Green Finance: opportunities and challenges
While the opportunities represented by Sustainable Development, Green Growth and Green Economy are well known by stakeholders in both developing and industrialised countries, the corporate and NGOs sectors are facing challenges in accessing finance to improve their Sustainable Consumption and Production (SCP) performance and rendering projects self-sustainable.
To address this gap, the SWITCH-Asia Network Facility organised on September 12th, 2014 a webinar to present experiences, opportunities and resources related to "green finance". The webinar was organized around two panels of about 45 minutes each, followed by two Questions and Answers sessions of 15 minutes each. (Videos of each presentation are available here.)
Opening the first panel on corporate green financing, Ms. Alexandra Boakes Tracy, President of Hoi Ping Ventures in Hong Kong and Chairwoman of the Board of the Association for Sustainable & Responsible Investment in Asia, presented the flows of Climate Finance in 2013 underlining that there is just a small percentage of institutional assets including Asian assets and that the Japanese Government Pension Investment Corporation was the most active with 1.3 USD Bn investments, followed by the Government of Singapore (200 million) and China Investment Corporation (195 million).
With concern to the main challenges for low carbon investing in Asia, she indicated the frequent lack of awareness and expertise by potential investors whose corporations also suffer due to internal systems and norms, project structures and risks profiles (mainly political and policy risks, new technology content not well known by the investors, inexperienced sponsors and the size of projects and businesses) further than global systemic issues as fossil fuel subsidies, global and local regulations.
However, Ms. Tracy also indicated some specific success stories that can be replicated, such as grants for seed funding and project development (as the "Seed Capital Assistance Facility of United Nation Environment Programme (UNEP), ADB and African Development Bank (AfDB) which encourages local private sector investments during the early stage of energy projects provide grants to fund managers to offer enterprise development services to qualified entrepreneurs while offering training, incubator services, co-financing of pre-investment feasibility studies.
Another example is represented by supports for off grid systems in Least Developed Countries (LDCs) (as the Photovoltaic Market Transformation Initiative financed by IFC and GEF) which allows the funding of supply chain and downstream businesses while also providing support to technology transfer and concessional finance. Furthermore, another successful intervention of green finance funds has been related to the promotion of climate resilient agriculture in LDCs, which also helped the development of private sector business, supporting climate resilient activities and related training for farmers.
Ms. Tracy concluded her intervention by indicating that in the sector of low carbon investments there is a growing private sector expertise, a deeper understanding of commercial opportunities, an increasing commitment by financial institutions (reaching US$35 billion investment funds in climate finance reporting) more than the unprecedented financial commitment of US$100 billion annually by 2020 through the UN Green Climate Fund which represents also a potential to leverage private funding.
Her presentation can be downloaded here.
Ms. Mayte de Vries introduced the SWITCH-Asia project that she manages in Cambodia, "MEET-BIS", which builds up on the experience of the previous SWITCH-Asia project in Vietnam "MEET-BIS" and is implemented by the ETC Foundation, AdaPPPt and RainWater Cambodia.
MEET-BIS has an innovative, private sector based approach for stimulating energy efficiency and renewable energy investments by SMEs in Cambodia and during its four years of implementation operates to stimulate SMEs investment in energy and resource efficiency through "Access to Finance".
Ms. de Vries explained that the main characteristics of energy-efficient and resource-efficient goods for SMEs are to be "plug and play" products, with low investment and which require technically simple interventions.
For SMEs the main interests rely on projects which allow cost savings, which are green related and facilitate an easier access to finance. However, lending to SMEs represents a challenge because most SMEs (92%) are not registered, there is a lack of business records, financial statements, collateral, hard/soft titles for land and of knowledge on how to produce financial statements, further than the absence of a second hand market for EE products and the fact that 75 - 90% of funding is internally generated.
During her intervention Ms. De Vries also presented four pilot models developed by the MEET-BIS project, i.e.:
1. products-based financing related to a construction leasing, where the supplier sells the equipment to the leasing company who owns the product until the SME has paid the full amount, and afterwards the ownership of the equipment gets transferred;
2. the ESCO model, where the supplier is financed by the bank and will pre-finance the investment of the SME while the SME will pay the savings on their electricity bill to the supplier until the complete investment has been paid while the SME owns the equipment;
3. the end-user finance which is a normal lending to a Small and Medium Enterprise (SME), but with the difference that the sales agents working for MEET-BIS /suppliers support the SME with preparing the correct paperwork and financial statements;
4. the revolving fund where the donation is based on crowdfunding and the funds are managed by MEET-BIS (providing also low interest rates, asking for some measurement data in return), and then after 3 years transferred to MFI/Solar Branch/ RWC/ or other entities.
Click here to download her presentation.
Opening the second panel about financial sustainability of green projects, Mr. Alexander Ablaza, Principal Advisor, Sustainable Infrastructure Finance and Investments, focused on the mobilisation of private sector capital toward Green Finance in Asia, explaining that energy efficiency (EE) definitely outperforms most renewable energy and other mitigation options and that USD 8 trillion investments in energy efficiency will need to be made in the global market between now and 2035.
Southeast Asia, especially Indonesia, Thailand, Malaysia, Viet Nam and the Philippines, will need USD 11 billion in EE investments for the region to meet short-term energy demand reduction targets, mainly in the three key sectors of industry, transport and buildings. IEA estimates that Southeast Asia will need to invest at least 9% of total energy investments, or $14 billion per year, in EE projects by 2035. While explaining that EE credit facilities are mainly implemented with the traditional structure of asset-based lending, he also presented some specific cases of programmatic interventions in the finance sector, such as:
- the Thailand EERF, an interest buy-down scheme involving 11 commercial banks sourcing concessional debt from revolving government funds,
- IFC's global Sustainable Energy Finance program in Southeast Asia supported local financial institutions in their roll-out of EE and RE lending lines through risk sharing facilities, portfolio loans and capacity building advisory services.
- the Malaysia Green Technology Financing Scheme (GTFS) offers guarantee and interest rebates to over 20 local banks for green projects.
- the SDCL Singapore EE Finance Program is a government initiative that allows USD 160 million of private funds to be invested in ESCO capex for industrial EE improvement projects.
Market gaps are in the way of a massive scale-up objective. Financial products do not meet the needs of ESCOs and EE supply chain. Commercial funders have not mainstreamed EE financial products and services. The available green facilities crowd out EE with RE and non-CC mitigation. Development investors are unable to achieve scale, especially in end-use EE. SME access to EE finance remains limited. The finance sector still prefers to invest in larger EE technologies.EE investment decisions by -end-users cannot compete with business priorities. Energy supply and demand-side policies and targets are still often decoupled.
The solutions proposed include the design and roll-out of innovative financial products and services that address the credit gaps, tenor mismatches and risk profiles of SMEs, ESCOs and other players in the EE supply chain; to create a new class of project aggregators which are able to attract portfolio investors and funds targeted at EE and greenhouse gas (GHG) impacts; to design portfolios that capture the higher inefficiencies of smaller EE technologies widely used by low credit-risk sectors; to scale up government catalytic investments in EE Finance (such as fund equity, first loss cover, interest buy-down, etc.); and, to bolster EE regulations toward accelerated investment decisions and integrated energy supply-demand strategies.He recommended four growth models for markets to structure as they aspire to achieve meaningful scale:
1. EE risk-sharing facilities with governments, climate funds or even private sector providing first loss cover;
2. ESCO-leasing company partnerships that can rapidly grow the market for savings-based equipment leases;
3. the factoring of ESCO receivables by special purpose financial institutions and investment funds which can quickly recapitalize smaller ESCOs; and,
4. the establishment of a "Super ESCO" which can play the dual role of a specialized financial institution for private sector ESCOs and a dedicated ESCO for public facility EE projects.
Furthermore, new financial products and services that cater to the needs of ESCOs, EE supply chain players, EE technology importers/exporters and long-term EE project developers will have to involve the active participation of governments, finance sector and the business sector.
In conclusion, Mr. Ablaza indicated that new EE financial structures with aggressive policy measures, catalytic high-risk investments by governments, climate funds and development agencies, and project pipeline generation and equity from the private sector can efficiently leverage private sector capital into EE finance, thereby sustaining a low-carbon path for Southeast Asian economies.
Mr. Ablaza's presentations can be downloaded here.
The participants had then the possibility to listen to the recorded intervention of Mr. Xiaochen Zhang, Climate Change Officer at the World Bank Group, who focused on exploring the potential of crowdfunding.
Recent scientific literature and analysis outlined evidences of hazardous climate change therefore underlining the need for climate finance. With this purpose various policies have been introduced, as dedicated international VC funding and risk capital for developing country start-ups, special support to small and medium enterprises, allowing firms to access national, regional and global supply chains, Government-funded Research and Development Centers ((R&D)), compulsory licensing, patent pools, bilateral and multilateral market access agreements, applied research networks and training for firms in understanding the "Base of the Pyramid innovation" needs, while conducting demonstration tests.
Crowdfunding, covering a range of investments between USD 50,000 and USD 1 M, is based on three main pillars as friends and family finance, social networks and Internet finance aiming at supporting innovative projects/ventures. Presenting some examples (kickstarter, indiegogo, rangde and crowdfunder), he underlined the positive impacts related to the possibilities for SMEs to access a larger base of potential investors, the direct communication with stakeholders, and the marketing and pre-ordering role.
Presenting specific cases and markets, Mr. Zhang indicated that projections for the size of the crowdfund investing market range from US$4 billion to as much as US$300 billion over the coming years. It is estimated that the 344 million households in the developing world have the ability to deploy up to US$96 billion a year by 2025 in Crowdfunding investments. The greatest potential lies in China, which accounts for up to US$50 billion of that figure, followed by the rest of East Asia, Central Europe, Latin America/the Caribbean, and the MENA region. He also brought the example of www.recrowdfunding.eu, a very useful Crowdfunding map in the renewable energy sector.
There are however some barriers limiting the scaling up in developing countries, as lack of Crowdfunding infrastructure, lack of business models knowledge, barriers to reach wider and deeper successful platforms, lack of knowledge, tools and data and the lack of risk management skills and tools. As to fill such gaps, Climate Innovation Centres - sponsored by the World Bank - help building private sector innovation capacity through a holistic service (covering VC, business advisory and training, government advisory market intelligence and technical and office facilities) and they have been already established in South America, Africa and Asia Pacific. Concluding his intervention Mr. Zhang presented in details the climate finance instruments and the related main activities of the World Bank.
Click here to download the presentation of Mr. Zhang.
The intervention of Mr. Zhang was followed by a message by Ms. Alina Neacsu, SWITCH-Asia Project Officer at EC DevCo who underlined the importance of the webinar as to facilitate the sharing of lessons learned among the EU-funded projects in Asia as well as the key role of green finance with concern to sustainable development. She also presented the role of energy efficiency investments in Asia and the aim of the SWITCH-Asia Program to replicate the sustainability of EE sustainable consumption and production, while underlining the importance to cooperate with local national governments and to facilitate access to finance to SMEs in the region.
Lively Q&A sessions took place after each of the panels, further demonstrating of the high relevance of the topic for sustainability projects. In line with the input provided during the event, the SWITCH-Asia Network Facility is organizing more such webinars on related topics.
Contact us if you would like to suggest a theme of interest for a webinar and please note that all presentations can also be viewed in our multimedia section.