banking on sustainability what does it mean for financial institutions? martin dasek ) senior...

BANKING ON SUSTAINABILITYWHAT DOES IT MEAN FOR FINANCIAL INSTITUTIONS?

Martin Dasek)

Senior Climate Financing Specialist, SEF Lead, IFC

November 27th, 2014, Karachi

A little bit of definitions01

Presentation outline

Business opportunities in the climate space02

Role of Governments and public bodies

03 Examples around the world

04

3

What does it mean “green” for a bank?

01 – introduction and definitions

• Being green is fashionable today and helps to sell all products, finance are not different

Corporate identity

• Internationally/nationally required by laws or voluntary agreements (environmental and social standards (E&S, ESMS))

Compliance with standards

• Portfolios are threatened by various threads, incl. climate change

Risk management

• Markets are huge in the “green/climate space”, • We speak about “Sustainable Energy Finance (SEF – EE/RE)” or more broad “Climate Finance” if include other sectors than energy too

Business opportunity for further growth






04

5

Sustainability - new market territories

02 - the business opportunity for financial institutions

ENERGY: Energy efficiency, renewable energy, storage, smart grids, energy access

TRANSPORTATION: Energy efficient components, fuels

and logistics

WATER: Capture, treatment, conservation, wastewater treatment,

access

AIR & ENVIRONMENT: Carbon credits, trading and

offsets

BUILDINGS: Low carbon strategy, energy efficiency, sustainable materials, green

buildings

MANUFACTURING: Green chemicals, RE/EE supply

chain, cleaner production.

AGRICULTURE & FORESTRY: Land mgmt, low carbon and

adaptation strategies, biomass, biofuels, EE.

RECYCLING & WASTE: Recycling and waste treatment services

6

Future is happening today already


• Climate space represents US$ 350-500 billion per year opportunity globally - 70% of investment must come from private sector

• Role of FIs and access to finance is going to be vital to enabling this shift in economic development in emerging markets

• Renewable Energy: Global Investment Reached US$ 260 billion in 2012, with increasing share going to emerging markets

• Green Buildings: 400 million homes estimated to be built by 2020 and most of them will be in emerging markets – estimated annual investment need of US$ 450 billion

• Base of the Pyramid & Rural: decentralized power solutions for the 1.2 billion who will lack access to energy by 2030 is estimated to require US$ 33 billion per year

7


Sector Potential borrower Energy efficient equipment/technology

Industrial Industrial companies, SMEs

• Energy efficient production lines• Waste heat recovery devices• Heating systems upgrades, Efficient boilers and heaters• Fuel switching (coal-gas, coal-biomass)• Electricity peak-load control systems• Cogeneration units

Commercial

Housing complexes operators, maintenance companies;housing developers,

• Heating and ventilation equipment• Control and metering systems, Electricity peak-load control

systems• Air-conditioners, Heat pumps, solar water heaters

Municipal Municipalities, district heating companies, street lighting operators, public buildings operators

• Boilers for district heating as well as for public/municipal buildings

• Heat exchangers, pipes for infrastructure projects• Cogeneration units

Residential/ Retail

Builders, home owners, home owner associations, individual households

• Solar water heaters, • Solar lighting, CFL, improved cook stoves, water purifiers,

efficient refrigerators, efficient HVAC units, roof/wall insulation, Energy efficient windows

• Roof-top building integrated photovoltaic

Agriculture

Farmers, Cooperatives, Supply chains

• Biomass/biogas digesters• Drip irrigation systems• Efficient agri-machineries, storage facilities

Renewable generation

Project developers, Corporate clients/SMEs

• Wastes to energy (wood waste etc.) • Production of fuel, biogas, biodiesel, solar, hydro and wind

power

8

Pakistan is not any different from other markets …..


• Pakistan’s total energy savings potential is estimated at 418,807 TJ (11.16 MTOE), inclusive of savings and energy transformation.

• This amounts to 17.25 percent of primary energy use (FY 2011-2012).

• According to the National Energy Conservation Center (ENERCON), annual energy savings of up to 25 percent are possible in all sectors, which equates to approximately $3 billion per year.

• The most suited EE options of all sectors in terms of technological measures are co-generation, compressor, heat recovery, heat transfer, lights, meters, motors, power factor, process control measures, and maintenance of steam distribution system.

• For RE developments, concentrated solar power (CSP), photovoltaic (PV), solar water heater (SWH), and wind energy are considered to be the most feasible options on the local industrial scene.

9

SEF: Why FIs should be involved


Expanded market share through a new business line

Improved risk profile of portfolio

Positive social and

environmental impacts

• Cost efficient clients = Better performing clients

• Energy cost savings as a part of cash-flow

• Enhanced brand reputation (innovative and socially responsible FI), PR opportunities

• Innovative product – First mover advantage/differentiation

• Sell on value to customer, not pricing• Monetize existing client base- Attract quality new

clients• New marketing channels through vendor

partnerships

10

SEF: Benefits for clients


• Businesses: Reasonable pay-back period (investments recovered from energy cost savings)

• Residential: Reasonable pay-back period and the value of the property will increase

• Businesses: Cost savings + Improved Product Quality/Output Capacity = Increased Competitiveness

• Residential: Cost savings = Savings money through investing in EE measures, Improve the living quality

• Businesses: Reputation of a socially responsible company

• Residential: Be a pioneer and contribute to climate protection

11

SEF: Sectors by a FI’s departments


Corporates :• Industrial plants improvement• Renewable energy projects• Commerce / large malls, big-box store

chains• Efficient building construction

companies • Cement Production Improvements

SMEs:• New machinery: substitution with

more efficient equipment in all sectors, manufacturers of equipment used for clean energy production, etc.

• Examples: ovens, air conditioners / chillers, compressors, lighting, solar heating, etc.

Retail/Residential:• Green Buildings• Housing EE renovations• Housing Appliances Financing• Hybrid Cars Loan• Small Renewable Energy (solar

lights)

Public Finance• EE/RE in Municipalities

(street lighting, public buildings renovations)

“More profitable clients make better borrowers. In our case, sustainable banking has been good both for the SMEs that drive the local economy, and

for the bank itself.”

CEO of SME finance bank, Russia

12

SEF: How difficult is to implement for FIs?

• SEF is a step forward in working with industry sector

• SEF requires internal capacity to assess transactions

• Banks need to develop a systemic approach to SEF lending:

• integrate it into the standard product line proposition

• offer this product to the market with confidence

• SEF is often associated with significant extra resources and risks

• SEF is usually limited by lack of technical know-how in the banks


???

“It is easier for us to buy IFC services and the proven SEF methodology than create it

from scratch.”

CEO of SME finance bank, Russia

13

What IFC can do for a FI to help to reach the SEF market?


Analyze markets, evaluate existing portfolio

Understand the market and its niches, develop dedicated product, build specialized team (if volume driven)

Reach new markets, become leader of the new the industry

Grow in volume, gain market share

Credit lines and senior loans

(medium- to long- term)

Risk sharing products and

partial guarantees

Mezzanine financing and subordinated

debt

Trade guarantees

Investment Products & …tailored to the needs of diverse markets

Market development, analysis and

product development

Capacity building,

trainings for staff on all

levels

Tools and resources

Linkages with contractors/ESCos/vendors

….& Advisory Servicesdesigned for help to build a profitable climate

business

14

IFC: Global reach with local champions Since IFC introduced sustainable energy finance in 1997, it has supported more than 125 financial partners with over 135 climate smart projects in 37 countries, providing $4.4 billion in financing. Our investments are coupled with staff training, technical guidance on pipeline and product development, and marketing


Erste Bank Ukraine

2010

Banque Libano-Francaise

2012

SME Bank

2011

Prime Finance Bank

2009

Agropromcredit Bank

2009

Tatfondbank

2007

Societe GeneraleAlbania

2012

Union Bank Albania

2014

Fondi Besa mfi

2010

NOA mfi

2010

TCB Bank

USD 18 million2011

LOCKO-Bank

USD 20 million2010

Credit Bank of Moscow

USD 20 million2010

Center-Invest Bank

USD 10 million2010

NBD Bank

USD 8 million2008

MDM Bank

USD 50 million2008

URSA Bank

USD 53 million2008

Tamweelcom

USD 3 million2011

AmeriaBank

USD 15 million2010

MTBank

USD 10 million2011

Bank Respublika

USD 15 million2013

Credins bank

USD 13.3 million2012

15

IFC SEF offering: The Advisory


Diagnostics Strategy

Budget

KPIs

Champion

Product Developme

nt

Policy

Marketing

Training

Pipeline Developm

ent

Evaluation of

projects

Meeting with

clients

Closure

16


Risk positions at the level of the Bank:

Long-term credit lines; Equity; Subordinated debt; Currency swap; Trade finance

Risk positions at the level of the underlying assets:

Guarantees; Portfolio Risk Sharing; RE Mezzanine Facility.

Investment Type 1.

Investment Type 2.

Project A.

Project C.

Project B.

Portfolio of SE Projects

Financial Products

Bank Loans to SEF Projects

Local Financial

Institution

Advisory Services

FIs of any type:

Commercial banks Leasing

Companies Microfinance

Institutions NBFIs






04

18

First Turkish EE/RE leasing

In 2008, IFC provided a first loan of US$50 million to Yapi Kredi Leasing Turkey (YKL). This investment help YKL diversify its portfolio and increase its market share in very competitive market.

YKL’s objective was to target SME's and new products in EE and RE financing. The transaction marks the first time that the company has taken financing to direct to sustainable energy projects.

YKL Leasing focused to develop sustainable energy investments across all industry sectors.

Within two years, YKL EE/RE portfolio reached US$200 million of loans

03 - Examples around the world – Private FIs

19

SEF Benefits: Center-Invest Bank

Over $250 m in EE financing to over 6,300 clients

СО2 over 105,000 tones/year

Increased number of new clients and strengthened loyalty of existing clients

Reputation of the region’s champion in sustainable banking

Partnership with major international DFIs (IFC, EBRD, FMO, KfW, OeEB, EDB)

03 - Examples around the world – Private FIs

0.0

10.0

20.0

30.0

40.0

50.0

60.0

“Market differentiation and expansion into segments with high potential are key factors to increase our competitiveness. That is why areas such as energy efficiency are among our strategic priorities.”

Sergey Smirnov, Executive Board member

20

BLF Lebanon: Lebanese market leader

Assistance to BLF who position itself as a leader of “green” banking in Lebanon• Senior Level Strategy Session to identify opportunities & key

strategic considerations• Staff training on SEF to build knowledge & awareness of SEF

opportunities• In-depth industrial sector reports highlighting SEF

opportunities• Comprehensive portfolio review to segment & identify SEF

targets in existing portfolio, client visits to evaluate SEF opportunities

US$ 168 m in approved SEF projects during pilot stage

BLF apparently SEF market leader, with 90% of total environmentally-friendly loans under BdL Circular 313

03 - Examples around the world– Private FIs

21

Ceska Sporitelna: First in CE

Leading Czech bank looking for new market opportunities in 2004

IFC identified SEF potential in Czech market (10m people) of $7.3 bn/6years

Bank embraced opportunity and developed FINESA (Financing Energy Saving Applications) with IFC assistance

FINESA means:

Product with defined internal procedures Targeted marketing strategy and sales Dedicated Energy team, dealing with sustainable energy

projects centrally, supporting credit officers and branches sales people

CS now leading bank in Czech SE market


22

Credins Albania: Small Market Matters

In 2012, IFC provided €10 million in financing to Credins bank.

This loan helps the bank provide sub-loans to Albanian companies interested in investing in energy efficient technologies and renewable energy projects.

“This partnership with IFC will help us take a leadership role in combating climate change in Albania. We believe that the potential for development of sustainable energy finance in Albania is significant and aim to offer our services to companies that plan to go green.” Artan Santo, Credins Bank CEO.


23

Tamweelcom: MFI with solar SEF product

• Jordan: Tamweelcom’s borrowers needed a solar water heater loan that could be repaid in easy installments, while helping them to manage electricity bills.

• The MFI redesigned its financing product to meet their needs by aligning payments as closely as possible with actual energy savings for a maximum period of 3 years.

• With a $3 million credit line combined with advisory services for capacity building, Tamweelcom successfully launched the solar water heater product within a year, becoming the first in the market to offer a repayment plan aligned with a customer’s electricity bills.


“ “It has been a very positive experience

for Tamweelcom to enter the climate financing sector and still work with

its target market and network of lower-income clients,” said Al-Refai.,

Tamweelcom CEO

24

TSKB: Resource Efficiency Pioneer

Longer tenor financing is critical to the success of sustainable energy projects, but is still relatively scarce in Turkey.

In 2013, IFC provided a US$75 million loan to Turkiye Smai Kalkmma Bankasi (TSKB). This long-term investment (7-year) is directed to pollution abatement and energy efficiency projects in various sectors.

The Scope of the project goes beyond GHG reduction by mobilizing funding for high-impact projects that help to reduce local pollutants such as dust particles.


25

BdL “Green” Interventions (Lebanon)

Banque du Liban (Lebanese central bank)• The Central Bank controls banks’ liquidity:• by monitoring or adjusting discount rates; • by imposing on banks reserve requirements on their deposits

in LBP.• The Central Bank can also regulate banks’ credit in

terms of volume and type:• by imposing credit ceilings to limit credit risk;• by directing credits toward specific sectors or purposes

• The BdL facilitated financing investments in SEF by exempting banks from part of the required reserve requirement to finance these projects at low cost.

• BdL has helped to develop a vehicle to finance Energy Efficiency and Renewable Energy, called NEEREA (National Energy Efficiency and Renewable Energy Action).

03 - Examples around the world – Central Banks/Govts






04

27

Requirements to scale up SEF

04 - role of governments and public bodies

• Investors• Financiers

• Market can sustain after incentives have been phased out

•Equipment Manufacturers

•Service providers

•Technical Firms

• End users• Other

beneficiaries

Demand

Product/ Service to

meet demand

Financing of products

and demand fulfillment

Sustainability

Driven by enabling

frameworks

Pure Commercial

finance

Market Capacity Creation

Scaling up

financing

28

Sustainable energy finance chain


Technology ResearchTechnology

Developmentand Pilots

Scaling up and Large scale

Demonstration

Mainstream roll out

Government/ Public Funds

• Research Grants • Grants for pilots • Grants/subsidies for reduction of transaction costs, and for creating the pipeline of projects

• Risk capital/first loss funding for financing

Not required

MDBs/DFI • Selective Equity, Debt and mezzanine financing

• Equity, Debt and mezzanine financing

• Phase out engagement over time

Equity • Limited Angel investing

• Angel/Venture investing

• Private equity • Public equity markets

Debt • Not available • Limited, low leverage financing

• High risk loans with up-side

• Commercial Financing available but constrained by risk appetite and risk perceptions

• Bank and market financing easily available

29

Typical Roles for Public Finance


Type of intervention Role of public finance Rationale

Establishing the necessary regulatory framework

Grants and Technical Assistance

Frameworks are necessary to create the demandHelp price public goods : Water, energy, other resources

Financing pilot products in new/emerging technologies

Capital/interest subsidies as Grants to make project viable

Demonstration will lead to lowering of technology costs and to scale up

Establishing capacity in the market

Grants and Technical Assistance

Capacity is necessary to create a pipeline of projects for scale up

Performance based incentives

Performance based subsidies to transform market behavior

Market behavior changes lead to scale up

Blended finance : (State first loss blended with commercial funds for equity, mezzanine and debt)

Higher risk investments

Reduces risk of private financial investors leading to higher risk appetite and scaling up

Create demand and

market drivers

Support market ability

to provide solutions

Enabling financing

30

Role of Govt. I : Creation of Demand


Intervention Comments

Providing capital subsidies

Cheaper to implement and Effective in the short term to change behavior but demand drops when subsidy is phased out.

Use based subsidies

More expensive to implement but less distortive and therefore more sustainable

Tax breaks Needs to fit within the tax paying regime

Financing incentives

To enable end users to choose the desired alternative : Most efficient and least distortive

Awareness creation of benefits

Most important aspect required for all other interventions

desira

bility

31

Role of Govt.II : Incentives for manufacturers



Providing capital subsidies

Useful to get critical mass of manufacturing capacity in place and to capture environmental externalities. Better to subsidize factors of production and sale rather than production cost.

Tax breaks This is effective to help set up manufacturing and service provision capacity but is preferable at point of sale/service provision rather than installation of capacity

Financing of manufacturer and end use

Both equity and debt financing are vital for manufacture. Financing of end use helps expand and create demand to make sure the enterprise is successful


Not as critical as with end users or financiers. Need support in accessing finance effectively

32

Role of Govt. III : Enabling Financing



Policy support to enable the range of finance required

Early stage venture for new manufacturingPrivate equityDebtConsumer and end use

Subsidizing cost of capital

Useful to get the process started but can become a dependence and market may fail once the subsidy is phased out

Subsidizing risk Very critical and efficient as the FI gets more comfortable with the business, this can be phased out

Subsidizing transaction costs

Necessary and efficient as the FI builds capacity and familiarity with the market, the market grows, transaction costs drop as a % of business enabling this to be phased out


Critically important as financiers typically tend to be conservativeSpecial Example: Super-ESCo

Martin Dasek Senior Climate Financing Specialist Sustainable Energy Advisory Lead IFC, Istanbul

thank you

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