Adapting to Change

Ann Goodman

• Publisher: Business Expert Press
• Year: 2016
• Print ISBN: 9781631571442
• eBook ISBN: 9781631571459
• Topic: Economics
• Subtopic: Sustainable Development
• Index: Economics

Get an inside look at how companies with cutting-edge sustainability programs are innovating in the face of extreme conditions related to climate change.Adapting to Changeprofiles the current efforts of Citi, Sprint, ConAgra, Stonyfield Farm, The Hartford, and IBM to improve climate resilience, with a focus on five themes: responding to weather; learning from disaster; doing more with less; taking a risk—andmanaging it; and communicating change, collaborating on climate. In these pages, readers will discover strategies that encourage resilience and mitigate risk across vastly differentsectors, both internally—with managers and employees—and externally—through supply chains, incommunities, among investors—with valuable insight for business professionals in all categories. Adapting to Changestresses pragmaticanswers toreal problems that companiesencounter every day. It focuses on the challenges climate presents to the firms profiled and how each company—with the help ofemployees and other stakeholders—facesthem head on. Onein a collection of books curated by world-renowned business ethics expert Mary Gentile, this book illustrateshow today's sustainability leaders are using business acumen to find solutions—whilecutting costs and creating new business opportunities—in a rapidly changing environment.

CHAPTER 1

Responding to Weather

Citi’s Climate Resilience Plan: Energy, Operations,
and Risk Management

What a difference a year can make.

In February 2014, after the Federal Reserve rejected Citigroup’s capital plan as part of the regulator’s post-2008 financial crisis “stress test,” the nation’s third-largest bank announced an ambitious three-point strategy to deal with a likely increase and intensity of climate-related events worldwide. After all, the bank, like other firms headquartered on Wall Street, had suffered dearly during Superstorm Sandy some 18 months earlier. Plus, with operations in over 160 countries, Citi must think globally.

In its 2013 Global Citizenship Report, released in early 2014, the bank wrote that 3 years ahead of schedule, it had surpassed its 10-year goal of directing $50 billion to “activities mitigating climate change, including financing for renewable energy and energy efficiency and investments in the greening of Citi’s operations [and] met our 2015 operational environmental goals for greenhouse gas and waste two years early, reducing our emissions by 25 percent.”

Then just one year later in March 2015, the bank, for the first time in years, passed the Fed’s stress test for its capital plan. And Citi’s CEO, Michael Corbat, announced that the bank was adopting an even more aggressive sustainability goal: a 10-year commitment to “lend, invest and facilitate $100 billion . . . for projects ranging from energy, to clean tech, to water, to green infrastructure,” twice the amount of its previous investment.

In that ambitious plan, Citi reiterated—while buttressing—its three-pronged resilience approach, which includes financing energy efficiency and renewable energy projects, reinforcing its operations and supply chain to prepare for potential interruptions, and expanding its risk management activities.

Importantly, the plan, spearheaded by the sustainability team early in the first decade of the millennium, is part and parcel of Citi’s business plan, as Corbat stressed in introducing the latest version of the bank’s goals. Corbat explained:

These efforts do not constitute philanthropy, nor do they represent costs. In fact, they reduce costs—and also increase revenues, enhance client relationships, and help manage risk. In other words, these efforts are integral to Citi’s business strategy.

Sandy’s Wake-Up Call

Citi’s 2015 announcement came two and a half years after some of the bank’s operations in New York City had been badly affected by Hurricane Sandy. Just over a year after the storm, the bank had already taken important steps to update some facilities, notably those in the Wall Street area, to prepare for future extreme weather events.

Citi, long a sustainability leader, awoke to the growing threat of climate change in the aftermath of the storm, a turning point in public—and corporate—awareness of the looming ­crisis. The bank’s 2015 announcement showed Citi’s determination not just to prevail in the face of potential threats, but to excel and innovate in the climate arena—not only for the sake of its continuity as a business and the safety of its employees and the communities in which it operates, but also for the good of its customers. The bank’s new commitments, while solidifying its intention to reduce greenhouse gases (GHGs) to mitigate climate change, also include new products and services to help both individual and institutional customers adapt to a changing climate, some first tested on Citi’s own turf to prove their mettle. The creative efforts are particularly noteworthy in an industry that can be slow to take the lead, particularly since the economic crash of 2008.

Nonetheless, despite its ambitious climate goals, Citi continues to carry climate risks. Like other big banks, it provides financing to large carbon dioxide (CO₂)-emitting clients in the coal industry. Citi got a 95 for disclosure in the 2013 CDP S&P 500 Climate Change Report. While the score didn’t qualify the bank for that year’sClimate Disclosure Leadership Index, covering open disclosure of climate change mitigation and related activities, the bank ranked far higher than the average of 79 for financials.¹

When it comes to support of fossil fuel projects, where there’s smoke, there may be fire—as an Exxon report, released in 2014 discussing the risks of that company’s potentially stranded oil and gas assets, made clear. That kind of stress could come home to roost at Citi, as at other firms, if shareholders start to voice concern, although Citi does work with groups like the Coalition for Environmentally Responsible Economies (CERES) and the Environmental Defense Fund (EDF) on such issues. The bank is strengthening its risk management policies to avert growing risks, and its ambitious resilience plans could help to offset any alarms. Indeed, as of 2015, a retiring Citi executive pointed out that some of the leading fossil fuel producers are also taking the lead in ­moving toward renewable energy.²

Perhaps most important, the bank’s 2015 report highlights a case the year before where the bank declined to finance a US fossil fuel project, suggesting a shifting attitude toward such activity:

In 2014, Citi considered taking an equity stake in a large operational coal-fired power plant in the United States. The facility had a sizable unlined coal ash storage pond, which is not considered best environmental practice, and had been subject to allegations of contamination of the local groundwater. Coal ash contamination has generated much public debate in recent years, and in late 2014, the EPA finalized a rule to update national coal ash disposal requirements.³

While the plant met all current governmental regulations, Citi ESRM (environmental, social, and risk management) felt that the transaction represented outsized environmental and franchise risk and declined to give approval.

Citi’s refusal to fund the project augurs well for more such moves in the future. Still, a major shift can take time. While many argue that the pace of adapting to a world already witnessing radical climate-related changes may not be optimal, even relatively swift moves in this arena aren’t immediate. As Bruce Schlein, Citi’s Director of Alternative Energy Finance, remarked about the bank’s recent updates to some flagship energy projects, they have taken a couple of years to come to fruition. “Anything new doesn’t happen at the same pace as what we’ve been doing for years. It takes longer, partly because there are lots of different market actors inside and outside [the company] who need to get comfortable” with innovations, such as new energy financing projects and mechanisms. Such projects also involve working among sectors, including different levels of government, which can be domestically especially in a highly regulated industry—and even stickier for a bank that operates globally. That is particularly true of collaborative initiatives among for-profit companies, NGOs, and government entities—sometimes called public–private partnerships (PPP)—as are some of the firm’s energy efficiency efforts designed to help reduce carbon and other emissions from energy sources.

Energy Financing

Among the three prongs of Citi’s ambitious sustainability plan, energy finance is emerging as one of the most innovative. In announcing Citi’s ambitious new goals in 2015, CEO Corbat noted:

Citi has financed some of the largest renewable energy projects in the world, including the Solar Star photovoltaic project in Southern California for Berkshire Hathaway Energy in 2013, the largest single renewable energy project finance bond offering to date. This project is expected to generate 579 megawatts of power when it is completed by the end of this year, making it the largest solar project in the world. Solar Star is expected to provide enough energy to power more than a quarter million homes, with the electricity generated displacing approximately 570,000 metric tons of carbon dioxide.⁴

Among other renewable energy projects in 2014, Citi also supported SunEdison with a $160 million facility “to finance a pool of distributed generation solar projects for commercial and industrial properties in the United States, averaging 1.1 megawatts each. The facility utilizes a structure that provides tax equity for roughly 40 projects,”⁵ according to the 2014 report.

Corbat added that the bank is “targeting reductions of 35 percent in greenhouse gas emissions, 30 percent in energy and water use; and 60 percent in waste.” The long-term ambitious goal is to reduce GHGs by 80 percent by 2050.

In addition to its leadership on renewable energy projects and its ambitious goals to reduce GHG emissions, Citi also has advanced significantly in two areas of energy efficiency financing: one aimed at the single-family residential market, in which the bank has two noteworthy projects (Warehouse for Energy Efficient Loans, or WHEEL, and Kilowatt), and another for corporate and industrial properties (Green Investment Bank, or GIB). The bank organizes its work in energy efficiency according to property type, mainly because of differences in how financing is structured based on ownership, Schlein explained.

Of its flagship corporate energy financing project, Citi’s London project with the UK’s British GIB, Corbat said:

We’re innovating not just on the types of projects we finance, but also the way in which we finance them. For instance, this past November we sought outside funding for an operational ­improvement—a move that many might not expect a financial institution to make. We developed an innovative energy efficiency measure to cut energy use by 10 percent at our London data center. Using a first-of-its-kind financing structure, the project is being funded through these energy savings and it involves no upfront capital from Citi. This is a model that’s applicable and attractive to clients of all types, and one that we expect to use more and more going forward.

Citi’s energy efficiency project at its data center in London is the first of its kind at a UK data center and the first project in the financial services sector to be to be backed by the UK’s GIB. GIB invested £2.6 m in the £5.2 m project.

As part of the project, Citi installed a Combined Cooling and Power (CCP) system that generates over 70 percent of the center’s electricity, while cooling the servers located there. Previously, Citi’s London data center got its electricity from the national grid, with back up from diesel generators. The project, expected to cut the data center’s energy use by 10 percent while reducing GHGs, included adding a CCP plant and other efficiency measures in the air handling and conditioning equipment. IT is among the most energy-intensive industries, second to aviation, with energy accounting for as much as 80 percent of the cost of running a data center, according to Shaun Kingsbury, Chief Executive of the UK’s GIB.⁶

The GIB project, in the works for many years, is unique mainly because Citi, instead of self-financing the project as is done conventionally, is both the property owner and the debt provider. Instead of using its own operating capital for capital improvements, the bank used third-party financing, including GIB as an equity investor, and the bank itself—“Citi lending to Citi,” Schlein said. The project’s financing structure is especially noteworthy in that “most, if not all” of corporate America uses self-financing for energy improvements to operations, setting a payback period of 1½ to 2 years, after which many have exhausted their willingness to pay, he added. Once the financing threshold has been reached, the company has three options, Schlein explained:

The first is to stop, and no one wants to do that, because we’re all setting more aggressive greenhouse gas reduction goals. A second option is to change the threshold to look at three or five years or longer, and the issue with that is that energy isn’t a core part of the company’s business—the company isn’t in the business of funding energy projects, even if it’s the foundation of the business. So, if you’re trying to decide between business extension in China or retrofitting buildings, and the first is more core to the business, you choose the former. The last option is seeking a third-party solution, a provider who’s in the business of energy services or energy finance to do it and figure out a way to have them finance it.

In London, Citi wanted to set more ambitious goals in energy improvement, and, because the bank isn’t an energy services company, it didn’t make sense to allocate more capital to the project. Instead, “we used ourselves as a guinea pig, going through all the steps to figure out how to procure energy as a service, transitioning from a mode of operating that we’re comfortable with, where we self-finance—to looking for a third party. In that process, we decided we wanted to be able to offer it as a financing product for clients,” an innovative approach that would include a test run with Citi as provider.

Innovation and Collaboration

After the London deal closed at the end of 2014, providing “an opportunity for our operations and banking teams to learn from each other and collaborate on som...

Table of contents

• Cover
• Half Title Page
• Title Page
• Copyright Page
• Contents
• Contents
• Contents
• Preface
• Acknowledgments
• Introduction
• Chapter 1 Responding to Weather
• Chapter 2 Learning from Disaster
• Chapter 3 Doing More with Less
• Chapter 4 Taking a Risk—and Managing It
• Chapter 5 Communicating Change, Collaborating on Climate
• Conclusion
• Index
• other