Inside Citi’s plan to deploy $100 billion for cities, renewables, climate
Inside Citi’s plan to deploy $100 billion for cities, renewables, climate
Today, Citi, the global banking giant, is announcing its next-gen sustainability strategy that includes an eye-popping number: $100 billion over 10 years for “lending, investing and facilitating” activities focused on mitigating climate and other sustainability solutions.
Citi’s financial commitment is part of a larger five-year plan the bank is launching at an event this morning in New York. It outlines three “strategic priorities” for the bank that it says aligns the company’s corporate and sustainability strategies: combating climate change, championing sustainable cities, and promoting social progress, including “universal human rights.”
This isn’t Citi’s first sustainability strategy — or its first big financial commitment. Eight years ago, it made a $50 billion, 10-year pledge to invest in and finance projects that reduce global carbon emission; it met that goal last year, three years early.
The company long has been ahead of the curve. It was one of the first major banks to set reduction goals for energy, waste and water. In 2003, it was one of 10 global banks — and the only U.S. company — to sign the Equator Principles, a framework to help financial institutions manage environmental and social risk in project finance.
The new $100 billion goal “builds on the learnings that we accumulated during the first $50 billion,” Val Smith, director of corporate sustainability at Citi, told me recently.
“When we knew that we were going to hit the $50 billion goal three years early, we did an assessment across our different businesses. We wanted to expand the scope of the $100 billion goal so that we could capture a lot of other activities that are very important to people, that are very important to cities, that our clients are deeply engaged in.”
The group cast a broad net, looking across industry sectors, including the energy and cleantech sectors that had been the focus of the previous investment goal, Smith said. “We also wanted to include some of the innovative work that we're doing with our municipal clients, and some of the green bond work and other areas that are important to communities around the world.”
Smith and her colleagues are quick to point out that Citi isn’t lowering its standards to fund these projects.
“We're only going to do business that makes sense for Citi as a regulated financial institution,” said Marshal Salant, global head of Citi Alternative Energy Finance. “We're not going to do business that's not economic just to hit an environmental goal. But we will look at more possible alternatives, and if they pass our hurdles we're going to pursue them.”
Salant noted, “We’re very focused on energy efficiency because that's the low-hanging fruit. It's hard to get corporations to focus on that, but by helping them finance their improvements, we not only allow them to do it but we allow them to do much more.”
Citi for Cities
Another big focus of Citi’s sustainability efforts are, perhaps appropriately, cities. The company’s Citi for Cities program draws upon the company’s expertise in providing financing and advisory solutions to cities around the world.
“For example, instead of doing a giant, multi-billion-dollar wastewater treatment plant, cities are doing things like changing the tax code based on permeable square footage that a building occupies,” explained Pam Flaherty, who recently retired as Citi’s director of corporate citizenship. “Or instead of building new parking garages, they're figuring out how to use sensors so that people can better understand where there's a parking space.
“You take those, and then you take different kinds of innovative finance, and the challenge for cities is how to put those things together. We at Citi have the financing knowledge, so we're helping them put it together in a very practical way.”
Bonds — green bonds
One financing mechanism is “green bonds,” a type of financial asset designed to fund a wide range of environmental initiatives and projects. In early 2014, Citi was one of four banks that helped draft the Green Bond Principles, a set of voluntary guidelines on the development and issuance of green bonds. They encourage transparency, disclosure and integrity in the development of the green bond market.
Salant sees a rise in green-bond financing, a trend we noted in this year’s State of Green Business report. For Citi, it represents one part of the company’s financing tool kit. Salant used solar energy as an example to describe the various ways Citi might deploy funding to that technology.
“We could loan $100 million to a specific project. Or we might do an initial public offering for a solar company and help them raise money. Or we might lead a bond deal in the private placement market with institutional investors. Or we might finance a green bond for the World Bank.”
He continued: “We're already starting to see states like New York, California, Connecticut and Massachusetts talk about doing green bonds, where they'll raise money specifically for green purposes. Corporates are finding that they have projects where they want to use [green bond] money for things that are environmentally proactive.”
Old King Coal
There’s another side of this, of course. I asked Smith, Salant and Flaherty about the elephant in the room: Citi, like all other banks, isn’t getting out of the business of lending to fossil-fuel companies. How does that stack up to all these environmental initiatives and commitments?
“We are a big financier of energy around the world, and many of our clients may be involved in coal,” said Flaherty. “But some of the leading companies are also leading in moving towards renewable energy. What all of us are trying to do is increasingly shift this complicated market towards more of the environmentally friendly technologies.”
Flaherty pointed to the company’s Environmental and Social Risk Management (ESRM) unit, which sets the firm’s environmental and social risk policies and procedures and works closely with bankers to advise clients on meeting international best practices. Citi was the first U.S.-based financial institution to develop a comprehensive ESRM Standard.
The company has a well-developed process for managing environmental and social risks in transactions. Its bankers and risk managers review transactions subject to the ESRM Standard, giving each an A, B or C grade. If gaps are found in a client’s environmental and social plans, policies or practices, the ESRM unit and the client agree on an “Environmental and Social Action Plan” to fill the gaps.
“We think we do environmental risk management as well or better than anybody in the business,” said Flaherty.
“We've always been pretty forthright about our financing of the energy sector, the really fundamental part of the global economy,” said Smith. "We try really hard to be transparent about this activity.” She explained that under the new strategy, Citi is committing “to increasingly include portfolio-level review for high-risk sectors, so that we, our bankers, our risk managers, our clients, are all on top of these risk and are managing them appropriately.”
Moreover, she said, the new strategy also commits the bank “to establish an early-warning system for emerging trends and risks so that we're continuing to stay on top of these risks and are helping to advise our clients on these as well.”
Banking as usual?
Reviewing Citi’s new commitments, I began to wonder how much all this was simply business as usual — after all, lending, investing and managing risk is what banks do. The fact that more of it is going into environmental initiatives is simply a matter of going where the market is.
Smith and her colleagues disagreed with that assessment. The new commitments, they said, represent a thorough integration of sustainability into business strategy.
“This is the first time that we're publishing a multi-year strategy that aligns a lot of activities across Citi's different businesses into one cohesive document,” said Smith. She pointed out that Citi has a number of operational footprint goals and other initiatives that are tied to the company’s sustainability strategy.
Moreover, she noted, the strategy was developed using a multi-stakeholder process. “We worked with Ceres during 2014 to convene a pretty diverse group of stakeholders, including advocacy NGOs, clients and investors. We pulled them all together and gave them a draft of the strategy with the goals and asked them for their feedback.”
Smith added: “Citi has had about 15 years of hard work and engagement on environmental and sustainability issues. We got to a point where we had this groundswell of activity that we could leverage to get even more innovation.”
Some of that leverage may be inside the company itself: The audience for the new commitments and goals is employees as much as external stakeholders, said Pam Flaherty.
“Part of this is aimed at enhancing and changing the culture internally so that this is increasingly embedded in all nooks and crannies across the company. It's part of the way we do business. The power of getting everybody internally behind something here is amazing.”