Journal of Cleaner Production 11 (2003) 611–613www.cleanerproduction.net

Introduction

Special issue on cleaner production financing

1. Introduction

Prevention is a better business that allowing inef-ficiencies to create losses. The cleaner production (CP)community knows and believes in this. Most of thesources of investment financing remain unaware, orunconvinced. While CP has made tremendous headwayin the engineering community in the last ten years,financing is still often seen as one of the main constraintsfor wider prevention practice.

There has, however, been a recent sharp increase inactivity and progress in this field. Research initiativeshave multiplied in issues related to sustainable finance,donor agencies have launched demonstration projects,and special financial mechanisms have emerged for CPinvestments in a number of countries in the last two tothree years.

Financial markets are also becoming more sensitive toissues related to sustainability, particularly environment.How companies address ‘sustainability issues’, influenceboth risks and returns. There is recent evidence that alsoinstitutional investors increasingly place financial sup-port on issues surrounding sustainability.

The 7th European Roundtable on Cleaner Production,held in Lund 2-4 May 2001, dedicated a one-day work-shop to financing issues. The workshop consisted of apanel with bankers followed by a series of sessionswhich discussed issues ranging from past experience totraining initiatives, funding schemes, accounting prac-tices and ethical investments. This special issue of theJournal of Cleaner Production presents updated versionsof some of the key papers submitted to that workshop. Theintegration of preventive approaches and efficient resourcemanagement is a very broad agenda and the issues coveredby these papers are by no means exhaustive. Several otherelements will be raised in the conclusions.

The first article by Ari Huhtala from UNEP/DTIE‘Promoting financing of cleaner production invest-ments – UNEP experience’ reflects on the lessonslearned in implementing a four-year project in fivedeveloping countries in Africa, Asia and Central Amer-ica, and conclusions and recommendations reached onfinancing issues at the 6th International High-Level Sem-

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inar on Cleaner Production, held in Montreal, 16-17October 2000. It then identifies the key challenges forthe near future as seen in 2001, thereby setting the stagefor further dialogue.

This document is complemented by an article by Drs.Staniskis and Stasiskiene from Apini, Lithuania, onexperience with CP financing demonstration projects inLithuania, Vietnam and Zimbabwe. The article high-lights the importance of building national capacity todeliver training, targeted credit schemes, and a mix ofpolitical and industry based responses. In concludes thatthe environmental performance measured through theadoption of CP measures can be regarded as an indicatorof business health by the financial community.

Developing countries have specific constraints andneeds with regard to financing CP investments. Experi-ence gained in Guatemala and Zimbabwe are analysedin an article by Elena Ciccozzi from UNEP/DTIE sup-ported by UNEP National Project Coordinators Ana Vic-toria Rodriguez and Rosie Chekenya. The article pro-vides examples of the economic climate, political andlegal environment, status of financial systems, availableskills at enterprises, as well as attitudes, beliefs andvalues of waste. The importance of awareness raising infinancial institutions is particularly emphasised.

Various approaches to CP funding are being tried out.A number of revolving funds have been established andthe environment funds of several countries have beenpartly tailored to meet the increasing demand for CPinvestments. A series of briefs from four multilateralfinance institutions on their approach to and experiencein promoting CP is provided. This gives a snapshot ofselected banks’ practices, but can in no way cover theentire spectrum of initiatives already in place. The exten-sive article from the Asian Development Bank summar-ises interesting lessons learned and conclusions, manyof which apply to other regions as well. The ADB is amajor promoter of CP in the region, and their extensiveexperience has shown that while national-level policyreform and CP integration remain vitally important, it islocal government that is the real ‘paying customer’ forCP and that has the greatest capacity to promote it. ADBwill use its capacities to help create positive incentivesthat reward CP behaviour. The greatest challenge will beinfluencing new investment, particularly among SMEs.

The paper from the European Bank for Reconstruction

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and Development (EBRD) describes study and pilottechnical assistance project in Poland and mixed resultswith financial intermediaries. The short report from thefield by the German development bank Kreditanstalt furWiederaufbau (KfW) provides examples of how supportfor CP is included in their SME support programmes.KfW observes that many improvements in companies donot need investment but rather an improved managementapproach (which CP can represent). The last article by adevelopment bank, the Nordic Environment Finance Cor-poration (NEFCO) provides a financier’s perspective tothe revolving fund described in the case study on Lithu-ania above. NEFCO has been running a facility forfinancing CP investments in the Baltic States and North-East Russia which owes at least part of its success torelated training activities and partnerships with well func-tioning advisory services which assist enterprises in pre-paring investment project proposals and loan applications.

The perspective of the private banking sector is pro-vided in the short report from the field by Paul Clements-Hunt, Coordinator of the UNEP Finance Initiatives. Thearticle lists a number of considerations of particular rel-evance to commercial financial institutions and identifiestwo fundamental steps that the CP community mightachieve to secure more favourable financing opport-unities: firstly, more effectively build CP language intobusiness mainstream, and secondly, engage in a moretargeted process of international lobbying to promote CPas ‘essential business practice’ which forms the foun-dation stone for a responsible company’s sustainabilitygovernance approach.

Energy efficiency is highlighted as a particularly rel-evant element in promoting CP in the commercial fin-ancial sector. Energy Service Companies (ESCOs) canalso play a role in promoting CP investment financing.The article by RISØ in Denmark identifies barriers, andoutlines some possible solutions. A successful ESCO inthe Republic of Korea provides an example of how it isnot sufficient to overcome the financing barrier, but alsoto lift the institutional barrier for energy efficiencyinvestment. In this regard, the role of government as amarket creator as well as a rule setter is emphasised.

How can company leader respond? The increasinginternalisation of environmental risk into corporateaccounting will allow proactive companies to benefitfrom economic, ecological and social changes. At thesame time, it will reduce the risk of unpleasant surprisesfor their shareholders by managing environmental andsocial challenges in a transparent way. The article by Dr.Christine Jasch from IOW, Austria, describes the corefocus of EMA as assessment of total environmentalexpenditure on emission treatment, disposal, environ-mental protection and management. In addition, thematerial purchase value of all non-product output and itsproduction can be added. This total sum often providesa frightening picture of total annual costs of inefficiency

and gets companies to improve their information systemsand material efficiency options, which is the goal of CP.

One of the main ways to bridge the gap betweendemand for CP investment funds by companies and sup-ply by financing institutions is capacity building. In anarticle on human resource development initiatives AriHuhtala from UNEP/DTIE, Dr. Jan Jaap Bouma fromErasmus University, Dr. Deborah Savage from TellusInstitute and Martin Bennett from Gloucester BusinessSchool, University of Gloucester describe tools andinstruments which have been designed for this purpose.The article also discusses four different strategic man-agement approaches which banks can take towards sus-tainability. This includes examples of defensive, pre-ventative, offensive and finally sustainable banking.

The last article of this special issue is authored byAnastasia O’Rourke. She addresses socially responsibleinvestment focussing on ethical products with potentialto influence many stakeholders. Is the message and tech-niques of ethical investment capable of effectivelyinfluencing corporations towards more sustainable pat-terns of production and consumption, and is it consistentwith the principles of CP? The paper gives an overviewof some of the definitions of ‘ethical investment’ and thescale of activities under this umbrella term, then exam-ines screening methods and their application, and finallyproposes a reflexive model of corporate and finance sec-tor learning based on the screen.

2. Conclusions

An analysis of these articles provides the followinghighlights and issues which can guide the various stake-holders in the years to come:

New language, tools and instruments need to be intro-duced to mainstream the preventive strategies into theinvestment decision making process.

CP must be recognised and promoted as behaviour,not a technical solution. CP requires thinking about thelife cycle of consumption, production and distribution,and using the results of the analysis in design and oper-ation. This behaviour of looking beyond the immediatenecessities of the project must be promoted as anelement of good management, risk reduction, socialresponsibility and competitive advantage.

CP requires thinking about the life cycle assessmentof consumption, production and distribution, using theresults of the analysis in design and operation. Thisbehaviour in companies looking beyond the immediatenecessities of a project must be promoted as an elementof good management, risk reduction, social responsi-bility and competitive advantage. The challenge aheadis to create added value by integrating sustainability intothe strategic and management processes of a company.

Demonstrate that CP investments can strengthen ban-kers’ clients’ fi nancial situation and reduce risk of loan

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default caused by generally low profitability or by fineson non-compliance. In the absence of collateral, thebanks should focus on the cash flow implications of aproject to make it attractive to financial institutions.

For asset managers, the process of discussing whatsustainability is to different members of society and howto measure it is an important step in the process of under-standing the progress we are making. An understandingof the economic merits of preventative approaches is stilllimited. A holistic approach to investing can prevent thedamages caused by unsustainable practices. Trans-parency is a pre-condition to sustainability; without it,there can be no assessment of sustainability. The marketfor environmental and sustainable investment can be animportant driver for sustainable development as a whole.

There is a need for increased emphasis on costing andon environmental management accounting as tools to pro-mote CP and improved cash generating capacity atenterprise level. ‘What you can measure, you can manage’ .Internal cost management is a key prerequisite for the pro-per assessment of CP projects also by financial institutions.

Government commitment is essential in creating amarket reality that will interest financial institutions inpreventive approaches. Stable macroeconomic con-ditions and policy measures such as effective insti-tutional frameworks, removal of trade and investmentbarriers, tax-treatment, loan guarantees, realistic pricingof utilities and efficient enforcement of environmentalregulations, are all conducive to healthy sustainableinvestment patterns. Market-based policies need to beintegrated across sectors, at national and local levels.

A basic capacity level is necessary at the country,industry and company level to ensure the absorption ofmeasures and instruments launched to promote CPinvestments. Not all countries or target groups are equ-ally likely to benefit from such initiatives.

Although regular commercial sources should be themain source of financing for new and retrofit CP invest-ments, revolving funds, energy efficiency windows, loanguarantee schemes for SMEs and other innovativeschemes have proven useful in jump-starting the processand introducing the concept to banks and industries,particularly in developing countries and economies intransition. Demand varies considerably from one regionto another and responses need to be tailored to localneeds. New schemes need to be designed in a mannerthat does not distort market mechanisms and should begeared, to the extent possible, towards permanent changein financial institutions’ behaviour in a specific market.Even when subsidised financing is required at the outset,commercial banks can play a role, for isntance in provid-ing their expertise in screening and assessing proposals.

Retrofitting factories will not be sufficient in the longrun. The greatest challenge will be influencing newinvestment, particularly among SMEs, to incorporate CPprinciples. New approaches must be developed to find

and work with intervention points so investors anddesigners can learn about CP methods and resources, andrewarded for their positive efforts to incorporate CP.

Well functioning advisory services are needed toassist companies in preparing project proposals and loanapplications, which can also be of great value to finan-ciers in securing solid baselines, supervising projectimplementation and monitoring project results. CPCentres should focus on catalysing behaviour change inpolicy and investment decision makers.

Small and medium enterprises (SMEs) play a crucialrole in the industrialisation of most developing countries.SMEs that are actively pursuing CP have unusually strongand visionary management that pays attention to allaspects of production. These are good indicators forefuture business performance and should be promoted tofinancial institutions as such. Special measures should beencouraged both by national ad local governments and byindustry to integrate CP in the supply chain decisions forSMEs. Multinational corporations can play an importantrole in this. In the same light, more effort should be putinto building a group of public and private procurementprofessional conversant with CP and eco-efficiency.

Finally, in putting the above into a functional contextwe should recall a number of basic facts concerning cleanerproduction. Commonly held misconceptions have oftenprevented the adoption of useful measures in the past:

First – Cleaner production is frequently an investmentwith a return at the end. Spending money on repairs oron environment control is a capital cost with no return.This makes CP part of the development agenda, not anitem of overhead.Second – Prevention of loss – whether materials, pro-ducts or money – is a matter for mainstream businessmanagers, including financial controllers. Cleaner pro-duction is a loss prevention approach which often justi-fies the extra expenditure by the increased productivityand business security it creates.Third – Cleaner production has an eye on long-termprofitability. Current fiscal policy is often needlesslyshort-term. CP financing is trying to overcome this bar-rier. Some new CP financing approaches have beendesigned to overcome this barrier, applied and found tobe successful.Fourth – Cleaner production is strategy that requireschange of attitude and behaviour to be broadly spread.It cuts across the entire spectrum of stakeholders fromproduction engineers to accountants, financial analystsand managers, government policy makers and academia.

A. Huhtala,Project Manager, Cleaner Production Financing

UNEP/DTIE, 39-43 quai Andre Citroen, 75739 Cedex15, France

E-mail address: ari.huhtala@unep.fr