, and need to make sure they align their loan portfolios according to financial risks that are associated with environmental, social and governance (ESG) risks. In this respect, banks are guided by regulatory frameworks and their own commitments to reaching net-zero. A core part of Deutsche Bank’s sustainability strategy is the commitment
The role of banks In any case, transition requires unprecedented levels of investment and innovation. In May 2021, the International Energy Agency (IEA) pointed out in the report, Net Zero by 2050: A Roadmap for the Global Energy Sector, that by 2050 almost half of CO2
emission reductions will come
to act as a reliable partner in financing and advising clients on the road towards achieving the goals of the Paris Agreement. The bank wants to ensure a just and orderly transition to a lower-carbon economy without causing unnecessary negative social effects and widening inequality. As a significant milestone towards more transparency, in March 2022 Deutsche Bank disclosed data on its corporate loan portfolio and announced it would deploy different levers to decarbonise its financing activities. These include: • Provision of transition financing to clients, reducing their carbon footprint
• Rebalancing loan portfolios towards clients with a greater focus on developing decarbonisation plans and on using fewer carbon-intensive technologies, such as renewables
• Reducing exposure to clients with limited capacity or willingness to decarbonise
By using the IEA’s Net Zero Emissions by 2050 Scenario (NZE) as its benchmark, the bank is developing net-zero pathways for our loan portfolio overall while concentrating on four energy-intensive sectors driven by the following metrics: • Oil and gas: kg of CO₂e per gigajoule (GJ) of production;
• Power generation: kg of CO₂e per megawatt hour;
• Steel: kg of CO₂e per tonne of steel produced;
• Automotive: g of CO₂e per vehicle kilometre travelled (emissions in the value chain of the company, so-called ‘Scope 3’)
Figure 1: Median total returns per carbon emissions management score, Jan–Apr 2022
This score measures how well a company manages its ESG risk. Higher management scores indicate a greater capacity to manage risk
USA
Below-median carbon emission managment score
Europe 0 -5 -10
Above-median carbon emission managment score
This article shares how this strategy is working on the ground, in day-to- day conversations with clients and in transactions that support their journey. It isn’t important how far down the path to transition companies are today, but it is essential they start the journey and have a clear plan of how they will get to net-zero.
Better ESG, better results Before we look at how financing structures can help, it is important to remember that there is a clear economic rationale behind steering capital to companies with better emissions management strategies. Evidence published by Deutsche Bank Research suggests that companies that have strong ESG risk management in place score better results than their peers. In the US, the effect is even more visible (see Figure 1). Improving carbon emissions management does not happen overnight. In this sense, every company is different: while some will require transition financing to invest in more energy-efficient machinery and manufacturing techniques, others may be more focused on increasing recycling shares of their end product and managing Scope 3 emissions in their wider supply chains.
-15 Source: Emissions in focus on Earth Day, Deutsche Bank Research (22 April 2022)
Transition infrastructure and commodities In general, it all starts with energy transition. One angle for Deutsche Bank’s vital contribution is to finance commodities and products that support the overall net-zero transition journey. Redeveloping oil and gas assets so that they lead to lower greenhouse gas emissions per barrel at design stage is one way that we have put this into practice. For example, Deutsche Bank’s Natural Resources Finance Team recently secured a US$1.1m reserve-based lending facility with Norwegian energy producer Noreco, providing a shining example of positive lending structuring. The race is on to ensure there is enough installed renewable capacity to meet rising global demand for energy without increasing emissions. “Renewables face a range of policy uncertainties and implementation challenges, including those relating to financing, permitting, social acceptance and grid integration. Current increases in commodity prices have put upward pressure on investment costs, while the availability of raw materials and rising electricity prices in some markets pose additional challenges for wind and solar panel manufacturers in the short-term,” says the IEA. It looks to government export credit agencies and lenders for the funding needed to overcome this.
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Photography: Alamy
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