How to finance sustainable businesses?

Solar panel farms, a developer of tidal energy systems and a company that rents LED lighting to businesses: these are all examples of innovative sustainable projects financed by ABN AMRO. ABN AMRO’s Sustainable Finance Desk pools the bank’s specialist knowledge that is needed to properly assess these finance projects.

The number of sustainable businesses and projects in the Netherlands is on the rise. These initiatives often need financing in order to grow. The fact that they are innovative means they don’t just require a loan – they need specialist financing. “New business models rely on different credit structures and knowledge of specific risks,” says Hein Brekelmans, Head of the Sustainable Finance Desk at ABN AMRO. The bank set up the desk last year to pool the specialist financing knowledge available throughout the organisation. “The Sustainable Finance Desk connects our relationship managers, financing specialists and risk managers who have experience with sustainable financing applications. This makes the knowledge we acquire in the different regions and sectors more widely available throughout the bank. This means we can help business clients realise sustainable projects better and faster,” says Brekelmans. “The desk is also a first point of contact for companies that are looking for financing for their sustainable activities. It gives them fast access to all our knowledge in this area.”

Accessing knowledge

The bank’s relationship managers know where to find the desk, as do businesses. Brekelmans coordinates the various financing applications and connects different parties with one another. “An example: I brought together a relationship manager who is serving a client that wants to start up a sustainable solar panel project in the south of the country with a relationship manager in another region who has experience financing a similar project.” The knowledge ABN AMRO acquired when financing a biomass power plant in one province of the Netherlands is now being used for a new application elsewhere in the country. The desk also accesses knowledge from the bank’s different business lines. “We are using ABN AMRO’s experience with financing large international offshore wind farms to finance smaller onshore projects.” The desk’s specialists also regularly meet with other banks, for example to discuss the financing structure for a typical circular business model. Brekelmans: “I’ve noticed that competition in this area is slightly less fierce, as we are all trying to achieve a higher goal. That’s good news.”

Circular economy

The Sustainable Finance Desk finances projects up to 25 million euros. The projects must be sustainable while giving the bank sufficient assurance, for example because it makes use of proven technology. Brekelmans: “We are very interested in projects that support the circular economy. Unlike traditional business models, under which raw materials are converted into products that you throw away at the end of their lifecycle, the circular economy runs on the re-use of raw materials and products.” The new business models need innovative financing. “This is often in the form of project financing where the cash flow generated by the activities, rather than the collateral, is crucial. Our financing specialists are therefore experts in detailed assessment of contracts and patents, challenging financing structures and cash flow analyses. This knowledge is used, for example, in financing the Dutch company LEDsEnable, which rents energy-efficient lighting to businesses. Companies in the Chemelot industrial area lease the lighting, meaning they pay for its use rather than owning it.”

Making sustainable projects possible

Brekelmans says that sustainable projects – certainly circular ones – require a different take on financing. “This means bankers sometimes need to rethink things. So we often give presentations on circular companies. A good example is Auping bed manufacturer, which plans to lease beds to consumers in the future. So the client will pay for the use of the bed, and the bed will remain the property of Auping. This is also known as ‘sleep as a service’. In financing ‘as a service’ models, the different cash flow pattern is important: there is a small, steady flow of rental income rather than a large sum upon sale. It’s also about assessing the residual value of raw materials. How do you recycle the parts of a bed, and how much will this yield? Ideally, residual flows become cash flows. The mattresses will be returned to Auping. As with regular financing, risk management is important, Brekelmans stresses. The bank is often willing to go the extra mile, for example in terms of advance payments and the term of the loan. Plus we are sometimes willing to settle for lower financial returns if we really like the project. We believe it is important to acquire knowledge, because this allows us to make more sustainable projects possible.”

Want to find out more? Contact Hein Brekelmans.