BANKING ON SUSTAINABILITY

WHAT DOES IT MEAN FOR FINANCIAL

INSTITUTIONS?

Martin Dasek)
Senior Climate Financing
Specialist, SEF Lead, IFC

November 27th, 2014, Karachi

Presentation outline

A little bit of definitions

01
Business opportunities in the climate space
02
Examples around the world
03
Role of Governments and public bodies
04
01 – introduction and definitions

What does it mean “green” for a bank?

Corporate identity

• Being green is fashionable today and helps to sell all products, finance are
not different

Compliance with standards

• Internationally/nationally required by laws or voluntary agreements

(environmental and social standards (E&S, ESMS))

Risk management

• Portfolios are threatened by various threads, incl. climate change

Business opportunity for further growth

• 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

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Presentation outline

A little bit of definitions

01
Business opportunities in the climate space
02
Examples around the world
03
Role of Governments and public bodies
04
02 - the business opportunity for financial institutions

Sustainability - new market territories

ENERGY: Energy efficiency, TRANSPORTATION: Energy WATER: Capture, treatment, AIR & ENVIRONMENT: Carbon
renewable energy, storage, smart efficient components, fuels and conservation, wastewater credits, trading and offsets
grids, energy access logistics treatment, access

BUILDINGS: Low carbon MANUFACTURING: Green AGRICULTURE & FORESTRY: RECYCLING & WASTE:
strategy, energy efficiency, chemicals, RE/EE supply chain, Land mgmt, low carbon and Recycling and waste treatment
sustainable materials, green cleaner production. adaptation strategies, biomass, services
buildings biofuels, EE.

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 02 - the business opportunity for financial institutions

Future is happening today already

• Climate space represents US$ 350-500 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

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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, • Heating and ventilation equipment

maintenance companies; • Control and metering systems, Electricity peak-load control systems
housing developers, • Air-conditioners, Heat pumps, solar water heaters

Municipal Municipalities, district heating
companies, street lighting
operators, public buildings
operators
Residential/ Builders, home owners, home
Retail owner associations, individual
households
• Boilers for district heating as well as for public/municipal buildings
• Heat exchangers, pipes for infrastructure projects
• Cogeneration units
• 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 • Biomass/biogas digesters

chains • Drip irrigation systems
• Efficient agri-machineries, storage facilities

Renewable Project developers, Corporate • Wastes to energy (wood waste etc.)

generation clients/SMEs • Production of fuel, biogas, biodiesel, solar, hydro and wind power

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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 17.25 percent of primary energy use (FY 2011-2012).
• 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.

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02 - the business opportunity for financial institutions

SEF: Why FIs should be involved

• Innovative product – First mover advantage/differentiation

Expanded market
• Sell on value to customer, not pricing
share through a
• Monetize existing client base- Attract quality new clients
new business line
• New marketing channels through vendor partnerships

Improved risk • Cost efficient clients = Better performing clients

profile of portfolio • Energy cost savings as a part of cash-flow

Positive social and

• Enhanced brand reputation (innovative and socially
environmental
responsible FI), PR opportunities
impacts

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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

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02 - the business opportunity for financial institutions

SEF: Sectors by a FI’s departments

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.
Corporates :
• Industrial plants improvement
• Renewable energy projects
• Commerce / large malls, big-box store chains
• Efficient building construction companies
• Cement Production Improvements

Retail/Residential: Public Finance

• Green Buildings
• Housing EE renovations
• Housing Appliances Financing
• Hybrid Cars Loan
• Small Renewable Energy (solar lights)
• 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

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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
“It is easier for us to buy IFC services and risks
and the proven SEF methodology than
• SEF is usually limited by lack of technical know-how in
create it from scratch.”
the banks
CEO of SME finance bank, Russia

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02 - the business opportunity for financial institutions

What IFC can do for a FI to help to reach

the SEF market?
Credit lines and senior Mezzanine financing
Risk sharing products
loans (medium- to long- and subordinated Trade guarantees
and partial guarantees
term) debt

Grow in volume,
Investment Products & … gain market share
tailored to the needs of diverse markets
Reach new markets, become
leader of the new the industry

Understand the market and its niches,

develop dedicated product, build specialized
team (if volume driven)
….& Advisory Services
Analyze markets, evaluate designed for help to build a profitable climate business
existing portfolio
Market development, Capacity building, Linkages with
Tools and
analysis and product trainings for staff on contractors/ESCos/v
resources
development all levels endors

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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 125
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 Banque SME Bank Prime Agropromcre Tatfondbank Societe Union Bank NOA mfi
Ukraine Libano- Finance dit Bank Generale Albania Fondi Besa
Francaise Bank Albania mfi

2010 2012 2011 2009 2009 2007 2012 2014 2010 2010

TCB Bank LOCKO-Bank Credit Bank of Center-Invest Bank NBD Bank MDM Bank URSA Bank
Moscow
USD 18 million USD 20 million USD 10 million USD 8 million USD 50 million USD 53 million
2011 2010 USD 20 million 2010 2008 2008 2008
2010

Tamweelcom AmeriaBank MTBank Bank Respublika Credins bank

USD 3 million USD 15 million USD 10 million USD 15 million USD 13.3 million
2011 2010 2011 2013 2012

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02 - the business opportunity for financial institutions

IFC SEF offering: The Advisory

Strategy Product Pipeline

Diagnostics
Development
Closure
Development

Budget Evaluation
Policy of projects

KPIs Meeting
Marketing with clients

Champion
Training

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 02 - the business opportunity for financial institutions

Investment Investment
Type 1. Type 2.
Financial Products
Risk positions at the level Advisory
Services
of the Bank:
Local Financial
 Long-term credit lines;
Institution
 Equity;
 Subordinated debt;
 Currency swap;
Bank Loans to SEF Projects
 Trade finance

FIs of any type: Risk positions at the level of

 Commercial banks Project A. Project B. the underlying assets:
 Leasing Companies
 Microfinance  Guarantees;
Institutions Project C.  Portfolio Risk Sharing;
 NBFIs  RE Mezzanine Facility.
Portfolio of SE Projects

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Presentation outline

A little bit of definitions

01
Business opportunities in the climate space
02
Examples around the world
03
Role of Governments and public bodies
04
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

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 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
60.0

50.0 ​ Over $250 m in EE financing to over 6,300 clients

40.0 ​ СО2 over 105,000 tones/year
30.0
​ Increased number of new clients and strengthened loyalty of existing clients
20.0
​ Reputation of the region’s champion in sustainable banking
10.0
​ Partnership with major international DFIs (IFC, EBRD, FMO, KfW, OeEB,
0.0 EDB)
05 0 06 0 07 0 08 0 09 01 0 01 1 01 2
20 2 2 2 2 2 2 2

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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

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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

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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.

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 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
“ “It has been a very positive experience capacity building, Tamweelcom successfully launched the solar
for Tamweelcom to enter the climate water heater product within a year, becoming the first in the
financing sector and still work with its target
market and network of lower-income clients,”
market to offer a repayment plan aligned with a customer’s
said Al-Refai., Tamweelcom CEO electricity bills.

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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.

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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).

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Presentation outline

A little bit of definitions

01
Business opportunities in the climate space
02
Examples around the world
03
Role of Governments and public bodies
04
 04 - role of governments and public bodies

Requirements to scale up SEF

• End users •Equipment
Driven by • Other beneficiaries Manufacturers Market
enabling •Service providers Capacity
frameworks •Technical Firms Creation

Product/ Service
Demand
to meet demand

Financing of
products and
Sustainability
demand
fulfillment
Pure Scaling up
Commercial • Market can sustain after • Investors
finance
financing
incentives have been phased out • Financiers

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 04 - role of governments and public bodies

Sustainable energy finance chain

Technology
Scaling up and Large
Technology Research Development Mainstream roll out
scale Demonstration
and Pilots
Government/ • Research Grants • Grants for pilots • Grants/subsidies for Not required
Public Funds reduction of transaction
costs, and for creating the
pipeline of projects
• Risk capital/first loss
funding for financing

MDBs/DFI • Selective Equity, • Equity, Debt and mezzanine • Phase out

Debt and mezzanine financing engagement over
financing time

Equity • Limited Angel • Angel/Venture • Private equity • Public equity

investing investing markets

Debt • Not available • Limited, low • Commercial Financing • Bank and market
leverage financing available but constrained by financing easily
• High risk loans with risk appetite and risk available
up-side perceptions

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 04 - role of governments and public bodies

Typical Roles for Public Finance

Type of intervention
Establishing the necessary
regulatory framework
Financing pilot products in
new/emerging technologies
Establishing capacity in the
market
Role of public finance Rationale
Grants and Technical Frameworks are necessary to create the
Create demand
Assistance demand
and market
Help price public goods : Water,
drivers
energy, other resources
Capital/interest subsidies Demonstration will lead to lowering of
as Grants to make project technology costs and to scale up Support market
viable ability to
Grants and Technical Capacity is necessary to create a provide
Assistance pipeline of projects for scale up solutions

Performance based Performance based Market behavior changes lead to scale

incentives subsidies to transform up
market behavior
Enabling
Blended finance : (State first Higher risk investments Reduces risk of private financial
financing
loss blended with investors leading to higher risk appetite
commercial funds for and scaling up
equity, mezzanine and debt)

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04 - role of governments and public bodies

Role of Govt. I : Creation of Demand

Intervention Comments
Providing Cheaper to implement and Effective in the short
capital subsidies term to change behavior but demand drops when
subsidy is phased out.

desirability
Use based More expensive to implement but less distortive
subsidies and therefore more sustainable
Tax breaks Needs to fit within the tax paying regime

Financing To enable end users to choose the desired

incentives alternative : Most efficient and least distortive
Awareness Most important aspect required for all other
creation of interventions
benefits

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04 - role of governments and public bodies

Role of Govt.II : Incentives for manufacturers

Intervention Comments
Providing capital Useful to get critical mass of manufacturing capacity in place
subsidies 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 Both equity and debt financing are vital for manufacture.
manufacturer and Financing of end use helps expand and create demand to make
end use sure the enterprise is successful
Awareness creation Not as critical as with end users or financiers. Need support in
of benefits accessing finance effectively

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04 - role of governments and public bodies

Role of Govt. III : Enabling Financing

Intervention Comments
Policy support to Early stage venture for new manufacturing
enable the range of Private equity
finance required Debt
Consumer and end use
Subsidizing cost of Useful to get the process started but can become a dependence and
capital 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 Necessary and efficient as the FI builds capacity and familiarity with
transaction costs the market, the market grows, transaction costs drop as a % of
business enabling this to be phased out
Awareness creation of Critically important as financiers typically tend to be conservative
benefits Special Example: Super-ESCo

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