In 2020, Deutsche Bank pledged to allocate up to €200 billion (US$233 billion) of its balance sheet into sustainable finance by 2025. And to emphasize and reiterate such a commitment, it brought forward at the start of this year the timeline to 2023. “This demonstrates how much Deutsche Bank is putting its investment and balance sheet behind this drive around sustainable finance,” says Rachel Chia, head of project finance, renewables, in Asia-Pacific (APAC) at Deutsche Bank Corporate Bank.
The heightened commitment to sustainability, fully backed by the management, underpins Deutsche Bank’s focus on renewables and exemplifies its environmental, social and governance (ESG) strategy. Chia was recently appointed to her newly-created role as the bank sees significant opportunity in this space as the demand in APAC for energy, and particularly for sustainable energy infrastructure, grows rapidly alongside its population and economies.
The drive towards sustainability is also prompted by the bank’s core clients and the big oil majors, which are diversifying into the renewable sector. Traditionally, the strength in Deutsche Bank corporate bank’s portfolio lies in reserve-based lending in the oil and gas sector, so it makes sense for Deutsche Bank to pull its clients into the renewables space in line with its corporate DNA.
Sustainability is a core pillar in Deutsche Bank’s transformation strategy, and it is committed to supporting clients as they transition to zero-carbon economy. “It is important for Deutsche Bank to follow its clients to help them grow in the sustainable/green financing sector in the different markets in the region,” says Chia.
The sustainability strategy is also in line with the themes and trends in the market. “If we do not follow the trend on sustainable/green financing and continue to sit behind what we traditionally do in corporate bank, we will be left behind the curve,” Chia explains. “It makes a lot of sense for Deutsche Bank to catch this wave right now.”
Rachel Chia, head of project finance, renewables, Asia Pacific at Deutsche Bank shares her views on why supply chains in the future need to have ESG considerations attached to them.
For Deutsche Bank to be successful in renewables space, Chia highlights the importance of having a strong human resource infrastructure. “To be able to arrange project financing in the renewable energy sector requires relevant expertise in terms of structuring,” she points out. “We need to hire good people so that we can deliver what we promise to clients and ensure execution certainty. Project financing is very demanding – from due diligence to financial close – compared to regular corporate financing. Execution certainty is key to clients and for Deutsche Bank to be successful, we need to have good people who understand how to structure deals and bring value to the table.”
For Chia, what is important to ensure the success of the renewable energy sector from the start are the government policies. “If you look at Europe, which is more mature than Asia in terms of green financing, their success is mainly due to government policies, including the provision of subsidies at the initial phase,” she notes. “This comes as producing electricity using solar and wind technology is more expensive as compared to the traditional coal and gas power plants until economies of scale can be achieved.”
So for Deutsche Bank, where it sees pockets of opportunities in APAC are in markets in which the renewable energy sector is driven by government policies. These include countries that have pledged to achieve net zero emissions by 2050, such as Japan, New Zealand and South Korea. Chia also sees opportunities in countries that have strong green federal government regulations.
Growing footprint in Australia
For instance, Australia has a large-scale renewable energy target, which is a federal government policy designed to ensure that at least 33,000 gigawatt-hours (GWh) of the country’s electricity comes from renewable sources by 2020. This has generated a large amount of investment of up to more than US$10 billion and is adding at least 3GW of renewable energy capacity every year.
Says Chia: “We are looking at Australia, which is one of the most active renewables markets in Asia-Pacific, including in M&A. We hope to generate between three to five transactions in Australia next year as we start to grow our footprint in project finance non-recourse renewables transactions. The aspiration is to be a reliable and credible project finance bank in Australia and make a big difference in this market.”
Chia also sees more opportunities in Taiwan, which has attracted huge investments in offshore wind projects on the back of a strong government policy. In 2019, Deutsche Bank was a mandated lead arranger in the NT$95 billion (US$3.40 billion) equivalent non-recourse term facilities for Yunneng Wind Power Company for the construction of a 640MW offshore wind project located in Yunlin, Taiwan. This was the largest non-recourse financing raised for an offshore wind project in Asia-Pacific.
In another project in 2020, Deutsche Bank also acted as a mandated lead arranger in the NT$90 billion project financing for Changfang Wind Power Company and Xidao Wind Power Company for the construction of a 589MW offshore wind farm located in Changhua, Taiwan. These offshore wind projects support Taiwan’s energy transition policy to focus on renewable energy sources and develop 10GW of offshore wind capacity.
Chia, though, cautions against certain risks in investing in markets such as Taiwan. One is concentration risk because of the huge amount of investment required in each offshore wind project. She says there are at least 10 more offshore wind projects that will be launched in Taiwan in the next 10 years. “We need to understand the concentration risk – either at the borrowers, technology or market level. This is one risk that we need to evaluate internally before we can expand further,” she adds.
There is also an emerging risk in global supply chain logistics. Chia says there is a severe shortage of vessels capable of transporting bigger wind turbines. The latest turbines are now capable of producing 12MW to 13MW of electricity, up from the previous 9MW, so the vessels have to be customized in order to transport those turbines.
What should help fulfil Deutsche Bank’s ESG commitment to its shareholders and to the market is the ESG Centre of Excellence (ESG COE), which the bank established in Singapore in May this year – the first one set up by Deutsche Bank globally. The ESG COE will work across all the business divisions of Deutsche Bank, focusing on execution of ESG transactions, new product development, and advisory services, including sharing of global best practices with Asian regulators and regional bodies such as the Association of Southeast Asian Nations (ASEAN) and the Asia-Pacific Economic Cooperation (APEC). It will also focus on innovation at the nexus of ESG and fintech to develop new products addressing gaps in the ESG market, including impact monitoring, data management and payments to unbanked communities.
The ESG COE will also help Deutsche Bank’s clients in terms of ESG advisory, such as how to make their supply chain greener, which Chia says will be a key trend going forward. “If your supply chain is not green, you are going to lose your competitiveness,” she points out. “There is now a discussion in Europe about imposing a carbon border tax on top of the supply chain just to ensure the companies align themselves to climate change.”