During the 2019 Madrid Climate Conference (COP 25) , we and our partner ImplementaSur shared the results of our work on building-up and designing green banks in emerging economies, which is a key ingredient of a future climate finance architecture in these countries.
Target sectors should be, strategic ones for emissions reduction or climate change adaptation for the country, where additional financing can drive long-term growth in a sector, lower the cost of the technology being deployed, and/or leverage other financings.
On this basis, Green Banks in emerging economies notably provide their own financing e.g. where existing public national development banks may not have relevant retail lending windows. For instance, 98% of the companies in Chile are Micro/Small/Medium Enterprises (MSMEs). However, there are few financial institutions willing to take the risk of engaging with them due to high due diligence costs relative to the size of the operation or the limited acceptability of the collaterals and guarantees MSMEs can provide.
In addition, Green Banks in emerging economies catalyze additional private finance through risk management for e.g. policy or currency risk.
Our presentation at the COP was based on the conceptual work done by the ImplementaSur team on the build-up of a Green Bank in Chile, where the team helped design aspects of the National Green Bank; and specific lending programs.
Designing the National Green Bank
On designing the National Green Bank, this work prioritized investment targets by determining both benefits and co-benefits from mitigation or adaptation investments, and scale-up or replicability potential. Furthermore, it analyzed current barriers to investment in these sectors and developed recommendations for Green Bank governance, operation and institutional coordination with the main public actors.
To clarify the meaning of Green Banks, here are two sector-level examples from recent projects:
- There are currently financial limitations for climate-friendly investments in manure management Chile. Hence our work provided proposals on how a Green Bank can provide financial conditions for investing in biodigesters to manage manure and support the creation of a market for digestate.
- An example from the residential energy efficiency sector, specifically, investments in energy efficiency retrofits in middle-income houses. Key design measures included getting local banks on board through developing standardized contracts and a long-term loan program on low-cost terms, using the credit capacity of the Central Government, combined with a system of qualification and selection of contractors. Furthermore, they included a first loss guarantee to boost access to finance especially to houses that were not of the current clients of the bank.
A quick broader outlook
Based on our experience, we believe the key success factors for scaling of Green Banks in emerging economies are
- to use expert local market knowledge and associated technical assistance to quickly develop both a project pipeline and origination capacity.
- to watch and anticipate the often rapid structural changes in the emerging economy it is operating in, with the Green Bank, therefore, being a change-maker rather than reactive. This means to constantly identify less mature but promising niches of climate investment, while ‘handing over’ the mature ones to a private source of financing.