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Insight

Financial Institution, Gatekeeper and Off-Taker

Wed, 02/19/2014 - 12:17

Sustainability policies show how institutions relate to social and environmental issues and their commitment to tackling these problems. Many financial institutions have shifted their mission from one based on maximizing profits at all costs to one that fosters socially and environmentally conscious actions. Banamex, Mexico’s largest bank, has embraced this perspective and says it has an energy savings program to prove it. Citigroup started a sustainability unit almost ten years ago in New York to oversee the whole group’s operations. The unit was created under pressure from board members, clients, and NGOs who wanted the banking group to play a more active role in matters of sustainability. Banamex, a subsidiary of Citigroup, followed the sustainability unit’s advice out of conviction, as the mandate came straight from the CEO. The Citigroup sustainability unit was created with the focus of engaging both employees and interest groups, whilst promoting awareness about Banamex’s environmental footprint. Banamex has a mandate stating that 80% of the company’s energy must come from clean sources by 2017. This makes the renewable energy sector crucial to Banamex’s activities, both as an off-taker and as a financial services provider. Partnering up with Italian utility company Enel has helped the bank achieve significant electricity savings while demonstrating the company’s commitment to minimizing its environmental impact.

Daniel Marroquín, Banamex’s Sustainability Director, recounts the process by which Banamex chose Enel. The bank looked and reviewed the experience and track records of several candidate companies, including their work in Mexico and abroad. Experience was a crucial element, since Banamex was looking to create a partnership that would last over a decade. “We looked at the project’s risks, since Mexico is full of stories of developers that waited for years without finalizing their projects. We looked at those projects that were ready to be built, we carried out financial, legal and technical due diligence to ensure that, for example, these projects had properly secured the legal rights to the land from the corresponding parties,” says Marroquín. The Enel project covered all of Banamex’s requirements and expectations. Additionally, Enel is one of the world’s largest utilities and has three hydroelectric plants and two wind farms already in operation in Mexico. In this, Banamex saw a trustworthy partner with global expertise and local knowhow. No less than 40% of all electricity used by Banamex comes from Enel’s Dominica wind farm in San Luis Potosi. “We are expecting to save approximately US$2.5 million a year from the project, which roughly amounts to 15% of that plant’s associated power bill,” tells Marroquín. The project with Enel underwent a complex authorization process as Banamex was the first financial institution in Mexico to go through this procedure. Reducing the company’s environmental footprint was definitely motivating, but Marroquín says wind power prices were the main reason that drove Banamex to become an off-taker. “All the sustainability initiatives we pursue have significant savings or cost-reduction effects on our business.” Marroquín says the current unfavorable economic times actually provide a good opportunity for banks to invest in sustainable practices and encourage them among their clients. “The world needs to start thinking about new business models. In times of high market turmoil and credit crunch, being aware of emerging business opportunities and risk mitigating mechanisms is very important.”

As an off-taker, Banamex has some advice for those who want to follow the bank’s lead, particularly small players. “Off-takers often do not fully understand the development risks linked to land ownership and to securing permits from local, state and federal authorities,” says Marroquín. “It is very difficult for smaller companies, which devote most of their time and resources to their business, to evaluate and address such risks. Banamex looked at 20 different projects, involving a very detailed approach to looking at developers and at the feasibility of their projects. That analysis capability might be one issue that smaller companies will run up against,” he outlines. Marroquín acknowledges that, given this gauntlet of regulation and research, it is rather difficult for small companies to develop a self-supply project on their own. However, he provides a valuable piece of advice: pooling several companies for self-supply developments. “Smaller customers have little negotiating power with large project developers, but similarly, it is hard for developers to sign 50 different PPAs. Both of these obstacles can be solved by pooling together several companies that wish to become sustainable and efficient.”

Banamex sees a large role for itself in Mexico’s renewable energy sector. “Being an off-taker in a wind energy project is just a small part of what we can do,” says Marroquín. In choosing what projects to finance or not, Banamex has an environmental and social risk management policy. Certain sectors are excluded de facto from Banamex’s financing programs, such as casinos or arms dealers. Potentially viable projects may also be assigned an external consultant, who will work with developers on environmental and social issues. To continue improving these practices, Banamex has been working with SEMARNAT on establishing ways to have financial institutions act as gatekeepers to decide which projects should receive support or not.