Green Banks and DFIs
The Green Bank Network has issued a useful report on how Green Banks assess and report the impacts of the finance they arrange – useful not least because it starts with a definition of what a Green Bank is: “Green banks endeavor to animate private investment in [low carbon resilient infrastructure (LCR)] by working closely with the private sector and using market-responsive strategies such as credit enhancements and other risk mitigants, project aggregation, contract standardization, and demonstration investments. Each of these approaches can help to build a track record and increase the confidence of private investors.”
Operationally, Green Banks “generally share the following core characteristics: a mandate focusing mainly on mobilizing private LCR investment using interventions to mitigate risks and enable transactions; innovative transaction structures and market expertise; independent authority and a degree of latitude to design and implement interventions; and a focus on cost-effectiveness and performance.”
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This definition helps to differentiate Green Banks from development finance institutions (DFIs), because while Green Banks are almost always publicly owned, their mandate differs from that of DFIs because of the exclusive focus on the private sector (DFIs primary focus is usually in governments) and, perhaps, the more “independent authority” they possess. Another interesting differentiating feature is that, while DFIs can only be established at national or multinational level, Green Banks can be formed by and operate at many different strata of governance. The 16 banks established so far are variously at national (5), state (6 in the USA), county (1, USA) and city (4) levels. The exception to public ownership is the recently privatised UK Green Investment Bank – but even this is still subject to an overriding ‘golden share’ arrangement protecting its mission. This differentiation between Green Banks and DFIs gives the former an identifiable role in the climate finance landscape that will be critical given the need to crowd in private sector money.
Apart from GHG avoided, the report says that the main impacts Green Banks seek to track include “capital committed and deployed, closed projects, projects in operation, total project value, capital leverage ratio, and size of their transaction pipeline. Green banks also employ energy-related metrics, including installed renewable energy capacity, clean energy generation, and energy savings.” The report notes the very localised nature of many of the metrics developed given the different circumstances of each institution, but that efforts are also underway to aggregate impacts and share reporting at the level of the Green Bank Network.
Perhaps the trickiest of the metrics Green Banks seek to track are those of the impacts on wider capital markets – what the report calls “market transformation” and says is the “next frontier” for impact measurement. Market transformation is “the process through which green bank activities increase the scale of private sector investment in LCR infrastructure markets. The ‘market’ can be broadly defined to include all LCR infrastructure, or it can be more narrowly defined by an institution that focuses on particular market segments. ‘Transformation’ implies widespread and permanent change toward a common envisioned future, and for green banks, that future is one in which LCR infrastructure is financed increasingly with private capital as new asset classes are created and enter the investing mainstream.”
One of the measures of such transformation is the “leverage” ratio of green bank to total capital in projects, and it’s an indication of the complexity of the topic that the report lists no less than 6 different approaches currently being taken by Green Banks to assess this effect. How this ratio is measured is also a matter of hot debate for DFIs.
Join the upcoming webinar
This short report is a pertinent addition to the ongoing work in progress on metrics, and will be part of the discussion on recent progress in the green banking world, to be hosted by the Network on Thursday March 8th, 12-1pm ET. Register here to take part.