Presentation on theme: "Banking on Sustainability"— Presentation transcript:
1 Banking on Sustainability What Does it Mean for Financial Institutions?Martin Dasek)Senior Climate Financing Specialist, SEF Lead, IFCNovember 27th, 2014, Karachi
2 01 02 03 04 A little bit of definitions Presentation outline01A little bit of definitions02Business opportunities in the climate space03Examples around the world04Role of Governments and public bodies
3 What does it mean “green” for a bank? 01 – introduction and definitionsWhat does it mean “green” for a bank?Being green is fashionable today and helps to sell all products, finance are not differentCorporate identityInternationally/nationally required by laws or voluntary agreements (environmental and social standards (E&S, ESMS))Compliance with standardsPortfolios are threatened by various threads, incl. climate changeRisk managementMarkets 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 tooBusiness opportunity for further growth
4 01 02 03 04 A little bit of definitions Presentation outline01A little bit of definitions02Business opportunities in the climate space03Examples around the world04Role of Governments and public bodies
5 Sustainability - new market territories 02 - the business opportunity for financial institutionsSustainability - new market territoriesENERGY: Energy efficiency, renewable energy, storage, smart grids, energy accessTRANSPORTATION: Energy efficient components, fuels and logisticsWATER: Capture, treatment, conservation, wastewater treatment, accessAIR & ENVIRONMENT: Carbon credits, trading and offsetsBUILDINGS: Low carbon strategy, energy efficiency, sustainable materials, green buildingsMANUFACTURING: 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 02 - the business opportunity for financial institutionsFuture is happening today alreadyClimate space represents US$ billion per year opportunity globally - 70% of investment must come from private sectorRole of FIs and access to finance is going to be vital to enabling this shift in economic development in emerging marketsRenewable Energy: Global Investment Reached US$ 260 billion in 2012, with increasing share going to emerging marketsGreen 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 billionBase 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 02 - the business opportunity for financial institutions SectorPotential borrowerEnergy efficient equipment/technologyIndustrialIndustrial companies, SMEsEnergy efficient production linesWaste heat recovery devicesHeating systems upgrades, Efficient boilers and heatersFuel switching (coal-gas, coal-biomass)Electricity peak-load control systemsCogeneration unitsCommercialHousing complexes operators, maintenance companies;housing developers,Heating and ventilation equipmentControl and metering systems, Electricity peak-load control systemsAir-conditioners, Heat pumps, solar water heatersMunicipalMunicipalities, district heating companies, street lighting operators, public buildings operatorsBoilers for district heating as well as for public/municipal buildingsHeat exchangers, pipes for infrastructure projectsResidential/ RetailBuilders, home owners, home owner associations, individual householdsSolar water heaters,Solar lighting, CFL, improved cook stoves, water purifiers, efficient refrigerators, efficient HVAC units, roof/wall insulation, Energy efficient windowsRoof-top building integrated photovoltaicAgricultureFarmers, Cooperatives, Supply chainsBiomass/biogas digestersDrip irrigation systemsEfficient agri-machineries, storage facilitiesRenewable generationProject developers, Corporate clients/SMEsWastes to energy (wood waste etc.)Production of fuel, biogas, biodiesel, solar, hydro and wind power
8 Pakistan is not any different from other markets ….. 02 - the business opportunity for financial institutionsPakistan 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 percent of primary energy use (FY ).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 02 - the business opportunity for financial institutionsSEF: Why FIs should be involvedExpanded market share through a new business lineImproved risk profile of portfolioPositive social and environmental impactsCost efficient clients = Better performing clientsEnergy cost savings as a part of cash-flowEnhanced brand reputation (innovative and socially responsible FI), PR opportunitiesInnovative product – First mover advantage/differentiationSell on value to customer, not pricingMonetize existing client base- Attract quality new clientsNew marketing channels through vendor partnerships
10 SEF: Benefits for clients 02 - the business opportunity for financial institutionsSEF: Benefits for clientsBusinesses: Cost savings + Improved Product Quality/Output Capacity = Increased CompetitivenessResidential: Cost savings = Savings money through investing in EE measures, Improve the living qualityBusinesses: Reasonable pay-back period (investments recovered from energy cost savings)Residential: Reasonable pay-back period and the value of the property will increaseBusinesses: Reputation of a socially responsible companyResidential: Be a pioneer and contribute to climate protection
11 SEF: Sectors by a FI’s departments 02 - the business opportunity for financial institutionsSEF: Sectors by a FI’s departmentsCorporates :Industrial plants improvementRenewable energy projectsCommerce / large malls, big-box store chainsEfficient building construction companiesCement Production ImprovementsSMEs: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 BuildingsHousing EE renovationsHousing Appliances FinancingHybrid Cars LoanSmall Renewable Energy (solar lights)Public FinanceEE/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? 02 - the business opportunity for financial institutionsSEF: How difficult is to implement for FIs????SEF is a step forward in working with industry sectorSEF requires internal capacity to assess transactionsBanks need to develop a systemic approach to SEF lending:integrate it into the standard product line propositionoffer this product to the market with confidenceSEF is often associated with significant extra resources and risksSEF 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? 02 - the business opportunity for financial institutionsWhat IFC can do for a FI to help to reach the SEF market?Analyze markets, evaluate existing portfolioUnderstand the market and its niches, develop dedicated product, build specialized team (if volume driven)Reach new markets, become leader of the new the industryGrow in volume,gain market shareCredit lines and senior loans (medium- to long- term)Risk sharing products and partial guaranteesMezzanine financing and subordinated debtTrade guaranteesInvestment Products & …tailored to the needs of diverse marketsMarket development, analysis and product developmentCapacity building, trainings for staff on all levelsTools and resourcesLinkages with contractors/ESCos/vendors….& Advisory Servicesdesigned for help to build a profitable climate business
14 IFC: Global reach with local champions 02 - the business opportunity for financial institutionsIFC: Global reach with local championsSince IFC introduced sustainable energy finance in 1997, it has supported more than 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 marketingErste Bank Ukraine2010Banque Libano-Francaise2012SME Bank2011Prime Finance Bank2009Agropromcredit BankTatfondbank2007Societe GeneraleAlbaniaUnion Bank Albania2014Fondi Besa mfiNOA mfiTCB BankUSD 18 million2011LOCKO-BankUSD 20 million2010Credit Bank of MoscowCenter-Invest BankUSD 10 millionNBD BankUSD 8 million2008MDM BankUSD 50 millionURSA BankUSD 53 millionTamweelcomUSD 3 million2011AmeriaBankUSD 15 million2010MTBankUSD 10 millionBank Respublika2013Credins bankUSD 13.3 million2012
15 IFC SEF offering: The Advisory 02 - the business opportunity for financial institutionsIFC SEF offering: The AdvisoryPipeline DevelopmentEvaluation of projectsMeeting with clientsClosureDiagnosticsStrategyBudgetKPIsChampionProduct DevelopmentPolicyMarketingTraining
16 Investment Type 1. Investment Type 2. 02 - the business opportunity for financial institutionsInvestment Type 1.Investment Type 2.Project A.Project C.Project B.Portfolio of SE ProjectsFinancial ProductsBank Loans to SEF ProjectsLocal Financial InstitutionAdvisory ServicesRisk positions at the level of the Bank:Long-term credit lines;Equity;Subordinated debt;Currency swap;Trade financeFIs of any type:Commercial banksLeasing CompaniesMicrofinance InstitutionsNBFIsRisk positions at the level of the underlying assets:Guarantees;Portfolio Risk Sharing;RE Mezzanine Facility.
17 01 02 03 04 A little bit of definitions Presentation outline01A little bit of definitions02Business opportunities in the climate space03Examples around the world04Role of Governments and public bodies
18 First Turkish EE/RE leasing 03 - Examples around the world – Private FIsFirst Turkish EE/RE leasingIn 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
19 SEF Benefits: Center-Invest Bank 03 - Examples around the world – Private FIsSEF Benefits: Center-Invest Bank “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 memberOver $250 m in EE financing to over 6,300 clientsСО2 over 105,000 tones/yearIncreased number of new clients and strengthened loyalty of existing clientsReputation of the region’s champion in sustainable bankingPartnership with major international DFIs (IFC, EBRD, FMO, KfW, OeEB, EDB)
20 BLF Lebanon: Lebanese market leader 03 - Examples around the world– Private FIsBLF Lebanon: Lebanese market leaderAssistance to BLF who position itself as a leader of “green” banking in LebanonSenior Level Strategy Session to identify opportunities & key strategic considerationsStaff training on SEF to build knowledge & awareness of SEF opportunitiesIn-depth industrial sector reports highlighting SEF opportunitiesComprehensive portfolio review to segment & identify SEF targets in existing portfolio, client visits to evaluate SEF opportunitiesUS$ 168 m in approved SEF projects during pilot stageBLF apparently SEF market leader, with 90% of total environmentally- friendly loans under BdL Circular 313
21 Ceska Sporitelna: First in CE 03 - Examples around the world– Private FIsCeska Sporitelna: First in CELeading Czech bank looking for new market opportunities in 2004IFC identified SEF potential in Czech market (10m people) of $7.3 bn/6yearsBank embraced opportunity and developed FINESA (Financing Energy Saving Applications) with IFC assistanceFINESA means:Product with defined internal proceduresTargeted marketing strategy and salesDedicated Energy team, dealing with sustainable energy projects centrally, supporting credit officers and branches sales peopleCS now leading bank in Czech SE market
22 Credins Albania: Small Market Matters 03 - Examples around the world– Private FIsCredins Albania: Small Market MattersIn 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 03 - Examples around the world– Private FIsTamweelcom: MFI with solar SEF productJordan: 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 experiencefor 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 03 - Examples around the world– Private FIsTSKB: Resource Efficiency PioneerLonger 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) 03 - Examples around the world – Central Banks/GovtsBdL “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 purposesThe 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).
26 01 02 03 04 A little bit of definitions Presentation outline01A little bit of definitions02Business opportunities in the climate space03Examples around the world04Role of Governments and public bodies
27 Requirements to scale up SEF 04 - role of governments and public bodiesRequirements to scale up SEFInvestorsFinanciersMarket can sustain after incentives have been phased outEquipment ManufacturersService providersTechnical FirmsEnd usersOther beneficiariesDemandProduct/ Service to meet demandFinancing of products and demand fulfillmentSustainabilityDriven by enabling frameworksMarket Capacity CreationPure Commercial financeScaling up financing
28 Sustainable energy finance chain 04 - role of governments and public bodiesTechnology ResearchTechnology Development and PilotsScaling up and Large scale DemonstrationMainstream roll outSustainable energy finance chainGovernment/ Public FundsResearch GrantsGrants for pilotsGrants/subsidies for reduction of transaction costs, and for creating the pipeline of projectsRisk capital/first loss funding for financingNot requiredMDBs/DFISelective Equity, Debt and mezzanine financingEquity, Debt and mezzanine financingPhase out engagement over timeEquityLimited Angel investingAngel/Venture investingPrivate equityPublic equity marketsDebtNot availableLimited, low leverage financingHigh risk loans with up-sideCommercial Financing available but constrained by risk appetite and risk perceptionsBank and market financing easily available
29 Typical Roles for Public Finance 04 - role of governments and public bodiesTypical Roles for Public FinanceType of interventionRole of public financeRationaleEstablishing the necessary regulatory frameworkGrants and Technical AssistanceFrameworks are necessary to create the demandHelp price public goods : Water, energy, other resourcesFinancing pilot products in new/emerging technologiesCapital/interest subsidies as Grants to make project viableDemonstration will lead to lowering of technology costs and to scale upEstablishing capacity in the marketCapacity is necessary to create a pipeline of projects for scale upPerformance based incentivesPerformance based subsidies to transform market behaviorMarket behavior changes lead to scale upBlended finance : (State first loss blended with commercial funds for equity, mezzanine and debt)Higher risk investmentsReduces risk of private financial investors leading to higher risk appetite and scaling upCreate demand and market driversSupport market ability to provide solutionsEnabling financing
30 Role of Govt. I : Creation of Demand 04 - role of governments and public bodiesRole of Govt. I : Creation of DemandInterventionCommentsProviding capital subsidiesCheaper to implement and Effective in the short term to change behavior but demand drops when subsidy is phased out.Use based subsidiesMore expensive to implement but less distortive and therefore more sustainableTax breaksNeeds to fit within the tax paying regimeFinancing incentivesTo enable end users to choose the desired alternative : Most efficient and least distortiveAwareness creation of benefitsMost important aspect required for all other interventionsdesirability
31 Role of Govt.II : Incentives for manufacturers 04 - role of governments and public bodiesRole of Govt.II : Incentives for manufacturersInterventionCommentsProviding capital subsidiesUseful 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 breaksThis is effective to help set up manufacturing and service provision capacity but is preferable at point of sale/service provision rather than installation of capacityFinancing of manufacturer and end useBoth equity and debt financing are vital for manufacture. Financing of end use helps expand and create demand to make sure the enterprise is successfulAwareness creation of benefitsNot as critical as with end users or financiers. Need support in accessing finance effectively
32 Role of Govt. III : Enabling Financing 04 - role of governments and public bodiesRole of Govt. III : Enabling FinancingInterventionCommentsPolicy support to enable the range of finance requiredEarly stage venture for new manufacturingPrivate equityDebtConsumer and end useSubsidizing cost of capitalUseful to get the process started but can become a dependence and market may fail once the subsidy is phased outSubsidizing riskVery critical and efficient as the FI gets more comfortable with the business, this can be phased outSubsidizing transaction costsNecessary 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 outAwareness creation of benefitsCritically important as financiers typically tend to be conservativeSpecial Example: Super-ESCo
33 thank you Martin Dasek Senior Climate Financing Specialist Sustainable Energy Advisory LeadIFC, Istanbul