Designing Green Banks for Emerging Economies: Supporting Private Lending for Technology Scaling
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:
- Currently, there are financial constraints to climate-friendly investments in manure processing in Chile. Therefore, our work provided suggestions on how a Green Bank can create financial conditions for investments in bio-digesters for manure processing and support the creation of a market for digestate.
- An example from the field of residential energy efficiency: investments in energy retrofits for middle-income homes. Key design measures included engaging local banks through the development of standardized contracts and a long-term concessional loan program that leverages central government credit, combined with a contractor qualification and selection system. They also included a first-loss guarantee to improve access to finance, especially for homes that are not current customers 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:
- Leveraging expert knowledge of the local market and related technical assistance to quickly develop both a project pipeline and contracting capacity.
- Monitoring and anticipating the often rapid structural changes in the emerging economies in which it operates, with the Green Bank, therefore, acting as a “change-maker” rather than a reactive entity. This means that it continually identifies less mature but promising niches for climate investment and “hands-off” the mature niches to a private funding source.