Leasing Life wanted to kick off its Climate Change edition by talking to the Greta Thunberg of the asset finance sector in the UK, a young company with low-carbon transition in its DNA, with concerns that we’re not doing enough to address global warming but prepared to make a difference through its actions.
Founded in 2006, Capitas Finance is an independent provider of specialist energy project financing for carbon-conscious businesses and public sector organisations. The business employs 12 people in its Surrey, UK headquarters and was a Sustainability finalist at the Leasing Life Awards 2019.
I asked Darren Riva, the company’s chief executive, about the pressure building on the corporate financing sector to get its house in order and the role of corporate responsibility when it comes to climate change.
Q: When it comes to climate change, investors have shifted their focus away from the oil, gas and mining extraction sectors toward the banks that enable fossil fuel producers to fund their operations. Is this focus likely to shift to other areas of corporate finance?
A: Yes, this focus is likely to shift to all areas of corporate finance. As ESG [environmental, social and governance] becomes a core pillar in business’ strategies, and their customers and shareholders demand even greater transparency and corporate responsibility, all finance providers will have to evaluate which sectors they support and which they decide to move away from.
Q: Are there any areas of corporate finance that may find themselves exempt from this pressure?
A: No. As more and more pressure is placed on corporate entities to report and reduce their carbon footprint so too this will impact their supply chains and hence those investing in them.
Q: The leasing sector considers itself very much on-trend with its ‘circular economy’ way of thinking about the use of capital goods. This is underpinned by a philosophy of not ‘owning’ equipment or fleets of cars, but simply being satisfied with having stewardship of goods or property at one point of its lifecycle. Is the world of finance leasing immune from these pressures?
A: No. Large enterprise customers are increasingly requesting pay-for-performance financing solutions that allow them to implement energy generation projects with zero upfront capital expenditure. Capitas has developed commercial documentation to deliver Energy-as-a-Service. These contracts include an Energy Services Agreement (ESA), Energy Performance Contract (EPC) and Power Purchase Agreement (PPA).
For example, the Capitas PPA pays for all project development and construction costs. Leasing assets which cannot be re-used or re-cycled is not creating a circular economy, hence lessors may need to build these criteria into their credit policies if they are to truly show they are enablers of the circular economy.
Q: Mark Carney, the outgoing Bank of England governor, has warned that companies and investors must do more to plan for climate change, arguing many corporate assets are at risk of becoming worthless. Are enough companies stepping-up their planning?
A: Mark Carney is correct. He warned: “If we were to burn all those oil and gases, there’s no way we would meet carbon budgets. Up to 80% of coal assets will be stranded, [and] up to half of developed oil reserves. A question for every company, every financial institution, every asset manager, pension fund or insurer: what’s your plan?”
At Capitas we see evidence that companies are taking this matter seriously as we hear more and more about businesses aiming for ‘net zero’, ‘carbon neutral’ and now ‘carbon negative’ targets. The key will be to ensure that these terms don’t just become marketing terms, but are embedded and reported on within the ESG framework.
Q: I understand that Capitas does not have a banking license. How do you fund the projects you are involved in? Could you unpackage your business model for our readers?
A: We operate two distinct businesses:
- Capitas Finance is an ‘origination’ energy solutions finance business accessing debt finance from finance companies, typically asset finance companies often wholly-owned subsidiaries of banks. This encompasses leasing, hire purchase, energy services agreements, and energy performance contracts.
- Capitas Energy Finance is an ‘operator’ of generation assets for companies, using debt finance to fund Power Purchase Agreements (PPA).
Capitas aims to develop partnerships with energy services companies to deliver sustainable, value-for-money solutions to end-user customers. The Capitas philosophy is that you need technical skills to understand the technologies and commercial skills to be able to price and structure the investment. It’s rare and difficult to integrate these distinct disciplines. Capitas integrates technical, commercial and financial thinking so that when the multi-disciplinary team is engaged on a project, it can provide specialist advice as well as the finance to execute.
Q: How big (and small) in financing terms are the projects you support?
A: Capitas targets suppliers with strong end-user customers requiring project finance with a small “p” using asset finance, managed services and asset management disciplines. Transaction sizes typically range from £50k to £5M, however there can often be multiple projects for each entity.
Q: Do you operate only in the UK?
A: Capitas resources for sales are focused on the UK but our supplier partners and customers can take us overseas; Capitas is currently working on live transactions in Mexico, Malaysia and Norway for existing large enterprise customers.
Q: The French bank, BNP Paribas, says it is committed to fighting climate change. In 2017, the bank said that it would no longer do business with companies whose activities primarily involve oil and gas extracted from shale deposits or tar sands. Do you have any dealings with them?
A: Yes, Capitas has a funding line with BNP Paribas Leasing Solutions.
Q: Recently the chief executive of Blackrock published a Dear CEO letter, saying in future it will take into account company policies on climate change when Blackrock decides where to invest its money. It seems we’re seeing the concept of ‘value’ changing from a narrow perspective, focussed solely on ‘shareholders’, to a broader definition focused on ‘stakeholder value’. How is this move likely to affect the corporate financing world?
A: Corporate responsibility and governance is becoming ever more challenged by both customers and shareholders, corporate financing cannot shy away from this. Corporate finance has a pivotal role to play in the future investments of UK businesses. As the UK population, politicians and investors take more control over the climate change debate and the swift transition to a truly low-carbon economy. So, corporate finance will have to evolve to support the mood of the country. I believe this is already happening and it will continue to gather pace as we look to show the ‘value’ we provide to both business and the communities we serve.
Q: Do ESG (environmental, social and governance) metrics offer a way forward for companies involved in providing asset finance and corporate leasing?
A: As with all companies, corporate finance and leasing companies should have ESG thinking at the heart of their investment process. Suitable metrics will help lenders assess the risks, and opportunities, posed by companies’ performance in the area of climate change. Company disclosure and standards of reporting on this issue are crucial for driving accurate investor information, public discourse, regulatory guidance etc.
We also believe that transparency is critical to driving positive outcomes at both a financial and social level. So ESG risks are just as important as financial risks. Heightened social, governmental and consumer attention on the broader impact of companies, as well as by the investors and executives, means that getting an ESG proposition right links to value creation and can safeguard a company’s long-term future.