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BANKING ON SUSTAINABILITY WHAT DOES IT MEAN FOR FINANCIAL INSTITUTIONS? Martin Dasek ) Senior Climate Financing Specialist, SEF Lead, IFC November 27 th,

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Presentation on theme: "BANKING ON SUSTAINABILITY WHAT DOES IT MEAN FOR FINANCIAL INSTITUTIONS? Martin Dasek ) Senior Climate Financing Specialist, SEF Lead, IFC November 27 th,"— Presentation transcript:

1 BANKING ON SUSTAINABILITY WHAT DOES IT MEAN FOR FINANCIAL INSTITUTIONS? Martin Dasek ) Senior Climate Financing Specialist, SEF Lead, IFC November 27 th, 2014, Karachi

2 A little bit of definitions 01 Presentation outline Business opportunities in the climate space 02 Role of Governments and public bodies 03 Examples around the world 04

3 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

4 A little bit of definitions 01 Presentation outline Business opportunities in the climate space 02 Role of Governments and public bodies 03 Examples around the world 04

5 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 6 Future is happening today already 02 - the business opportunity for financial institutions 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 7 02 - the business opportunity for financial institutions SectorPotential borrowerEnergy 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 8 Pakistan is not any different from other markets ….. 02 - the business opportunity for financial institutions 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 9 SEF: Why FIs should be involved 02 - the business opportunity for financial institutions 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 10 SEF: Benefits for clients 02 - the business opportunity for financial institutions 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 11 SEF: Sectors by a FI’s departments 02 - the business opportunity for financial institutions 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 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 02 - the business opportunity for financial institutions ??? “ 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 13 What IFC can do for a FI to help to reach the SEF market? 02 - the business opportunity for financial institutions Investment Products & … tailored to the needs of diverse markets ….& Advisory Services designed for help to build a profitable climate business

14 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 02 - the business opportunity for financial institutions Erste Bank Ukraine 2010 Banque Libano- Francaise 2012 SME Bank 2011 Prime Finance Bank 2009 Agropromcre dit Bank 2009 Tatfondbank 2007 Societe Generale Albania 2012 Union Bank Albania 2014 Fondi Besa mfi 2010 NOA mfi 2010 TCB Bank USD 18 million 2011 LOCKO-Bank USD 20 million 2010 Credit Bank of Moscow USD 20 million 2010 Center-Invest Bank USD 10 million 2010 NBD Bank USD 8 million 2008 MDM Bank USD 50 million 2008 URSA Bank USD 53 million 2008 Tamweelcom USD 3 million 2011 AmeriaBank USD 15 million 2010 MTBank USD 10 million 2011 Bank Respublika USD 15 million 2013 Credins bank USD 13.3 million 2012

15 15 IFC SEF offering: The Advisory 02 - the business opportunity for financial institutions Diagnostics Strategy BudgetKPIsChampion Product Development Policy Marketing Training Pipeline Development Evaluation of projects Meeting with clients Closure

16 16 02 - the business opportunity for financial institutions 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

17 A little bit of definitions 01 Presentation outline Business opportunities in the climate space 02 Role of Governments and public bodies 03 Examples around the world 04

18 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 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 “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 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 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 03 - Examples around the world– Private FIs

22 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. 03 - Examples around the world– Private FIs

23 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. 03 - Examples around the world– Private FIs “ “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 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. 03 - Examples around the world– Private FIs

25 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

26 A little bit of definitions 01 Presentation outline Business opportunities in the climate space 02 Role of Governments and public bodies 03 Examples around the world 04

27 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 28 Sustainable energy finance chain 04 - role of governments and public bodies Technology Research Technology Development and 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 Grants/subsidies for reduction of transaction costs, and for creating the pipeline of projects Risk capital/first loss funding for financing Risk capital/first loss funding for financing Not required MDBs/DFI Selective Equity, Debt and mezzanine financing Equity, Debt and mezzanine financing Equity, Debt and mezzanine financing Phase out engagement over time Equity Limited Angel investing Angel/Venture investing Private equity 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 Commercial Financing available but constrained by risk appetite and risk perceptions Bank and market financing easily available

29 29 Typical Roles for Public Finance 04 - role of governments and public bodies Type of interventionRole of public financeRationale Establishing the necessary regulatory framework Grants and Technical Assistance Frameworks are necessary to create the demand Help 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 investmentsReduces 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 30 Role of Govt. I : Creation of Demand 04 - role of governments and public bodies InterventionComments 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 breaksNeeds 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 desirability

31 31 Role of Govt.II : Incentives for manufacturers 04 - role of governments and public bodies InterventionComments 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 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 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 Awareness creation of benefits Not as critical as with end users or financiers. Need support in accessing finance effectively

32 32 Role of Govt. III : Enabling Financing 04 - role of governments and public bodies InterventionComments Policy support to enable the range of finance required Early stage venture for new manufacturing Private equity Debt Consumer 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 riskVery 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 Awareness creation of benefits Critically important as financiers typically tend to be conservative Special Example: Super-ESCo

33 ​ Martin Dasek ​ Senior Climate Financing Specialist ​ Sustainable Energy Advisory Lead ​ IFC, Istanbul thank you


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