By Miranda Stokkingreef, CEO of ABN AMRO Asset Based Finance
First and foremost leasing forces us to think about the lifespan of a product. If you offer a product as a service – not just a sell-and-forget transaction – it’s in your interest to put that product in circulation for as long as possible. You’ve made the capital outlay, and you want to receive a monthly fee for as long as possible. Then at the end of its lifecycle, it pays to recoup the materials for reuse.
For example, Michelin, the world-leading tyre manufacturer, now offers rentable tyres. It has a vested interest in saving those tyres from the scrap heap and is much better placed than any customer or even third party to reuse the materials. Or Dutch telephone company KPN: it recycles the valuable metals in its handsets and uses them in new models. Customers don’t have to worry about maintenance and usually get a shiny new version every few years.
This ‘circular economy’ mimics the natural cycles we see on our planet. It is about increasing product lifespan by giving businesses and consumers an economic incentive for sustainability – then ensuring there’s an economic incentive to reuse or recycle.
Durability and resource efficiency have also become drivers for growing market share. And the change in cash flows – to monthly licencing fees, for example, not one-off upfront payments – also gives businesses fresh financial firepower. Leasing sits at the heart of this more self-supporting economy.
Secondly, leasing is green in the way it enables businesses to invest in newer, more efficient, less resource-intensive equipment. Rather than commit capital to purchase machinery outright – especially if there’s older, less-efficient equipment currently doing a job – it makes sense to approach a financial services company and have them finance the deal. It ties outlays more closely to returns.
ABN AMRO has long been working on sustainable funding solutions – this was bolstered by the 2016 Paris Agreement known as COP21. It committed governments to long-term goals aimed at keeping the increase in global temperatures below 2°C above pre-industrial levels.
In November 2018, ABN AMRO launched its refreshed strategy, built around its purpose: Banking for Better, for generations to come. Supporting its clients in their switch to sustainability is an important element of this refreshed strategy.
Short-termism hurts our customers, their economies and the planet. As a target, by 2020 ABN AMRO aims to finance 100 circular deals, with a total loan volume of €1 billion. And, the bank is increasing its sustainable financing for its Commercial Banking clients – by 2020, we expect this to be at least €3 billion.
As part of that sustainability drive, ABN AMRO Lease supports our clients’ shift towards a greener future through financing sustainable assets. An example of this is the Nij Smellinghe hospital in the Netherlands. ABN AMRO Lease helped to finance 5,500 solar panels for its parking lot and 3,500 panels on its roof. Capex finance for a project on this scale would be nigh-on impossible for a hospital. But thanks to our leasing package, today it produces 30% of its energy from the sun. (By 2030, Nij Smellinghe wants to be 100% self-sufficient – and even supply energy back to the grid from its renewable capacity.)
Many of our projects focus on the environment and clean energy – such as solar panels, solar collectors, heat pumps and energy storage systems. Leasing has facilitated energy-saving assets from a €30,000 solar installation to a €10 million solar park.
In the UK, ABN AMRO Lease financed three deals for 50 zero-emission electric buses and their charging infrastructure. The UK government has committed to stop the sale of conventional new diesel and petrol cars and vans from 2040. This kind of regulatory change towards sustainability goals can be a headache for businesses. But leasing allowed us to fund more than £25 million for these assets – allowing operators to get ahead of the change.
Steve Laws, relationship director for our UK Lease Specialist Asset Finance Team, said at the time: “We’re pleased to have provided a flexible funding solution that contributes to this sustainable initiative.”
The other feature of many of these leasing deals is that they’re highly collaborative. We work with Mitsubishi Elevator Europe to help its customers finance its circular lift, the M-Use – now deployed in 100 locations in the Netherlands.
Customers pay towards some construction costs, but effectively lease the lift system. As Mitsubishi remains the owner, it’s also responsible for maintenance. This means the M-Use will last longer than standard lifts. When it reaches the end of its life, Mitsubishi recycles more than 95% of the materials.
“From a leasing point of view, the Mitsubishi deal is spectacular and is a good example of how we are expanding the lease product range,” explains Product Development Manager, Robert Peterson. “Elevators can be an expensive one-time investment and this deal eliminates the problem of initial costs. A contract is signed for two decades, but it is easy to extend. Mitsubishi also provides an annual professional service, so there are savings. Once you’re done with the product, it’s in Mitsubishi’s interest to keep the elevator in use. That’s great from a sustainability point of view, but also for other customers looking for a refurbished elevator.”
We have also financed machinery that produces bio-plastics; and a thermal furnace that converts used asphalt into sand, gravel and gypsum – which are valuable for other processes. In all these cases, leasing is a great match for resource efficiency and sustainable returns.
Those returns from the circular economy could be in the order of €1.8 trillion by 2030 in Europe alone, according to The Ellen MacArthur Foundation. It works with businesses, governments and academia to build a framework for an economy that is restorative and regenerative by design. Its prediction is based on both commercial returns, fresh growth (which is limited by access to finite resources) and the reduced costs of environmental impact.
Businesses typically need more immediate upsides, even if they’re committed to a more sustainable future. And there are plenty of those, too. Moving from one-off product sale to product-as-a-service enables them to develop stronger, more direct relationships with customers. Clients can more rapidly upgrade to new products, for example, and the on-going cash flows help fund Research and Development.
Switching to a product-as-a-service model is not hassle-free, of course, even with the support of a leasing provider to answer some of customers’ financial questions.
For example, how do you calculate price per use? How robust are your asset-tracking capabilities? The Internet of Things (IoT) promises robust, real-time data from equipment, helping manage the maintenance component. But are your systems geared up for them?
What about financial modelling of your own and capex? The transition from lumpy cash flows to a steady stream – both in and out, potentially – is an interesting challenge for any CFO. Then there’s the risk the customer might not be as sustainable as your new approach to leasing. How is client default best managed?
That’s where product-as-a-service fits so well with leasing (and, more generally, with asset finance). A financial provider with the right size and experience, such as ABN AMRO, can adapt to sudden shocks like a leasing customer going bust; or use deep market experience to optimise credit and asset risk policies.
That combination of risk awareness and range of asset finance options is important. It means we can structure more intelligent advanced payments, for example. For the right project and ideal risk profile, a more ‘holistic’ finance provider can price much more keenly. It means when a client wants to make transitions such as switching to a product-as-a-service model, we know how to help in several dimensions.
Whether or not the financial services sector has a moral imperative to help finance sustainable projects, no finance provider is going to structure leases or lending just because a project or customer is ‘green’. There’s an art to crafting a sustainable lease proposition.
For the finance provider, it’s really valuable to have local knowledge and awareness of sustainability opportunities. These on-the-ground resources have three main areas of focus: credit conditions, blocking issues and risk. Understanding risk is particularly important, not least because local projects can feed into a wider understanding of what opportunities are feasible in different situations.
Our access to market insights, for example, enables us to maintain a monitoring and reporting system that’s fit for purpose in such a fast-changing environment.
Customer communication is important, too. That’s why it’s so important to have a relationship-driven approach. A client request to lease, say, a fleet of electric scooters, is rarely a binary decision. A lot depends on the product being leased, the market and the achievable sustainability aims.
A collaborative approach, informed by that wide-ranging approach to market intelligence, usually results in a more nuanced outcome – as it did with one recent solar panel leasing deal. The equipment was being mounted on listed buildings, a potential nightmare in planning and maintenance terms. But exploring the options and deploying prior experience made it doable.
Combining ABN AMRO Lease with Commercial Finance has also been valuable for our clients. Merging these two award-winning business lines together to form ABN AMRO Asset Based Finance means that we have the expertise, knowledge and capital under one roof, helping us capitalise on economies of scale, translate our experience to more situations and provide more tailored, risk-managed finance solutions – as well as finance larger deals.
It’s a much more sustainable business model – and it ensures that increasing numbers of sustainable deals and business model transformations can be successfully delivered.
Sustainability is high on the agenda of many companies. However, being sustainable requires major investments, both in financial resources and time. The tips below could help companies everywhere make the shift to a greener business.
News - 19 September 2019