Green-bond supported wind farm in Penonome, Panama. Photo credit: Alessandra Bazan Testino / IFC

Green Investment Banks – one way forward for green capital in Latin America?

29/07/2017

Combatting global climate change requires both enormous policy efforts and massive capital investment in mitigation and adaptation.

This is not a new assertion.  Both the Sustainable Development Goals (SDGs) and of course the Paris Agreement – which was built on the foundation of 149 countries’ Nationally Determined Contributions (NDCs) – emphasize the need to get finance flowing towards low-carbon, climate resilient investment rapidly.  It is widely acknowledged that public resources alone will be insufficient to achieve these goals, and that mobilizing private capital into low-carbon, climate-resilient (LCR) investments is critical.  Green Investment Banks (GIBs) in developed countries have proven to be a successful model at the local level to use public resources to catalyze private investment

At a recent conference in Mexico, “National Development Banks and Green Banks: Key Institutions for Mobilizing Finance Towards the Implementation of NDCs and SDGs”, the applicability of the green investment bank model to Latin America was explored in detail. The conference was organized by the   Inter-American Development Bank (IDB) in cooperation with the Mexican National Bank for Public Works and Services (BANOBRAS), the Organization for Economic Co-operation and Development (OECD), the Green Bank Network (GBN), and the Latin American Association of Development Financing Institutions (ALIDE).

To read the presentations from ‘National Development Banks and Green Banks: Key Institutions for Mobilizing Finance Towards the Implementation of NDCs and SDGs, click here.

More than 150 policy makers, representatives from national development banks (NDBs), development finance institutions, international organizations, and private sector banks and developers shared perspectives on needs, challenges and achievements in scaling up LCR private investment, and found common dialogue on the complementarity of NDBs and GIBs in domestic financing ecosystems. From a series of informative panels including leading representatives from Mexico, Brazil, Chile, Colombia, Argentina, Paraguay and other countries in the region, GIBs from the UK, Australia, Malaysia and the United States, as well as the Green Climate Fund and a variety of international organizations, a few key themes emerged, including:

  • There is a need to be more creative in how to get funding flowing, including through innovative financing and business models, and ensuring greater understanding of risks and opportunities (including adaptation),
  • Complementary efforts from policy makers to support stronger enabling environments is required, and
  • Capacity building is critical for both public and private sectors.
How significant are LAC’s LCR investment needs?

Like many parts of the world, the financing gap to achieve both the climate targets and the SDGs in LAC is significant. The International Finance Corporation estimates that LCR investment needs in the region are on the order of US$176 billion annually until 2030. Yet, in 2014, preliminary results of soon-to-be-published research by the IDB and the Climate Policy Initiative, concludes that total investment fell far short of this amount and that the majority of financing came from public banks.

Clearly, entities uniquely focused on crowding in private capital will be essential in In LAC.

In LAC, like in many other emerging market regions NDBs play an important role in financing investments directly, as well as promoting private domestic investment across a broad range of segments and sectors that contribute to economic growth, such as small and medium-sized enterprise, housing, agribusiness, traditional infrastructure – and also renewable energy and energy efficiency. The good news is that many NDBs in LAC are stepping up to support LCR investment. In fact, LAC participants confirmed that NDBs are the single largest source of public climate finance in domestic markets.

Yet NDBs and others in the region face barriers to increasing LCR investment on their own account, let alone catalyzing additional private capital. These include, for example:

  • A lack of long-term, low-cost capital;
  • Insufficient risk-adjusted returns;
  • Conservative investment mandates that cause capital to be deployed elsewhere;
  • Risk perception of climate finance investments; and
  • Challenges in identifying and assessing risks and structuring financing solutions.
So, what is a GIB and how might it help?

GIBs are specialized financial institutions, facilities or trusts that are capitalized with public funds, and specifically designed to target climate-relevant, LCR investment.  In addition to focusing solely on climate-relevant investments, they use their funds to reduce risks for other investors, thereby “crowding-in” private capital and accelerating market expansion. Currently, there are 14 GIBs operating at national and subnational levels around the World, 13 in OECD countries and one in Malaysia.

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Where they exist, GIBs have been successful in mainstreaming new technologies and business models, and crowding-in private capital. For example, the Connecticut Green Bank was an early lead funder for local deployment of rooftop solar, and after building a sufficient portfolio of these investments played a key role in bundling these projects for institutional investors, providing such investors access to projects for which appetite to invest directly had been lacking. In addition, with US$88 million in equity and mezzanine investments, Japan’s Green Finance Organisation (GFO) has supported renewable energy projects valued at US$904 million – a 9:1 leverage ratio –  through year-end 2016. The only emerging market GIB, GreenTech Malaysia, has supported 272 projects valued at US$700 million through April 2017 and in doing so has brought 28 new domestic lenders into the sector. GIBs in New York, Australia and the United Kingdom have similar success stories in their targeted sub sectors.

Based on this track record, the GIB model has garnered significant interest in LAC and in emerging markets, and presents an interesting opportunity in relation to existing key channels of domestic public climate finance, particularly NDBs.

GIBs and NDBs in LAC – Complementarity and creativity in domestic financing ecosystems

The background paper for the event prepared by NRDC and CFA, “National Development Banks and Green Investment Banks: Mobilizing Finance in Latin America and the Caribbean Toward the Implementation of Nationally Determined Contributions” fed a rich discussion at the conference, which featured case studies from the UK Green Investment Bank, Green Tech Malaysia, the Connecticut Green Bank and Australia’s Clean Energy Finance Corporation. It concluded that the GIB model could play a complementary role to support meeting climate finance objectives, including through identifying LCR projects, assessing financial and technological risks of such projects and structuring innovative financial solutions. A key aspect of applying the GIB model to LAC is to consider the most appropriate structural alternative for each market. Various structural options exist which can support the important role NDBs already play in LAC. For example, an existing NDB could opt to establish a green division within its institution.  Or an NDB may seek to establish a “green affiliate” or external fund.  Finally, creating a new GIB institution with the specific mandate is an option. Whether a part of existing institutions or alongside, GIBs can help build NDB capacity in LCR investments and improve risk perceptions by demonstrating commercial viability so that greater volumes of NDB capital can be deployed to support LCR investments – and mobilize even more private LCR capital in the process.

About the Authors:

Doug Sims is Director of Strategy and Finance at NRDC’s Center for Market Innovation in New York City, where he leads a team that provides analysis, advocacy and thought leadership on innovative financing for low carbon and climate resilient infrastructure. Douglass is a co-founder of the global Green Bank Network, a membership organization of Green Banks. A project finance lawyer by training, Douglass began his career at Allen & Overy LLP, working on energy and infrastructure projects in Latin America, Africa and the Caribbean. The Natural Resources Defense Council works to safeguard the earth—its people, its plants and animals, and the natural systems on which all life depends.

Lori Kerr is a Senior Director at CFA in Washington DC. where she works with governments, development finance institutions and the private sector on climate-smart investment strategies, designing financial solutions that support low-carbon, climate-resilient investment at both project and programmatic levels, and incorporating climate risk into investment decision-making. An infrastructure and energy banker by training, Lori previously held a variety of senior positions at the Inter-American Development Bank Group and teaches International Project Finance and Investment at Georgetown University. Climate Finance Advisors is a Benefit LLC with the explicit purpose of creating material positive impact on society and the environment. Our mission is to facilitate the acceleration of sustainable, climate-smart investments, and to ensure climate considerations are integrated into financial products, services and policies in order to make investment more resilient.

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