Banking on the positive

Mark Nicholls reports on how the UK arm of Triodos Bank is making a push into investment banking – and taking a typically unconventional approach

James Vaccaro, Triodos: "We're a hybrid between a bank and a social experiment"

In late November, Triodos Bank held a reception in London to mark the formal launch of its UK arm’s investment banking division.The event also saw the publication of a new report from Triodos, ambitiously entitled The Future of Finance.The report sets out the bank’s vision of “conscious investment”, which seeks to move beyond what it considers to be the devalued concepts of ethical and socially responsible investing.

“Triodos was set up to use money in a different way … to understand its social value,” James Vaccaro, head of investment banking at Triodos, told the audience at the Institution of Mechanical Engineers. “We’re very far away from the rest of the UK banking sector – we’re a hybrid between a bank and a social experiment.”

The ‘experiment’ began in the Netherlands in 1980, with an explicit mission to invest positively – working with businesses and charities that, in the view of Triodos’ loan officers, deliver clear social or environmental benefits. Its UK office – in Bristol, in the west of the country – was opened in 1995, two years after it expanded into Belgium. In 2004, it set up a Spanish office, and last year opened a representative branch in Germany.

The bank has offered investment banking services for some time, primarily out of its continental offices. But the November reception was to highlight a significant increase in the UK operation’s involvement in this area: while still small, the investment banking group has grown from one and a half full-time staff at the end of 2005 to seven.

“We now have a comprehensive range of services – we’ve closed some of the gaps,” says Vaccaro. As important, however, is a pull from the customer side. “The sector, and the investable space, is reaching a stage of maturity. There’s a lot of leadership in the UK in environmental and social enterprises.”

And recent months have seen a number of acquisitions, initiatives and transactions that are raising the bank’s profile. In July, it partnered with the Carbon Trust, a UK-government funded company promoting a shift to a low-carbon economy, and engineering firm Mitsui Babcock to set up Connective Energy, a joint-venture designed to build and exploit a market in the UK for waste heat.

In October, Triodos Renewables – an unlisted investment fund, managed by the bank – acquired 17.3MW of onshore wind farm capacity from the Hainsford Group, in a £27 million ($53 million) deal which took the fund’s assets under management to £35 million. Triodos now owns 7% of the UK’s onshore wind capacity.

Vaccaro has high hopes for the fund – which had assets of just £2.8 million two and half years ago. He hopes to grow Triodos Renewables to above £100 million within a couple of years.“At a certain point,we realise we’ll have to go to AIM,” he says, referring to a listing for the fund on the London Stock Exchange’s Alternative Investment Market. “But at the moment, there’s so much demand from existing shareholders.”

But, while Triodos in the UK has been building its onshore wind portfolio,Vaccaro’s team have made a decision to avoid the offshore wind sector. “The capital requirements for individual projects are too large,” Vaccaro says. “We’re planning to leapfrog offshore wind.”

Instead, the bank is looking to take a strategic position in the emerging wave energy sector. “It’s a sector in which you can do smaller-scale projects, at the end of harbour walls, for example,” notes Matthew Clayton, Triodos Renewables’ investment manager.The company plans to replicate its approach to onshore wind, taking “strategic positions” in a handful of technology and project development companies.

The bank is looking to take a strategic position in the emerging wave energy sector

However,Vaccaro won’t be drawn on which developers look attractive.

Triodos is also making a push into the UK venture capital (VC) market. The bank as a whole has raised €75 million ($100 million) into its VC funds, mostly from continental investors, although one fund is investing in UK companies.“This is taking us very actively into the UK venture capital market,” he says, adding that the bank is planning to raise a VC fund from UK investors in 2007.

“We’re open for investment in the UK,” he told the reception and, in contrast to most venture capitalists, “we’re not exit driven. We’re a long-term partner in the businesses we invest in – we feel that this is a more sustainable approach.”

And Triodos is also planning to expand its corporate finance business. It is currently marketing a £5 million, five-year bond for Ecotricity, a UK wind farm developer and operator, which will securitise the company’s income from its generating assets. It follows the first ever bond issued for a charity in the UK, a £2 million issue for the housing arm of mental health charity Mencap in 2002. In total, Triodos in the UK has raised £23 million since 1998, and hopes to raise an additional £100 million-plus over the next three years.

The UK operation can rely on support from – and the experience of – Triodos on the continent. Vaccaro notes that the bank as a whole manages some €800 million of renewable energy investments, across a range of funds, and has been investing in the sector since 1986 when, in the wake of the Chernobyl nuclear accident, Triodos Ventures was set up to invest in wind farms.

Its Dutch arm recently won the mandate to manage the European Commission-backed Global Energy Efficiency and Renewable Energy Fund, to help encourage private sector investments in clean energy in developing countries (see Environmental Finance, November 2006, page 7).

Overall, Vaccaro sees developments at Triodos as keeping the bank in step with the changing needs of its clients, as environmental technology companies and social enterprises increasingly push into the mainstream of UK business. “There’s a serious step change in what we’re trying to do, and we feel that we’ve now got the back-up in terms of capacity,” he says.