Photo: TMimages PDX

Green Investment Banks are key to financing Paris

16/12/2016

An important report launched at Marrakech was a study by the Natural Resources Defense Council’s Center for Market Innovation (together with Climate Finance Advisors and Coalition for Green Capital) on Green and Resilience Banks and their role in scaling up climate finance in emerging markets.

NDCI.global spoke to the Center’s Director of Strategy and Finance, Douglass Sims, on the report and its wider work on promoting Green Investment Banks (GIBs). We began by asking Mr. Sims about the Natural Resources Defense Council itself.

Douglass D Sims, Director of Strategy and Finance Center for Market Innovation

Can you say a bit about the history of the NRDC?

NRDC is a US-based not-for-profit that partners with businesses, elected leaders, and community groups in 16 thematic or geographical programmes that straddle a spectrum from advocacy and litigation to innovations in commerce and finance.

It has been around since the early 1970’s. It was founded by partners from a number of major law firms that cared about the environment, the idea being to create the first public interest law firm for the environment that could help strengthen the legal framework and bring suits to enforce the laws. NRDC was instrumental in the landmark US environmental legislation like the Clean Air Act and Clean Water Act and has been a party to many famous cases.

Right away, though, it broadened out into wider advocacy and thought leadership, and NRDC has been a protagonist in major initiatives such as the Clean Power Plan, which is a fundamental element of the USA’s INDC for Paris.

Currently, we have over 500 advocates working on all of the key environmental issues from many different angles.  We have offices around the US and a large operation in Beijing. We are active in the international climate space and have a growing India programme. We are privately funded by major foundations, ‘high net worth’ individuals, and 2.4 million member activists.

“Our aim is to accelerate the adoption of the more resilient, inclusive, and efficient investment models that we need to allow people to thrive, supported by a healthy base of natural resources.”

And what’s the background to the creation of the Center for Market Innovation?

The Center was established and we started to work on market innovations about a decade ago, when it became clear that policy alone – for example clean energy incentives – wouldn’t create the necessary pace of change. We realised that we needed to develop products and structures that could channel finance in effective ways.  So NRDC recruited people with private sector experience in finance and investment to build out the Center or CMI, as we call it.

CMI’s objective is to accelerate the shift to a greener, more prosperous economy that benefits everyone, through new approaches to finance and investment that offer strong profit potential and increased opportunity for people of all income levels. Our experts collaborate with private- and public-sector leaders to accelerate the adoption of the more resilient, inclusive, and efficient investment models that we need to allow people to thrive, supported by a healthy base of natural resources. We do this by piloting strategies and taking them to scale using demonstration projects and financing tools that help boost profits while making markets greener and more accessible.

In that context, we saw pretty early on that specialised financing vehicles would be needed to get private investment flowing into clean energy. NRDC had done a ton of work on different kinds of incentive programmes, which were not always successful and never sustainable over the long term. We saw that green banks would be a key part of creating these specialised structures , and we started work on them at the federal level in 2010. That effort stalled, though, for various reasons and we shifted our focus to state-level green banks in New York and California.

Do you have any thematic focus?

Currently, our work focuses on getting low carbon and resilient infrastructure designed, financed, built, operated and maintained for a world that needs clean, green and inclusive growth. We call this general concept High Road Infrastructure – we have a paper that ties it all together  –  Green banks, green bonds, innovative public-private partnerships and fulsome infrastructure standards that ensure that projects are bankable, viable and beneficial from an environmental and social perspective are our strategic priorities.

“We have consistently advocated for the United States and other developed nations to provide international climate finance.”

Where did your involvement on the international scene start and where are you mainly working?

NRDC has been involved in international issues ever since its inception, mainly on the advocacy and environmental protection side.  We have consistently advocated for the United States and other developed nations to provide international climate finance. This includes funds for mitigation and adaptation projects around the world – to protect the most vulnerable communities and speed the deployment of clean energy technologies. In some cases, this includes work in country consulting with governments on how to direct more finance into these efforts, how to shift funding out of subsidies for fossil fuels, and advocating that the multilateral development banks reconsider the substantial funding they provide to fossil fuel projects in developing nations.

The Center for Market Innovations moved into international field about four or five years ago.  My own background is in international project finance, as a commercial lawyer with Allen & Overy.

At the moment, we are developing the Green Bank Network (GBN) – a membership organization consisting of the Connecticut Green Bank, GreenTech Malaysia, Japan’s Green Finance Organization, Australia’s Clean Energy Finance Corporation, NY Green Bank, the UK Green Investment Bank, NRDC and the Coalition for Green Capital. The GBN aims to foster collaboration and exchange of best practices among existing green banks and to provide support for those jurisdictions looking to explore the model.

We are also working on the ground in India, where there is an NRDC team. The work there has been market and legal research on the opportunities for a green bank of India and in May we convened a high-level meeting on green banks and green bonds.  We have a similar programme in Chile. It would be great to see the green bank model flourish on every continent – just last week there was a promising meeting in Cape Town on a GIB in South Africa.

3-D density analysis for sustainable planning for Mumbai. Photo: Mars Architects

We aren’t working in China yet, but given our deep bench in Chinese energy policy and our state-level experience in the US there may be a useful role we can play in the 12 province-level green development funds that the government intends to set up.

 

Turning to the report you launched at the Marrakesh COP in November on Green Investment Banks, what were the key conclusions of that as far as financing the NDCS specifically is concerned?

First, GIBs serve as specialised intermediaries between the public and private sectors. They have in-house or insourced technical expertise about the technologies. They have private sector finance expertise. They have connections with government. Thus, they can be instrumental in identifying a project pipeline that meets the green low carbon and resilience requirements of the NDC and the bankability requirements of private capital providers.

Second, GIBs through market development activities, GIBs can determine what public sector interventions can be most effective in getting private capital to flow and also where private capital maybe isn’t a good fit because there’s no identifiable revenue stream. They can convene and survey contractors, developers, end users and financiers to get a practical understanding of the market. They can provide a feedback loop with the market.

Third, GIBs can themselves deploy financial products – for example, loans, guarantees, credit enhancement – to facilitate private partner participation in demonstration transactions. This builds capacity.

Fourth, GIBs can also deploy what the OECD calls “transaction enablers”, such as warehousing small projects to get to scale or making a subordinated cornerstone investment to reduce equity requirements.

Fifth, we think GIBs have the potential to blend and coordinate different kinds of capital – philanthropy, grants, concessional loans, equity and commercial loans. There’s some evidence of that in the early green banks.

“The reasons for the capital not being there are always somewhat different because the barriers to investment are always somewhat different …The fundamental concept of a GIB is to get involved in difficult Low Carbon and Resilient segments that need to attract additional investment.”

What would the practical steps be for a country to set up a GIB?  Does that require a certain level of development in local capital markets / interconnection with international capital markets?

This has been done a number of times and we have a pretty good formula down. The first step is to identify key public and private stakeholders. On the public side this may be various ministries – finance, energy, environment – but also public/development banks and specialist climate and finance agencies. The lead agency always differs, but like most policy initiatives, there needs to be political will at some high level. On the private side, stakeholders include different private capital providers, developers, trade associations and NGOs.

We then interview and work with the stakeholders to survey the existing institutional and policy landscape, and after that we look at market barriers and opportunities. It’s most always that case that more financing, more education and more capital is needed to achieve climate policy goals. It’s not always the case that a dedicated green financing agency is what’s most needed. The reasons for the capital not being there are always somewhat different because the barriers to investment are always somewhat different. The investment climate is always different.

A green bank can’t solve problems like corruption, inefficient subsidies, weak regulatory regime, faulty price signals and so on. However, its job is to investigate, become smart about and address specific barriers to private investment in low carbon and resilient infrastructure (broadly defined) and then tailor interventions to deal with that.

We also work with lawyers to do a legal analysis that covers the necessary powers and capital sources of any existing institution that could convert into a green bank or create a green bank division, as well as the pathway, feasibility and desirability of creating a new entity.

The process I’m describing pre-dates the NDCs and goes back several years to the creation of the first green banks. The NDCs, with their focus on climate strategies to deal with Paris commitments, already represent a first cut at a market analysis.


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Your report says that “finance is still not available for many underserved segments of the climate finance arena: adaptation and resilience, energy efficiency, smaller-scale projects and other under-resourced LCR projects, especially in least developed countries.”  How could a GIB get involved in these segments, especially adaptation work that may not have a commercial return?

The fundamental concept of a GIB is to get involved in difficult Low Carbon and Resilient segments that need to attract additional investment. It does this in flexible, outcome-oriented and locally relevant ways within the parameters of policy goals. In Least Developed Countries, green banks necessarily will be partners with or outgrowths of local institutions like MFIs that have experience and relationships with small businesses and consumers. As in other places, GIBs in LDCs will have to identify and work with the service providers that have a track record or high potential and GIBs will have to have controls in place that make them good stewards of the capital entrusted to them as well as excellent communication and capacity building skills.

GIBs may need to finance adaptation actions such as disease programmes. Photo: USAID

In the adaptation area, that really depends on what technology you’re taking about – adaptation can be drought-resistant seeds, water infrastructure or mosquito netting. The GIB would be expected to work with other parts of the government and civil society to prioritize and understand adaptation priorities and where it can play a role.

Generally, though, I’d expect GIBs in LDCs to gravitate towards smaller, distributed projects that are driven by consumer and business demand rather than large infrastructure of the kind undertaken by the World Bank. These are the kinds of opportunities that can be taken over by local banks and investors once the GIB has shown that the demand is there and how to tap into it.

“Properly staffed by investment professionals with experience in the private sector, GIBs could play an important intermediary role between government and the local and international capital providers”

You speak in the report about GIBs being able to “incentivize investments to incorporate standards, metrics and other methodologies, which can help track progress towards a country’s NDCs and international climate goals”? How might this work and what is the role / responsibility of GIBs in capacity building?  Similarly, how would GIBs helping to “quickly incorporate market information that can inform a country’s climate and business enabling policies” work in practice?

GIBs to date – led by Connecticut, New York, the UK and Australia – are learning from and changing the practices of the many counterparties in transactions and, over time, the broader market. There are a growing list of examples of green banks working with regional banks utilities, municipalities, or institutional investors that have never done a solar, LED or Energy Efficiency or other type of transaction but who then go on develop new business lines after the initial transaction.

Some have participated on the buyside in green bond transactions. Others are issuers. They are pioneering underwriting and disclosure approaches. The UK GIB just launched a green evaluation certification methodology.

In the emerging markets, you can envision that a green bank co-ordinates stock exchanges, industry associations and government in promulgating and pushing out NDC-related standards and metrics, in addition to building capacity in counterparties during transactions.

Properly staffed by investment professionals with experience in the private sector, GIBs could play an important intermediary role between government and the local and international capital providers, reporting out data and standards are most useful and efficient. More generally, as such an intermediary, GIBs should have a seat at the table with the relevant ministries and regulators in evaluating and adjusting Low Carbon and Resilient policies and NDC progress.

The model here as I’d see it is the New York Green Bank, which is embedded in larger policymaking and grant-making entity known as the NYSERDA. NY Green Bank, NYSERDA, the New York Public Service Commission and the state treasury work very closely together to formulate and evaluate the state’s clean energy policy and investment strategy.

You mention that “GIBs can complement many existing bilateral and multilateral development finance institutions by addressing various market-related, economic and financial barriers, which result in insufficient  financing for LCR investments.”  Can you give me an example of these barriers and how GIBs can help overcome them?

Generally, GIBs seek to reduce both real and perceived risks in its counterparties and in the market generally. As noted in recent the recent OECD paper on Green Banks, GIBs deploy risk mitigants like credit enhancements and cornerstone enhancements, and transaction enablers, like standardizing and warehousing small projects to get to investible format and scale. In the context of working with bilaterals and Multilateral Development Finance Institutions (MDFIs), we don’t have any actual examples now, but based on the existing operating tendencies, GIBs, since they are inherently local, tend to be more flexible and very close to the ground in the markets where they operate. If this trait were to be maintained in the new GIBs, we’d expect them to be able guide MDFI capital dexterously to increase the efficacy of the blended finance approaches.

“Dollars are really the wrong way to look at the impact of a green bank. It’s about market transformation and network effects

Given the $ trillions needed every year, what is the real capacity of GIBs to deliver?  For example, the UK GIB since 2012 has invested £2.7 bn in projects totalling £11.1 bn.  While this is 4x leverage, it is still quite a small amount given the UK has such well developed capital markets

Dollars are really the wrong way to look at the impact of a green bank. They may never be as big as public sector banks like KfW but they don’t have to be. It’s about market transformation and network effects.

This is hard to measure but we are in early days and the GIBs are working on ways to measure it. Overall, I don’t find this is a reason not to deploy more green banks wherever we can. Meanwhile the Green Bank Network, as a platform for spreading innovations and best practice, is gaining traction. We expect a lot more progress on this front in 2017/18.

Turning to wider issues …

Do you regard the differentiation between “green” finance and “climate” finance as right / useful?  Where does NRDC stand on the “$100bn” and related climate justice issues?  Given that even if all this finance was available it would still only account for a small amount of the funds needed, would campaigning energy be better used on e.g. setting up GIBs and getting funding for those?

Green finance is a broader definition, which includes issues of environment and sustainability beyond just the climate implications, so it’s important to differentiate between the two correctly. The$100bn commitment is a starting point – it’s a combination of public and private funds for climate finance and provides important examples of what can be accomplished. But it cannot be the only source – we need to see a shift in the trillions of dollars towards climate-resilient projects and clean energy projects.

And in relation to the $100bn being mobilized, it’s also important to consider how we can shift subsidies away from fossil fuel projects towards that goal. Greater attention to the public/private mobilization of investments through GIBs is essential if we want to shift resources and decades-long investments at the scale required.

How does NRDC view the early outcomes from the GCF?  Is it backing the right projects?  If improvements are needed, what would these be?

The GCF has been able to get projects off the ground relatively quickly, given that it is a relatively new organization. The next challenge is going to be doing more transformational work – finding ways to empower regional and national entities to design and manage their own projects or portfolios of projects – to move finance at a larger scale so that countries can take the lead in transforming entire sectors or segments of their economy to be low-carbon and resilient.

We’d like to see the GCF capitalise some green banks, for example.

Are DFIs taking enough risk in their role in scaling up development finance?  If not, how can their risk appetite be changed?

I don’t know if this has a general answer and, if so, that I’m qualified to have an opinion. What I can say is that the main raison d’etre for GIBs is to crowd-in private capital, which is in turn a main reason why they are a welcome addition to the institutional landscape. DFIs have the critical and broad mission of achieving the SDGs. GIBs are also critical to achieving SDGs but their role is specialized so we expect them to work in partnership with national, regional and international development banks.

What is NRDC’s view on likely outcomes of the Trump presidency as its relates to / threatens international green / climate finance?

A Trump presidency would have more to gain by supporting international climate finance – and taking a leadership role in building the clean energy market around the world, especially since US firms are leading innovators when it comes to clean energy technology. Not assisting around the world to build the market for a low-carbon future would be ignoring a big opportunity.

On top of that, climate denial and reneging on our climate finance commitments for mitigation and adaptation would be a foreign policy blunder, and I think President Trump is starting to recognize that it would be a mistake – with negative repercussions for years to come – if he does not support our existing international climate change efforts.

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