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GREEN FINANCING – Awareness Session

State Bank of Pakistan and GIZ

Renewable Energy & Energy Efficiency Project
Karachi – 19th May, 2015

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Content of awareness session

• Introduction and rationale

• International context
• Situation in Pakistan - The business case
• Commercial banks becoming green
• Lending Modalities
• Risk assessment and mitigation

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 Introduction and Rationale

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What is Green Finance/Green Banking?

• Green Finance: “A strategic approach to incorporate the financial sector

in the transformation process towards low-carbon and resource-efficient
economies, and in the context of adaptation to climate change”.
• Green Banking highlights the role of banks in the transformation
process by a. become an environmentally friendly cooperation itself and
b. by using “green” standards in the their investment decisions.
• Green: low carbon and resource efficiency in all sectors
• Sustainable Finance, environmental finance, climate finance…..

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78% renewable 
energy

Climate finance mitigation USD 301 

10% energy effciency
volumes worldwide bn (91%)

2013
adaption + mtigation 
6% transport
USD 4 bn (1%)

climate finance USD 
331 bn 58% water supply and 
management

14% climate resilient 
infrstructure/costal 
protection
adaption USD 25 bn 
(7%)
9% disaster risk 
management

8% 
agriculture/forestry

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Rationale for Commercial Banks

• Acknowledging the importance of climate change as a systemic risk

• Role of bank as a facilitator of the economy
• Role of bank as part of corporate society
• Power shortage and high cost of power lead to shortages
• Future water shortage/shortage of other natural resources
• Supporting the private sector
• Creating new bank business

Green banking becomes part of

daily routine, not an add-on.

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Banks‘ risks of not acting

1. Direct risk: Banks become liable for borrowing to clients who commit
environmental breaches (legal, security/ collateral risk)
2. Indirect risk: Climate change impacts the repayment ability of
borrower (business, industry, market risk)
3. Reputational risk: Bank is associated with negative image of pollution

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Banks‘ rewards for acting

1. Improve risk profile of current portfolio: diversification of future risk

through green banking
2. Create new business opportunities for your bank: acquisition of new
clients and new markets
3. Leverage financial resources: use savings in energy/availability of
energy as free/additional cash flow
4. Possible national and international support

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 International context

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International Context

Equator Principals (formed on 1 July 2010)

• Voluntary risk management framework for determining, assessing and
managing environmental and social risk in projects which is primarily
intended to provide a minimum standard for due diligence to support
responsible risk decision-making.
• Currently 80 Equator Principles Financial Institutions (EPFIs) in 35
countries have officially adopted the EPs, covering over 70 percent of
international Project Finance debt in emerging markets.

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International Context

United Nations Environment Program Finance Initiative (UNEP FI)

• Is a global partnership between UNEP and the financial sector. Over
200 institutions, including banks, insurers and fund managers, work
with UNEP to understand the impacts of environmental and social
considerations on financial performance.
• Through peer networks, research and training UNEP FI identifies,
promotes, and realizes the adoption of best environmental and
sustainable practices at all levels of FI operations

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International Context

Basel II and Basel III

• Global, voluntary regulatory standard on bank capital adequacy, stress
testing and market liquidity risk
• Identifies environmental risk as an integral element of credit risk that
financial institutions should address to meet capital requirements

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International Context

Green Finance Regulations in other countries:

• Bangladesh: Environmental Risk Management Guidelines were
developed in 2011 by Bangladesh Bank, in collaboration with local
banks and other stakeholders. Mandatory Environmental Risk
Management (ERM) Guidelines were launched in 2012.
• China: China’s Green Credit Policy, introduced in 2007, laid the
foundation for sustainable banking in China.
• Vietnam: The State Bank of Vietnam (SBV) issued the Directive on
Promoting Green Credit and Managing Environmental and Social Risks
in the lending activities (see English translation) in March 2015
• India, Brazil, Nepal, Philippines, Egypt, Indonesia ………

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 Situation in Pakistan
The business case

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Situation in Pakistan

• Installed power generation capacity: 22,797 MW

• Supply-demand gap of around 5,000 MW, high transmission and
distribution losses, low levels of grid penetration
• Energy savings potential around 418,807 TJ (11.16 MTOE)
 Equals about 17.25 percent of primary energy use (FY 2011-2012).

• The National Energy Conservation Center (ENERCON) sees p.a.

energy savings of up to 25 percent are possible in all sectors
 Equals about $3 billion per year.

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Feasible technical options

• concentrated solar power (CSP)

Renewable • photovoltaic (PV)
Energy • solar water heater (SWH)
• wind energy

• co-generation
• compressor
Energy
• heat recovery, heat transfer
Efficiency
• lights, meters, motors, process control
measures

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Potentials in renewable energy by sector and technology

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Potential of energy efficiency in Pakistan’s industry

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Savings potential by sectors

The investment potential in energy efficiency and renewable energy is

estimated to be 1.75 trillion PKR. The split by sectors:

Agriculture 46%

Industrial 38%

Residential and commercial 16%

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What clients to target

Residential/retail clients SME clients
 EE in buildings  EE in production
 Solar lighting, water heater  New EE machinery
 Household appliances  Producer of green equipment

Agricultural clients 
 Drip irrigation, rain water 
harvesting
 Biomass/biogas
 Crop and planting  rotation
Corporate clients Municipalities
 Renewable energy projects  EE in transportation
 Infrastructure projects  EE in public buildings
 Large commercial buildings  Waste‐Water reuse, 

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 Commercial banks becoming green

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Impediments for banks

• Cost of refinancing • Ability to bundel/sector 
• Government/donor  knowledge
support • Standardization of EE 
• Legal basis for  cash  lending
flow lending • Cost of monitoring
• Government incentives

transaction 
refinancing
cost

demand ability
• SME demand for EE finance • Understanding of cash flow 
• Savings potential in the  lending
industry • Standard instruments only
• Interest rate level • Technial understanding of 
• Current price and ratio of  savings approach
energy costs • Understanding of donor 
support

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Green activities of banks:

1. Transform conventional investments into green investments (e.g.
solar, wind or hydro versus coal and gas in project finance)
2. Transform conventional assessment standards into green standards
(e.g. check environmental impact on each investment)
3. Transform accounting convention into green accounting (e.g. annual
report states investments into green businesses as recurrent figure)
4. Become a green corporate citizen

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Where to start?

• Set up green evaluation standards for each individual products

• Analyze current portfolio and evaluate the environmental impact (risk
prevention)
• Incorporate green skills with relevant staff
• Analyze the market and identify a niche
• Develop new lending products which reflect the green nature

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 Lending Modalities

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Lending modalities

• A matter of supply and demand

• Standard banking instruments: loans and guarantees BUT due diligence
process includes “green” assessment

Specialized modalities
• Dedicated credit lines
• Guarantees

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Dedicated credit lines/on-lending facilities

SME,
Funds (grant Local ESCOs,
Donors element) loan technology
commerci
alBanks providers
TA

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EBRD Model
Loan amount: x

Local
Commercial
Bank: SME
EBRD Funds
Technical
Officers
evaluate EE

Suggest EE upgrade and

finance additional amount
Loan amount: x+y

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Risk sharing facilities/Guarantee funds

Loan at lower interest rate (reduced risk)

Bank SME
In case of (partial) default

Governments Donors
Guarantee fund

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 Risk assessment and mitigation

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Risk Assessment

Normal lending procedure:

• Decision based on the financial health of the client
• Feasibility of investment
Understanding the new markets and technologies
• Include ESCOs
• Understand technical audit reports
• Employ inhouse technicians
• Set up dedicated list of reliable equipment provider

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Risk Assessment

The usual procedure

• Identification
• Rating
• Mitigation
• Monitoring and controlling

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Critical success factors

• Set of clear, comprehensive SPB green finance guidelines

• Phased approach of implementation
• Possibly financial support
• Capacity building and trainings at all levels
• Marketing and communication

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Thank you!

Any questions and comments?

Please fill in the feed-back form

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As a federal enterprise, GIZ supports the German Government in achieving Responsible

its objectives in the field of international cooperation for sustainable Ute Zimmerman
development.
Author(s)
Published by
Deutsche Gesellschaft für Ute Zimmerman
Internationale Zusammenarbeit (GIZ) GmbH Layout
Registered offices, Bonn and Eschborn, Germany Hasan Zaman
Renewable Energy & Energy Efficiency project
House 11-B, Street 50, F-8/4, Islamabad, Pakistan.

T +92 51 2851 175

F +92 51 2854 576
E uz@uz-consult.com
I www.giz.de

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