1. Banking on Sustainability
What Does it Mean for Financial Institutions?
Martin Dasek)
Senior Climate Financing Specialist, SEF Lead, IFC
November 27th, 2014, Karachi

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

3. What does it mean “green” for a bank?
01 – introduction and definitions
What does it mean “green” for a bank?
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. 01 02 03 04 A little bit of definitions
Presentation outline 01
A little bit of definitions 02
Business opportunities in the climate space 03
Examples around the world 04
Role of Governments and public bodies

5. Sustainability - new market territories
02 - the business opportunity for financial institutions
Sustainability - new market territories
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
02 - the business opportunity for financial institutions
Future is happening today already
Climate space represents US$ 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. 02 - the business opportunity for financial institutions
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
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 …..
02 - the business opportunity for financial institutions
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 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 institutions
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
02 - the business opportunity for financial institutions
SEF: Benefits for clients
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: Reasonable pay-back period (investments recovered from energy cost savings)
Residential: Reasonable pay-back period and the value of the property will increase
Businesses: Reputation of a socially responsible company
Residential: Be a pioneer and contribute to climate protection

11. SEF: Sectors by a FI’s departments
02 - the business opportunity for financial institutions
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?
02 - the business opportunity for financial institutions
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?
02 - the business opportunity for financial institutions
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 Services
designed for help to build a profitable climate business

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

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

16. Investment Type 1. Investment Type 2.
02 - the business opportunity for financial institutions
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
Risk positions at the level of the Bank:
Long-term credit lines;
Equity;
Subordinated debt;
Currency swap;
Trade finance
FIs of any type:
Commercial banks
Leasing Companies
Microfinance Institutions
NBFIs
Risk 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 outline 01
A little bit of definitions 02
Business opportunities in the climate space 03
Examples around the world 04
Role of Governments and public bodies

18. First Turkish EE/RE leasing
03 - Examples around the world – Private FIs
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

19. SEF Benefits: Center-Invest Bank
03 - Examples around the world – Private FIs
SEF 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 member
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)

20. BLF Lebanon: Lebanese market leader
03 - Examples around the world– Private FIs
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

21. Ceska Sporitelna: First in CE
03 - Examples around the world– Private FIs
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
03 - Examples around the world– Private FIs
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
03 - Examples around the world– Private FIs
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
03 - Examples around the world– Private FIs
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)
03 - Examples around the world – Central Banks/Govts
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).

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

27. Requirements to scale up SEF
04 - role of governments and public bodies
Requirements to scale up SEF
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
Market Capacity Creation
Pure Commercial finance
Scaling up financing

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
Sustainable energy finance chain
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
04 - role of governments and public bodies
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 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
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
04 - role of governments and public bodies
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
desirability

31. Role of Govt.II : Incentives for manufacturers
04 - role of governments and public bodies
Role of Govt.II : Incentives for manufacturers
Intervention
Comments
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
Awareness creation of benefits
Not 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 bodies
Role of Govt. III : Enabling Financing
Intervention
Comments
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 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
Awareness creation of benefits
Critically important as financiers typically tend to be conservative
Special Example: Super-ESCo

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