Promoting financing of cleaner production investments—UNEP experience

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<ul><li><p>Journal of Cleaner Production 11 (2003)</p><p>Promoting financing of cleaner production investmentsUNEPexperienceA. Huhtala </p><p>Cleaner Production Financing UNEP/DTIE, 3943 quai Andre Citroen, F-75739 Paris cedex 15, France</p><p>Received 28 August 2001; accepted 12 August 2002</p><p>Abstract</p><p>The article provides a summary of a recently completed study by UNEP/DTIE on past investment practices in cleaner production.It also provides a brief on the conclusions and recommendations of the debate that culminated at the parallel session on financingissues at the 6th International High-Level Seminar on CP, held in Montreal in October 2000. The article then extracts the mostrelevant and topical issues from these papers and outlines the main challenges ahead as perceived in 2001. 2002 Elsevier Science Ltd. All rights reserved.</p><p>Keywords: Investment financing; Capital budgeting; Profitability assessment</p><p>1. Introduction</p><p>Is an end-of-pipe solution an investment with econ-omic return or an unnecessary expense? Is the actual costof waste related to an investment project reflected in thecalculations or is it hidden in company overheadaccounts? Are preventative criteria embedded in theenvironmental impact assessments required by lenders?</p><p>These are the types of questions that dominate the cur-rent discussion on issues related to financing cleaner pro-duction investments. To address these issues, UNEPstarted implementing project Strategies and mechanismsfor promoting cleaner production investments indeveloping countries in 1999 with financial supportfrom Norway. The project aims at understanding reasonsfor constraints faced by enterprises choosing the CPstrategy in securing external funds for investments andat developing instruments to alleviate those constraints.In addition to global activities, the project has extensivefield activities in five countries in three regions.</p><p>This article summarises some of the outcomes and les-sons learned in implementing the project and in recentfora where this issue has been debated. It then outlinesthe main issues dominating current global dialogue on</p><p> Tel.: +33-1-4437-1431; fax: +33-1-4437-1474.E-mail address: (A. Huhtala).</p><p>0959-6526/03/$ - see front matter 2002 Elsevier Science Ltd. All rights reserved.doi:10.1016/S0959-6526(02)00108-7</p><p>cleaner production financing and the key challenges forthe immediate future.</p><p>2. Study on past investment practices</p><p>A study on past investment practices was conductedin eight countries and among global financial institutionsin 1999 and early 2000. The countries studied includethe five pilot countries of the project: Guatemala, Nicara-gua, Tanzania, Vietnam and Zimbabwe, and three othersto allow for comparison: India, Lithuania and Mexico.A full report of the study was published in November2000 [1].</p><p>The overarching conclusions of the study, applicableto all countries, can be grouped under three main head-ings [1: pp. 8790]:</p><p>2.1. Language</p><p>The level of response to the global survey was exceed-ingly low. Language for cleaner production has notbeen embedded in the financial services industry in thesame way as environmental management. There is alack of clear understanding of the CP concept and mis-understandings or misinterpretations regarding its pur-pose. This language barrier was also evidenced at thenational level where there were clear differences in the</p></li><li><p>616 A. Huhtala / Journal of Cleaner Production 11 (2003) 615618</p><p>boundary conditions for CP investment descriptions.The flexibility of interpretation is to be encouraged, itpromotes innovation, extends the boundaries of environ-mental management to sustainable development policiesand practices, and engages a wider level of societal inputthan would otherwise be the case.</p><p>2.2. Time scales</p><p>The process of initiating a CP assessment of a pro-duction process or potential design change is generallyquite swift. Ensuing recommendations requiring littlecapital investment are normally implemented quickly.However, in cases where the CP concept is integratedinto the capital budgeting process, a much longer timeframe is required. Empirical evidence confirms that theperiod between loan agreement and disbursement is asignificant barrier.</p><p>2.3. Size of investments</p><p>The danger is that where the CP component of aninvestment is justified separately, it is seen as anadditional rather than an integral part of the project. Thishas the consequence of isolating CP investment as ahybrid rather than a mainstream embedded issue. Clearlybest results can be achieved, if the process changesincorporating CP investment is valued as a whole.</p><p>In addition, each of the individual country sections ofthe study report incorporates national conclusions, basedon the CP project analysis and financial institutionsreview, together with relevant recommendations. In thefollowing, some interesting findings relevant to one orseveral of the studied countries is provided.</p><p> In many developing countries bank loans are con-sidered unattractive due to high interest rates andunattractive terms of loans. Most companies requirelow interest, long term loans for environmental pro-jects. Furthermore, the procedure for borrowingmoney from commercial banks is often consideredcomplicated and costly.</p><p> In many banks the due diligence process considersmainly the financial aspect of loan applications with-out paying much heed to technical ones. However,in some countries environmental considerations andsustainable development are gradually beginning tobe translated into financial markets. Although manyfinancial institutions are familiar with environmentalopportunities, environmental investments remainsmall. Forthcoming environmental funding pro-grammes (such as the World Bank Carbon Fund) areseen as new opportunities.</p><p> Current efforts in promoting and implementing CPmostly concentrate on developing and adapting tech-nology to existing production plants. In the future, the</p><p>focus will eventually involve technological leaps ortechnique transfer. This will require a shift to funda-mental changes in the production plant, compositionof raw materials and intermediary products, productdesign, etc. The size and magnitude of the CP projectswill begin to reflect the change that is taking placeduring this transition. Consequently, this will havesignificant implications to the financing requirementsfor industry.</p><p> So far, government policies have focused mainly onthe tools for enforcing and extending compliance. Thechallenge for the governments will be to create aframework that provides incentives for companies tomove beyond compliance and to take up CP as anefficiency measure.</p><p> Policies introduced in some countries have high-lighted the importance of favouring the adoption ofenvironmental technologies with tax breaks, forexample, on the importation and use of contami-nation-control equipment. Equally, the establishmentof a similar policy focusing predominately on CPtechnologies and techniques could highlight theadvantages over end-of-pipe.</p><p> The ability to purchase appropriate machinery andequipment to support the CP concept has proven dif-ficult for businesses.</p><p> In some countries, the greatest potential for CP is theinflow of foreign direct investment (FDI) which canstimulate further new investment through downstreamor upstream production. In this sense FDI can contrib-ute to capital formation and job creation.</p><p>This study has highlighted some key recommendationsfor the adoption of cleaner production investmentsworld-wide. These include:</p><p> The need for governments to signal change withregard to national strategies that embrace cleaner pro-duction</p><p> The need for industry to take up the challenge of cre-ating an on-going demand for cleaner productionmeasures that will spur continued progress</p><p> The need for educationalists to integrate such thinkinginto the formal education programme</p><p> The need for the financial services sector to identifycleaner production as an investment opportunitythrough financial innovation.</p><p>In doing so, the authors of the study believe that thelong-term goal will be to pursue the introduction of cle-aner production by every industry as a way of triggeringa world-wide transformation of industrial practice andphilosophy.</p></li><li><p>617A. Huhtala / Journal of Cleaner Production 11 (2003) 615618</p><p>3. Sixth International High-Level Seminar onCleaner Production (CP6)</p><p>During the CP6, held in Montreal, Canada, 1617October 2000, a parallel session on financing issues wasorganised. The discussion was based on a backgroundpaper prepared by UNEP/DTIE [2] and panelists fromgovernment agencies in Tanzania and Thailand, theWorld Bank, CAF, Rabobank and KPMG presented theirown views. The panel drew generally very similar con-clusions as are outlined above in Chapter 3. The panelmade the following recommendations [3]:</p><p> CP should be embedded in government policies toencourage commercially competitive CP investmentsand to discourage perverse subsidies.</p><p> Accounting practices in enterprises should beimproved to reflect more accurately the actual cost ofwaste management and external environmental costs.</p><p> Concerted efforts are needed to strengthen thecapacity of financial institutions, business schools,academia and the media to understand the benefits ofpreventive approaches.</p><p> Enterprises, particularly SMEs, need to be trained toprepare creditworthy investment proposals.</p><p> Revolving funds and other targeted investment facili-ties should be encouraged to jump-start theimplementation of bankable CP investments parti-cularly in developing countries.</p><p>4. Challenges ahead</p><p>As can be concluded from the above summary, theanalysis of constraints in cleaner production financinghas evolved considerably in recent months and focus onspecific issues is emerging. The main challenges aheadcan be summarised as follows:</p><p> The number of stakeholders in activities related tothe promotion of CP investment financing goes wellbeyond those that are customarily linked to the dia-logue on CP proper. This should reflect in more activeparticipation at CP roundtables of financial insti-tutions and academia with curricula on financialanalysis, business planning, accounting and engineer-ing. An example of this expansion of CP to newgroups of stakeholders is the interest shown by privatebanks to the presentation made on CP financing at theUNEP Finance Initiatives Annual InternationalRoundtable in Frankfurt 1617 November 2000 andsubsequent requests by bankers for training onimproved investment analysis tools.</p><p> Need to develop a definition of a CP investment. Thiswould address the issue of language which has beenidentified by the study on past investment practicesand the CP6 parallel session as a key constraint. Some</p><p>proposals were presented in the UNEP/DTIE back-ground paper to CP6. This debate needs be pursuedfurther.</p><p> Knowing the costs of processes is vital for estab-lishing what we might save by doing something in adifferent way. What you can measure, you can man-age. CP needs to be mainstreamed into the due dili-gence process for preparing and assessing investmentproposals. Within the framework of work carried outby the United Nations Division for Sustainable Devel-opment (UN-DESA), a process is currently underwayto improve the role of government in promotingenvironmental management accounting (EMA).Partly the same group of international experts hasdesigned training programmes for the UNEP/DTIEproject on CP financing for field implementation. Sev-eral initiatives are being launched with a view to pro-moting wider use and greater harmony in the account-ing practices with a CP bias. Improved accountingpractices can improve the likelihood of finding fund-ing for CP investment proposals, particularly if theyresult in increased cash generating ability of the com-pany in question.</p><p> The need for training and capacity building hasclearly emerged as an important element in the abovesummaries. Based on field analysis of training needsand a review of available global expertise,UNEP/DTIE has embarked on a process of designingfour distinct training programmes for large-scaleimplementation in the five pilot countries of the CPfinancing project. The objectives and contents of theprogrammes are presented in a separate article onhuman resource development initiatives.</p><p> The role of financial institutions is naturally crucial.Some have established revolving funds and specialcredit lines for CP investments, with varying results.Some others are beginning to include CP into theirtraining of financial intermediaries. Some others donot pay attention to CP as such, but have a more gen-eral environmental focus. Banks should be brought tothe centre of the action by making them hosts offuture CP programmes, giving them first-hand infor-mation about the profitability of CP investments.More generally, they will experience how CP invest-ments can strengthen their clients financial situationand reduce the risk of loan default caused by gener-ally bad profitability or by fines on non-compliance.</p><p> Governments have a key role in creating a policy andregulatory environment conducive to the adoption ofpreventive strategies in business. The principal meansto trigger a commercial reality likely to interest fin-ancial institutions in preventive approaches wouldappear to lie with the government, either through tax-treatment or through the implementation and enforce-ment of in-country regulations on emissions and dis-charges.</p></li><li><p>618 A. Huhtala / Journal of Cleaner Production 11 (2003) 615618</p><p>References</p><p>[1] Financing cleaner productionStudy on past investments prac-tices. United Nations Environment Programme, Division of Tech-nology, Industry and Economics (UNEP/DTIE) 2000. ISBN: 92-807-1951-3</p><p>[2] How to finance cleaner production? Background paper by AriHuhtala, UNEP/DTIE for a parallel session at the 6th InternationalHigh-Level Seminar on Cleaner Production, Montreal, Canada16 October 2000</p><p>[3] Industry &amp; Environment 2001;24(1/2), UNEP/DTIE.</p><p>Promoting financing of cleaner production investments-UNEP experienceIntroductionStudy on past investment practicesLanguageTime scalesSize of investments</p><p>Sixth International High-Level Seminar on Cleaner Production (CP6)Challenges aheadReferences</p></li></ul>


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