Raising US$23 Trillion Greening Banks and Capital Markets for Growth G20 Input Paper on Emerging Markets Raising Us$23 Trillion Greening Banks and Capital Markets for Growth G20 Input Paper on Emerging Markets AUTHORS: PEER STEIN; GURSIMRAN ROOPRAI; TIBOR KLUDOVACZ October 2018 Acknowledgements This Input Paper was prepared by the IFC’s Financial Institutions Group (“FIG”) for the G20 Sustainable Finance Study Group. The authors are grateful of the support provided by the Bank of England team including Michael Sheren and Kendall Colman. The authors are also grateful for insightful peer review and expert input from World Bank Group and International Monetary Fund colleagues, including Erik Feyen, Elena Panomarenko, Martin Cihak, Martijn Regelink, Rong Zhang, Wei Yuan and William Beloe. © International Finance Corporation 2018. All rights reserved. 2121 Pennsylvania Avenue, N.W. Washington, D.C. 20433 Internet: www.ifc.org The material in this work is copyrighted. 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Additionally, “International Finance Corporation” and “IFC” are registered trademarks of IFC and are protected under international law. table of contents 2 |  CHAPTER I: What is the Size of the Climate Investment Opportunity in Emerging Markets? 5 |  CHAPTER II: What Level of Bank Financing Does It Take to Meet the Climate Investment Needs for 2030? 7 |  CHAPTER III: Are Banks Able and Likely to Ramp-Up Lending for Climate Investments? 11 |  CHAPTER IV: What are Emerging Market Regulators and Policy Makers Doing as Lenders Scale-Up Climate Financing? 14 |  CHAPTER V: What Debt Capital Markets Instruments May Help Lenders in Scaling Up Climate Financing? 17 | CHAPTER VI: Conclusion 18 | Annex 1: Summary of the Analysis 22 | Annex 2: About IFC and Case Studies 24 | Annex 3: A Simplified Schema on Broad Terms of Sustainable Development 25 |  Annex 4: Summary of Green Business Opportunities for Banks in Emerging Markets 27 |  REFERENCES Input Paper on Emerging Markets: Sustainable Banking and Debt Capital Markets In December 2015, at the Conference of the Parties climate related investments – as indicated in the paper – 21 (“COP 21”) in Paris, France, 196 countries came from an estimated 7 percent in 2017 to 30 percent in together to forge a climate change agreement that 2030, including renewables, energy efficiency, green pledged to keep global warming to 2 degrees Celsius buildings, and climate-smart transportation. Banks will or less. To bring the world to this 2-degree track, need to rely on debt capital markets to help with the the International Energy Agency estimates that the necessary maturity transformation to match primarily cumulative investments needed in energy supply and longer dated assets with long-term liabilities. The efficiency reach US$53 trillion1. Based on the IFC important role that non-bank financial institutions analysis of US$23 trillion in climate-smart investment and equities markets can play in financing climate opportunities in emerging markets between 2016 and investment opportunities are not discussed in this paper. 2030, this paper analyzes the role of the banking sector The paper concludes with several case studies that and debt capital markets to provide the financing showcase how lenders leverage debt capital markets to necessary. For lenders to finance the expected levels of increase their lending capacity to meet the significant debt, banks will need to significantly ramp-up financing of financing needs that the climate transition presents. ■ 1 Chapter I What is the Size of the Climate Investment Opportunity in Emerging Markets? As outlined in the Climate Investment Opportunities in Emerging Markets report (2016), IFC undertook a bottom-up analysis to assess the market potential for climate- smart investment opportunities in emerging countries2. The IFC team analyzed the national climate change commitments, commonly known as the Nationally Determined Contributions (“NDCs”), and other policies in 21 countries, representing 62 percent of the world’s population and 48 percent of global GHG emissions. Based on this information, IFC estimated that key sectors in these countries have an investment opportunity of about US$23 trillion from 2016 to 2030, as shown in Chart 1. The estimated amount of US$23 trillion in climate-smart • Clean energy in Africa: Côte d’Ivoire, Kenya, investment opportunities is likely an underestimation, Nigeria, and South Africa’s total investment potential as there are certain data gaps for sectors such as is nearly US$783 billion, which is spread across climate-smart agriculture which have not been covered renewable energy generation (US$123 billion) and in the report. To illustrate this point, a more recent buildings and transportation (US$652 billion). IFC report further analyzes the potential for climate- • Energy efficiency and transport in Eastern Europe: smart financing needs in South Asia, and estimates an Russia, Serbia, Turkey, and Ukraine’s estimated additional US$1.1 trillion climate-smart investment climate-smart investment potential of US$665 billion. opportunity between 2018 and 2030 from India and Energy efficiency is a priority sector, while renewable Bangladesh alone3. energy investments are only beginning to accelerate. The key climate-smart investment opportunities in these • Renewables in the Middle East and North Africa: countries include the following: Egypt, Jordan, and Morocco’s total climate- • Green buildings in East Asia: China, Indonesia, investment potential of US$265 billion, over one- the Philippines, and Vietnam have a climate-smart third of which is for renewable energy generation investment potential of US$16 trillion, which is (US$97 billion), while 64 percent (US$169 billion) primarily concentrated in the construction of new is for climate-smart buildings, transportation, green buildings. industrial energy efficiency, electric transmission and • Sustainable transport in Latin America: Argentina, distribution, and waste solutions. Brazil, Colombia, and Mexico have an investment Furthermore, to unlock the private investment potential, potential of US$2.6 trillion, almost 60 percent of governments must prioritize the following actions: which is for transport infrastructure. • Achieve NDC goals: Many countries have already • Climate-resilient infrastructure in South Asia: integrated their NDC commitments into national Bangladesh and India have an investment development strategies and budget processes. potential of about US$2.2 trillion, which is Governments must now put in place clear and concentrated in the construction of green consistent policies – such as carbon pricing, buildings, ports and rail transport infrastructure, performance standards, and market-based support – and energy efficiency. and ensure that climate considerations are integrated 2 CHART 1 Climate-Smart Investment Potential 2016–2030 (US$ billion) Source: IFC Investment Opportunities Report 20162 into other sector policies. In addition, based on as carbon pricing and market responsive support the IFC-managed Sustainable Banking Network mechanisms. program experience, greater consistency and In order for a government to set out and implement a awareness for the significant role the private sustainable finance strategy (or, policies) it is critical sector can play is often missing. to strengthen the role of the financial sector to • Strengthen the private sector investment climate: manage climate risks and mobilize capital for green Attracting private investment will require a development. This should include actions on disclosure robust domestic enabling environment, with standards to improve climate-related information reduced risks, strong competition, and measures disclosures, a taxonomy on ‘brown’ and ‘green’ to promote investment and capital flows. A stable financial assets to support alignment of investment enabling environment also requires an appropriate portfolios with a 2 degrees scenario, the integration combination of macro-financial policies, including of sustainability risks in prudential regulation and monetary/exchange rate policies, fiscal policies, supervisory practices, clarification of fiduciary duty financial sector and macro-structural policies. with respect to sustainable investments, and steps • Strategically use limited public finance: Government to develop local markets, demand and issuance for budgets will not be enough to address climate green financial products. The European Commission change. Governments should use public funds (“EU”) has also laid out its action plan for a financial strategically to mobilize private capital by, for system that supports the EU’s climate and sustainable example, creating markets, reducing risk and development agenda4. providing project support. Given the underlying type of climate investments Although many countries are making good progress focused, in particular, on infrastructure and green in amending policies and improving investment buildings, debt financing will likely represent the climates, more can be done to set comprehensive majority of total financing, with significant demand long-term targets, provide targeted public finance, for longer tenors. While equity investments will have eliminate counterproductive policies (including fossil a critical role to play for the overall mobilization of fuel subsidies), and provide the right incentives, such financing, this paper focuses on debt financing only. 3 And special emphasis in extending debt financing is is a role to play for multilateral development banks, given to banks, as they provide most of the formal development finance institutions and donors in credit in emerging economies. Two key questions arise project preparation and risk-sharing to support and in this context: How do total debt financing needs enhance the bankability of projects. Further, while the compare to total bank financing and debt capital investment universe in this paper covers climate related markets in 2030? And what would it take for banks investments – i.e. investments that have an impact on to extend the estimated debt levels to meet the climate climate mitigation and/or climate adaptation – some of investment opportunity? the related financial sector policies may cover a broader In answering those questions, it is assumed that the universe of sustainable finance needs, as do some of the assessed climate investment opportunity in emerging financial instruments such as green bonds. For a good markets will translate into bankable projects, which can comparison on respective definitions of sustainable be financed within sound risk management frameworks vs. green vs. climate please refer to UNEP 20165 of banks. We acknowledge that in many cases there (see Annex 3 for further details). ■ 4 Chapter II What Level of Bank Financing Does it Take to Meet the Climate Investment Needs for 2030? In 2016, total banking sector assets were US$43.4 trillion and bank loans to the private sector stood at US$21.9 trillion for the 21 emerging markets that were covered in the IFC analysis of climate investment opportunities6. Assuming average growth rates going forward to be the same as over the past ten years, it is expected that during 2016–2030 bank lending to the private sector – including corporate, commercial small and medium scale enterprise (“SME”) and retail lending – will double from US$21.9 trillion to US$44.5 trillion. About 75 percent of this growth is expected to come from China. Asia and Latin America & the Caribbean will have a pronounced growth of around 115 percent while the rest of the countries will grow around 73 percent over the same period. During the same period, climate investment opportunities average of 6 percent of climate loans in the loan books of of US$23 trillion have been identified by the IFC report 58 banks in emerging markets surveyed by IFC in 2016, in those countries, with key opportunities including and about 4 percent of climate-smart trade finance for investments in construction of low-carbon buildings, the 58 banks surveyed by IFC in its 2017 trade finance renewable energy power production, transport and survey9. Estimating China and Brazil at the current levels industrial energy efficiency. Assuming tenors of 15 years, of climate related lending based on the existing industry and average debt financing levels of 80 percent, the total data, and conservatively assuming 5 percent climate climate investment opportunity of US$23.6 billion from lending for all other countries, we estimate the total 2016 to 2030 would translate to about US$13.3 trillion climate related loans of banks to the private sector in of climate related debt outstanding in 2030. 2016 to be about US$1.5 trillion, or about 7 percent of How does this compare to climate financing currently total claims on the private sector. provided by banks? While reliable data of bank financing Based on these assumptions, the share of banks’ loan for climate related investments is still limited, we do have portfolios dedicated to climate related lending would data from both Brazil and China on the respective levels have to significantly shift between now and 2030, of climate loans by banks, which we can complement as shown in Chart 2. It would have to grow from with bank level data collected by IFC from its work the estimated 7 percent today, to about 30 percent with banks in emerging markets. Based on the most of total bank lending to accommodate the debt recent data available from China for 2016, the China financing associated with the climate-smart investment Banking Regulatory Commission’s green credit statistics opportunities11. In absolute terms, it would have to grow for the top 21 Chinese banks—accounting for about from US$1.5 trillion, to at least US$13.3 trillion (see 80 percent of total banking assets - shows green credit Table 1.a of the Annex 1 for the detailed projections). accounting for approximately 9 percent of these banks’ This raises at least three sets of questions: portfolios7. The most recent survey of banks conducted by Febraban, the Brazilian banking association, indicates • First, will banks be able to make this transition to that climate related loans by the banking sector stood at significantly increase their climate related lending 18.8 percent of total corporate loans (in 2016), for the by 2030 to account for about a third of their loan banks participating in the survey8. This compares to an book? What do we know about current trends 5 CHART 2  Bank Lending for Climate Investments in 2016 and 2030 for 21 Emerging Markets10 Source: IFC Compilation amongst banks to increase climate related lending, • Third, what debt capital markets instruments will be as well as the efforts by banking regulators and available to support banks to either refinance or off- banking associations to support those trends? load assets to help them grow their lending capacity? • Second, how are financial market policy makers How will debt capital markets solutions support and regulators addressing climate opportunities and lenders in the required maturity transformation, risks in the banking sector? What kind of policies given that the majority of climate related lending is and regulations have been implemented in emerging likely to have longer dated tenors? markets, and what is their state of development in In the following, we will review each set of questions different countries? in turn. ■ 6 chapter III Are Banks Able and Likely to Ramp-Up Lending for Climate Investments? The following assessment is based on IFC’s experience in working with banks and other lenders in emerging markets, including its two decades of lending to climate-smart businesses through financial institutions in emerging markets. IFC has a portfolio of 750+ financial institution clients in 118 countries with over US$5 trillion in assets accounting for over 20 percent of total banking assets in non-BRIC developing countries. Climate finance is a major focus of IFC in its work with financial intermediaries across the world. IFC’s climate finance work includes setting up green banks, investing in and issuing green bonds, structuring and providing credit enhancement facilities for green projects, carbon finance, sustainable forestry finance, energy efficiency and green building finance and a wide range of other investment and technical advisory services that increase the availability of climate financing through banks, non-bank financial institutions and debt capital markets. Since 1997, IFC has worked on climate finance with SURVEY I – IFC Reach Survey: In 2017, 135 of IFC 150+ lenders in over 50 countries through 270 climate FIG’s investment portfolio clients reported on their projects, providing nearly US$8 billion in long-term climate portfolios and trends through an online climate financing for own-account and in core mobilization questionnaire, part of the annual Reach Survey conducted financing towards mainly energy efficiency and renewable by IFC. The sample represented over 25 percent of the energy projects. With the corporate goal of reaching FIG Portfolio clients that have lending operations. Based 28 percent of climate commitments by fiscal year on this survey, 72 percent of the banks did provide climate 2020, IFC plans to quadruple its climate business lending – up from 61 percent the year before – with the through financial institutions to reach US$2 billion in top two lending categories being renewable energy and annual commitments by 2020. While today’s relative energy efficiency, as shown in Chart 3.a and Chart 3.c. share of climate financing in banks’ lending books is When asked about the growth trends in their portfolios, still small, based on IFC’s assessment it is poised for most of the banks see their portfolios as steady or disproportionately fast growth. This is corroborated by growing. With respect to their assessment of the portfolio two recent surveys undertaken by IFC that indicate a quality, likewise most banks see their climate portfolios significant interest from lenders to support climate-smart perform in line with their overall portfolio or better, as opportunities in emerging markets. Those surveys are: shown in Chart 3.b. I. 2017 IFC Reach Survey: An annual survey covering SURVEY II – Green Finance Latin American Report: IFC client banks across all emerging markets. The IFC, Felaban and eco.business Fund jointly published survey is conducted internally by IFC with the Green Finance Latin American Report 2017, which 135 respondents in the most recent survey. is based on a survey of 400 Latin American banks plus II. 2017 IFC Green Finance Latin American Report12 in 18 regional banking associations12. The key features of partnership with Felaban13 and eco.business Fund14. the report were: The survey covers 400 banks in Latin American • The report looked at four green business dimensions region with 101 respondents. adopted by Latin American banks in their daily 7 Chart 3.a: Banks Financing Climate Business Chart 3.b: Climate Portfolio Performance Chart 3.c: Growth trends in Various Sectors for IFC Client Banks CHART 3  IFC REACH Survey Results Source: IFC’s Financial Institution Client Survey (2017) activities. Firstly, internal resource and energy • The report was produced after an extensive regional efficiency practices that banks implement within survey guided by Ernst & Young, with responses their own organizations and value chains. Secondly, from 101 banks in 17 countries (about a quarter of environmental risk management systems and all Latin American banks), as well as 18 regional practices to mitigate climate risks. Thirdly, green banking associations. products and services offered to their clients, and • Key findings include: finally the overall strategic commitment to green • The report found that the most popular form of finance. climate commitment by banks was to incorporate • The report’s main goal was to review to what extent resource efficiency into their own operations, banks in the region are adhering to these four green which was the case for 74 percent of the dimensions, and to assess the level of maturity of the 101 participating institutions. green finance market in Latin America, highlighting • Out of the 101 banks surveyed, 49 percent of the gaps and opportunities. the banks offered specific green products and 8 CHART 4  Survey Results on Banks Offering Green Products to Clients Source: IFC Compilation services, including credit products for renewable non-financial services. The third most adopted energy projects, industrial energy efficiency, green green product are green investment funds, green buildings, and climate-smart agriculture. Of the accounts etc. 51 percent that currently do not yet offer dedicated • In line with IFC’s global bank survey, the climate products, 88 percent are interested in banks that measure the performance of those providing those kinds of products and services in portfolios see a better loan performance of the future, as shown in Chart 4. their green portfolios as well as higher growth • As shown in Chart 5, amongst the banks that rates. One third of the Latin American banks are commercializing green products and services, surveyed see year-on-year growth rates above green credit is, at 94 percent, the most widely 50 percent. adopted product. This includes not only green To summarize, banks are ready, willing and interested lines but also, green leasing. 64 percent of the to mobilize private sector financing for climate-smart banks sell green insurance products, many business but require additional support. Indeed, about related to climate risk, and green advisory 1 out of 2 banks surveyed in the IFC Reach Survey CHART 5  Adoption of Green Products by Latin American Banks Source: IFC Compilation 9 indicated that they have used consulting or technical • Develop marketing/product strategy and assistance to build their climate related lending business. impact reporting: green finance still provides an Based on IFC’s experience in working with banks in opportunity for banks to differentiate themselves, emerging markets in building their climate finance and capture market share in a fast-growing segment. business, we see the following key areas in which banks Communicating about this line of business requires require technical assistance: additional reporting capabilities for the climate impact • Identify market opportunities and risks related to of bank financing, which is also a requirement for any climate business: while there are commonalities refinancing of green assets through green bonds. in global trends for climate business related to • Mobilize financial resources for green growth: banks’ renewables, green buildings and energy efficiency, lending operations for climate business typically local conditions differ significantly and determine the deserve a dedicated funding strategy, as they open bankable size of the market. new funding avenues. Historically, development • Analyze the banks current portfolio related to finance institutions or multi-lateral development climate: many banks often already finance climate banks have provided dedicated climate linked credit related investments in their corporate, commercial or lines to banks, while more recently green bonds retail portfolios, which often provides a good starting have emerged as an important avenue for banks’ point for identifying growth areas and articulating refinancing of green assets. value propositions for clients. Given that banks are operating in a highly regulated • Acquire technical expertise to develop green lending: environment, this further raises further questions while larger renewable energy or energy efficiency about the role of regulators and policy makers. projects typically require bespoke technical expertise, How have regulators responded and approached smaller ticket loans such as SME or retail lending climate finance? Have emerging markets regulators for energy efficient equipment, vehicles or homes can been addressing this topic and what is the state of often be standardized. However, in all cases banks development of respective policies and regulations in need to invest in dedicated staff resources. emerging markets? ■ 10 chapter IV What are Emerging Market Regulators and Policy Makers Doing as Lenders Scale-Up Climate Financing? IFC has led the market in setting up the Sustainable Banking Network (“SBN”) which captures a new trend of country-level sustainable finance initiatives. SBN is a collective learning platform that brings together banking regulators and regional/national banking associations from 35 emerging markets covering 85 percent of banking assets in emerging markets that are committed to advance sustainable finance in line with international good practice. Established in 2012 by regulators from 10 countries, it is facilitated by IFC. The SBN now includes 35 countries, of which 16—Bangladesh, Brazil, China, Colombia, Ecuador, Indonesia, Kenya, Mexico, Morocco, Mongolia, Nigeria, Pakistan, Peru, South Africa, Turkey and Vietnam – have launched national policies, guidelines, principles, or roadmaps focused on green banking, as shown in Chart 6. SBN’s first global progress report reviewed policies and principles developed and launched from 3 perspectives, facilitating green finance flow, managing environmental and social risks and enabling factors. Many SBN members have introduced market incentives portfolios. Brazilian banks’ lending to green sectors of to drive banks to step up green investments. Incentives the economy has grown from 11 percent of the banks’ may focus on (i) positive recognition for good performers, portfolios in 2013 to 14 percent in 2015. such as through awards, preferential considerations and An enormous gap still exists on green finance recognition during supervision; or (ii) increased lending definitions, data, reporting, and incentives to to specific green sectors or market segments, such as facilitate private sector participation. Only a few through dedicated funds or credit lines. However, markets are moving into the definition and reporting very few countries have developed and implemented space. Bangladesh, Brazil, China, and South Africa systematic incentive mechanisms to promote and track have defined green assets and sectors for investment. green finance at this stage. The Brazilian Federation of Banks developed a Some SBN members are tracking the outcomes of methodology and tool to systematically track and green financing policies and principles to demonstrate report green loans and credit financing. Bangladesh the business case for sustainable finance. For example, and China are requiring financial institutions to statistics from China’s top 21 banks (accounting for report periodically on green flows data. China is more than 80 percent of total banking assets) show that also providing them with a tool to report complex the loan balance toward green credit is US$1.09 trillion, indicators, such as environmental benefits. representing a 16 percent growth year-on-year, two Although climate change is driving many sustainable percent higher than the overall lending growth rate. finance initiatives, most policies and principles do not The percentage of the total that was nonperforming require financial institutions to align climate-related stood at 0.41 percent, which is 1.35 percentage points definitions and investment targets with countries’ climate lower than the overall rate for all loans. Green credit strategies. Only four national policies or principles—in now makes up approximately 9 percent of these banks’ Bangladesh, China, Morocco, and Vietnam—specify 11 CHART 6  Assessment of SBN Countries’ Progress in Policy and Principles Development Source: SBN Global Progress Report, IFC, February 201815 climate as a standalone and specific environmental risk to path. The People’s Bank of China (“PBoC”), China be addressed. Banking Regulatory Commission (“CBRC”), and • Brazil: has followed a path of combined voluntary Ministry of Environmental Protection jointly issued and mandatory approaches to sustainable the “Green Credit Policy” in 2007, followed by banking driven by the need for stronger efforts in CBRC’s “Green Credit Guidelines” and a monitoring environmental conservation and to foster sustainable framework to guide the implementation. At the end development. Facilitated by the banking association, of 2015, CBRC’s green credit statistics for the top Febraban, voluntary Green Protocols were first 21 Chinese banks (accounting for around 80 percent adopted by five Brazilian state-owned banks in 2008 of total banking assets) show the majority have and then by commercial banks in 2009. In 2014, adopted E&S risk management practices and Green the Central Bank of Brazil published a mandatory Credit now makes up approximately 9 percent of Resolution no. 4,327 on Social and Environmental these banks’ portfolios. In 2016, PBOC launched Responsibility for Financial Institutions. Based on the the Guidance on Greening the Financial System, most recent study, financing and/or loan balances for to expanding green finance development in China Green Economy sectors accounted for 18.8 percent beyond banking. Before that, PBOC introduced green of total corporate loans in 2016 by the Brazilian bond into China inter-bank market supported with banks participating in the study16. green bond catalogue to define eligible greet assets. • China: China adopted a policy-based approach • Indonesia: Otoritas Jasa Keuangan (“OJK”), the to sustainable banking to help tackle profound Indonesia Financial Services Authority, launched a environmental problems and support the transition Sustainable Finance Roadmap in December 2014. to a green, inclusive and resilient sustainable growth The roadmap enlists the financial sector, including 12 banking, capital market, and non-bank financial • South Africa: The Banking Association of South institutions (insurance, leasing, pension funds) to Africa introduced voluntary Principles for managing contribute to the national commitment to address Environmental and Social Risk in 2014. Since climate change and support the transition to a 2016, the National Treasury has led and facilitated competitive low carbon economy. In 2017, OJK discussions to develop a Framework Paper, with a released the Sustainable Finance Umbrella Policy goal to frame the discussion and prioritization of to provide guidance to the whole financial system sustainable finance at a policy level and to set out a in Indonesia. The Policy covers: (i) definition of work plan for a multi-stakeholder process to develop sustainable finance; (ii) principles of sustainable the necessary components to enable the market to finance; and (iii) an Action Plan for banking, capital adopt sustainable finance practices. markets and non-banking sectors. Overall, the role of regulators and policy makers in • Mexico: The Mexican Banking Association (“ABM”) emerging markets has been a proactive one, which has has led a voluntary industry approach through the also created market confidence and signals to banks to development of a “Sustainability Protocol”, which further embrace this market segment. However, in the was formally signed by Mexican banks in April assessment of the respective policies and regulations of 2016. Aligning with national priorities, such as the 15 countries covered in SBN’s Global Benchmarking government climate change targets for the next Report, it is clear that more work specifically on the 15 years, and endorsed by relevant Mexico government climate aspects of sustainable finance policies and agencies, the Protocol provides guidance on both risk regulations is needed15. This brings us to the final management and sustainable lending, coupled with question of this paper, which is about the link of bank a plan to provide capacity building and tools for financing with debt capital markets in financing the implementation. climate business opportunity in emerging markets. ■ 13 chapter V What Debt Capital Markets Instruments may Help Lenders in Scaling up Climate Financing? Debt capital markets will play a significant role in supporting banks scale-up their balance sheet to finance the low-carbon transition. This is likely to take different forms. At the one end of the spectrum, lenders may need to access debt capital markets to raise longer dated liabilities to match the longer tenors required for climate investments in renewables and green buildings. This may include the issuance of green bonds and other debt and tier 2 capital instruments, where the loans remain on the books of the lenders. On the other end of the spectrum would be securitizations and other true sales of banks’ assets into the debt capital markets, to increase the banks capacity to originate new loans within existing capital constraints. In between those two ends of the spectrum are a range of instruments that extend a bank’s capacity to offer longer tenors, including covered bonds and on-balance sheet capital relief transactions. Total debt capital issuances in the 21 markets covered Government of India in 2012 to mobilize financing in this analysis stood at US$14.8 trillion in 2016. for long term infrastructure projects from capital Projecting linear growth based on the past 10 years, markets investors. It also serves as a mechanism for debt capital markets would reach US$28.3 trillion by commercial banks to address their asset liability 2030 (see Table 1.b of the Annex 1 for the detailed mismatches by buying long term infrastructure loans projections). It is likely that the green bond market will and creating more headroom in their books for continue to outpace the overall debt capital market new project exposures. The central idea of IDF was growth, which would specifically benefit the refinancing to create a mechanism by which the institutional needs of banks and other lenders. Already banks in investors could be offered high quality fixed income emerging markets represent the single largest issuer of assets that would be consistent with their investment green bonds. Based on IFC’s survey results of its client guidelines in terms of credit quality, tenor and banks, this trend is likely to continue. Only 1 out of pricing and which would relieve them of the task 3 banks in the survey do not consider issuing a green of evaluating individual projects on a case by case bond in the next three years, as shown in Chart 7. basis. Also, the intent was to offer a mechanism The following provides several examples of projects that would service this asset portfolio on behalf of and transactions that are already available today, and the institutional investors and handle the project which at scale may support the capacity of banks portfolio management complexities at the level of the and other lenders to scale their lending to the green IDF itself. economy by 2030: • BBOXX, in United Kingdom: At the end of 2015, • Infrastructure Debt Fund, in India: Infrastructure Oikocredit and BBOXX, a British-based solar energy Debt Fund (“IDF”) is co-sponsored by Industrial provider, had teamed up to fund the distribution Credit and Investment Corporation of India, Bank and financing of solar technology for low-income of Baroda, and Citibank, and was introduced by the households in Kenya. The securitization structure 14 banks active in emerging markets. Amundi has raised a total of US$1.42 billion from investors worldwide and provides its services in managing EM debt. The fund aims to be fully invested in green bonds within seven years. • Covered Bonds, in Turkey: In June 2017, IFC invested US$150 million in the equivalent of Turkish lira in covered bonds issued by Turkey’s Garanti Bank, aimed at helping to boost the development of green buildings in the country’s housing sector. The five-year maturity bond is backed by a portfolio of residential mortgages. Half of IFC’s funds will be used to provide green mortgages for the purchase of CHART 7  BanksPlanning to Issue Green Bond energy-efficient housing. The bond is issued as part in the Next Three Years of Garanti Bank’s €5 billion covered bonds program, Source: IFC Compilation launched in 2015 and a relatively new funding instrument in Turkey’s capital markets. The bank expects its green housing loans portfolio to be worth was created by setting up a special purpose vehicle: US$100 million by the end of 2020. In a similar a company called BBOXX DEARs, that bundles the transaction, in October 2017, IFC also invested contracts of BBOXX customers who have bought US$150 million in Turkish Lira equivalent in covered solar home systems which are paid off in instalments. bonds issued by Turkey’s Yapi Kredi Bank, to help BBOXX DEARs then issues notes and sells them strengthen the country’s capital markets and boost to Oikocredit. The value of the notes was based its residential mortgage sector, including green on future receivables on the customers’ contracts. mortgages. IFC’s investment in the issuance aims to BBOXX therefore secured a landmark US$500,000 support Turkey’s nascent covered bond market. The securitization deal with Oikocredit. Since 2010, bond has a five-year maturity and is issued as part of BBOXX has sold more than 55,000 solar kits and Yapi Kredi Bank’s €1 billion covered bonds program impacted over 250,000 lives across 35 countries, by launched in 2016. At least 15 percent of IFC’s funds providing more secure energy supplies which don’t will be used to provide green mortgages for the require an electrical grid infrastructure. purchase of energy-efficient housing. Yapi Kredi Bank • Amundi Emerging Planet One – previously, IFC expects its green housing loans portfolio to be worth Green Cornerstone Bond Fund – World Region: US$250 million by the end of 2021. By offering Financing developing countries’ shift to a greener green mortgages, banks increase the purchasing path of growth can often be a challenge. Private power of buyers by folding in the costs of the home’s investors frequently have both the capacity and improvements. Buyers can thus pay for features that appetite to invest in climate-smart projects in lower utility bills, while banks can offer new loans. emerging markets, yet they lack the proper tools to • FHipo, in Mexico: Fideicomiso Irrevocable F/2061 make investments happen. To tackle this deficiency, FHipo (“FHipo”) is the only publicly traded real IFC has recently partnered with leading asset estate investment trust (“REIT”) in Mexico that management company Amundi to launch the world’s provides returns to its investors on income generated largest green-bond fund dedicated to emerging by mortgages. It co-finances mortgages offered by markets—a US$2 billion strategy aimed at unlocking Infonavit and Fovissste to workers with income levels private funding for climate-related projects. IFC is below the equivalent of six monthly minimum wages. investing US$256 million in the Green Cornerstone As a publicly listed entity, FHipo contributes to Bond Fund, which will buy green bonds issued by strengthening Mexico’s capital markets, maximizing 15 finance for development by attracting private investors first Mexican mortgage REIT as a unique asset class through its public issuances, including securitizations in Mexican capital markets, increasing liquidity of and covered bond offerings. The proceeds from the residential mortgage originators focused on low- and US$110 million investment will be used by FHipo middle-income segments. It will not only contribute to consolidate its business model and grow its to an increase in the overall number of mortgages in mortgage portfolio by at least 13,000 new loans Mexico, but also fosters climate change mitigation within three years. Half of IFC’s proposed investment and promotion of Green Building Finance by will be dedicated to Green Buildings, with the main financing building developments that reduce water objective to contribute to the consolidation of the and energy usage. ■ 16 chapter VI Conclusion The climate investment opportunity in emerging opportunities for climate financing in emerging markets markets will require a significant amount of debt will be important in accompanying a sound evolution financing. Given that banks are the primary source of climate sector financing in emerging markets. of formal credit in emerging markets, they will have Further, given the long tenors and significant financing to play an important role in mobilizing the necessary volumes involved, banks will need to rely on debt private sector debt financing for those investments. capital markets for funding those lending operations. To meet the expected debt levels associated with the Only as those three elements come together, i.e. banks climate business opportunity, banks would have to scaling their climate lending business, regulators grow their climate related loans from an estimated 7% providing consistent guidance on climate related risks of their loan portfolios today, to at least 30% by 2030. and opportunities, and debt capital markets evolving to Banks are increasingly ready, willing, and interested in provide means for financing climate related debt, will climate financing. But they do need support to scale-up we properly leverage the private sector to mobilize the this line of business. Given that banks do take their necessary debt financing in emerging markets that the cues from banking regulators, consistent policy support climate investment opportunity arising from the Paris and regulatory guidance about both the risks and the Agreement presents. ■ 17 ANNEX 1 Summary of the Analysis 18 Climate- Claims on Smart Lending Claims on Climate-Smart Private as % of Claims Climate-Smart Private Investment Sector Total Assets on Private Lending Sector Total Assets Potential (2016) (2016) GDP (2016) Sector (2016) (2016) (2030) (2030) GDP (2030) (2016–2030) # Countries (US$ billion) (US$ billion) (US$ billion) in % (US$ billion) (US$ billion) (US$ billion) (US$ billion) (US$ billion) 1 China* 16,791.6 33,176.2 10,031.6 7% 1,209.00 33,573.0 65,444.3 20,771.8 15,000.0 2 Indonesia 304.9 522.3 920.9 5% 15.25 641.2 1,035.0 1,855.0 274.0 3 Philippines 130.8 289.3 292.5 5% 6.54 234.9 517.6 508.9 115.0 4 Vietnam 206.1 N/A 184.1 5% 10.30 460.7 N/A 405.5 753.0 East Asia & Pacific 17,433.5 33,987.7 11,429.2 7% 1,241.1 34,909.8 66,996.9 23,541.1 16,142.0 5 Argentina 68.4 168.8 505.8 5% 3.42 127.6 285.3 899.9 338.0 6 Brazil** 1,197.5 3,650.4 1,910.0 8% 95.80 2,767.5 7,564.9 3,529.8 1,300.0 19 7 Colombia 135.3 198.0 287.4 5% 6.77 265.0 387.9 503.1 195.0 8 Mexico 252.1 646.5 943.6 5% 12.60 438.3 1,131.2 1,514.8 791.0 Latin America & 1,653.3 4,663.7 3,646.8 7% 118.6 3,598.4 9,369.3 6,447.6 2,624.0 Caribbean 9 Bangladesh 97.0 185.5 219.2 5% 4.85 191.8 364.8 411.0 172.0 10 India 1,052.7 1,522.0 2,237.7 5% 52.64 2,264.6 3,228.1 4,317.8 3,000.0 South Asia 1,149.7 1,707.6 2,456.9 5% 57.5 2,456.4 3,593.0 4,728.8 3,172.0 11 Côte d’Ivoire 7.8 15.3 30.5 5% 0.39 14.0 28.0 51.7 10.0 12 Kenya 22.9 41.2 60.7 5% 1.15 46.4 80.8 123.6 81.0 TABLE 1.a.  Forecasting the Growth in Banking Sector to Support Low-Carbon Transition in 21 Emerging Markets (continues) Climate- Claims on Smart Lending Claims on Climate-Smart Private as % of Claims Climate-Smart Private Investment Sector Total Assets on Private Lending Sector Total Assets Potential (2016) (2016) GDP (2016) Sector (2016) (2016) (2030) (2030) GDP (2030) (2016–2030) # Countries (US$ billion) (US$ billion) (US$ billion) in % (US$ billion) (US$ billion) (US$ billion) (US$ billion) (US$ billion) 13 Nigeria 52.7 104.9 336.6 5% 2.64 99.4 211.8 687.9 104.0 14 South Africa 211.6 364.1 315.4 5% 10.58 363.3 647.3 569.8 558.0 Sub-Saharan Africa 295.0 525.4 743.3 5% 14.7 523.1 967.9 1,433.0 753.0 15 Russian 743.7 1,343.2 1,378.0 5% 37.18 1,655.2 3,525.0 2,855.4 313.0 Federation 16 Serbia 15.8 30.8 35.9 5% 0.79 32.9 62.0 64.2 9.0 17 Turkey 485.9 774.3 734.1 5% 24.29 988.2 1,491.1 1,357.5 270.0 18 Ukraine 34.0 65.4 87.9 5% 1.70 74.0 134.5 156.1 73.0 20 Eastern & Central 1,279.4 2,213.7 2,236.0 5% 64.0 2,750.3 5,212.6 4,433.3 665.0 Asia 19 Egypt 51.0 214.9 149.4 5% 2.55 72.3 309.4 311.5 174.0 20 Jordan 29.0 N/A 38.7 5% 1.45 49.3 N/A 74.8 23.0 21 Morocco 64.3 128.8 100.5 5% 3.21 122.9 235.0 157.8 68.0 Middle East & 144.3 343.7 288.5 5% 7.2 244.6 544.4 544.2 265.0 North Africa 21,955.2 43,441.9 20,800.6 7% 1,503.1 44,482.7 86,684.1 41,128.0 23,621.0 TABLE 1.a.  Forecasting the Growth in Banking Sector to Support Low-Carbon Transition in 21 Emerging Markets (Continued ) All Figures expressed in Billions of US$ Source: IFC Compilation – using IMF – International Finance Statistics Yearbook 2017 for the period between 2005–201617 Note: *For China, we have assumed the Climate-Smart Lending as % of Claims on Private Sector, i.e. ~7.2%, on the basis of the data reported by CBRC (8.22 trillion yuan (end of June 2017) ~ USD 1,212.5 billion using the Jun17 Fx). **For Brazil, it is assumed that the Climate-Smart Lending as % of Claims on Private Sector, i.e. ~8%, on the basis of the data reported by Febraban (BRL 309,080 million (in 2016) ~USD 94.96 billion using the Jun16 Fx). 2016 2030 2016 2030 # Country (US$ billion) (US$ billion) % % 1 China 9,409.0 17,636.0 63.5% 62.3% 2 Indonesia 279.0 492.3 1.9% 1.7% 3 Philippines 129.0 316.4 0.9% 1.1% 4 Vietnam 3.0 6.2 0.0% 0.0% 5 Argentina 203.0 217.0 1.4% 0.8% 6 Brazil 2,203.0 4,100.2 14.9% 14.5% 7 Colombia 130.0 295.3 0.9% 1.0% 8 Mexico 700.0 1,537.0 4.7% 5.4% 9 Bangladesh — — 0.0% 0.0% 10 India 797.0 1,979.2 5.4% 7.0% 11 Côte d’Ivoire 4.0 8.5 0.0% 0.0% 12 Kenya 3.0 6.3 0.0% 0.0% 13 Nigeria 8.0 17.1 0.1% 0.1% 14 South Africa 235.0 399.9 1.6% 1.4% 15 Russian Fed. 423.0 843.3 2.9% 3.0% 16 Serbia 5.0 13.8 0.0% 0.0% 17 Turkey 249.0 357.8 1.7% 1.3% 18 Ukraine 6.0 24.8 0.0% 0.1% 19 Egypt 8.0 10.8 0.1% 0.0% 20 Jordan 5.0 9.9 0.0% 0.0% 21 Morocco 8.0 18.2 0.1% 0.1% SUM 14,807.0 28,289.9 100.0% 100.0% TABLE 1.b.  Forecasting the Growth in Debt Capital Markets From 2016 to 2030 Source:  Bank of International Settlements, data from December 31, 2005 to December 31, 201618 21 ANNEX 2 About IFC and Case Studies About IFC19: on China’s green lending market, CHUEE SME • Member of the World Bank Group with a mission to partner banks have issued over 1500 green loans promote development through investment in private independently, which helped to mobilize another sector; US$12 billion and achieved more CO2e emission reduction. Cumulatively, beyond IFC’s RSFs, IFC’s • Owned by governments of 184-member countries, eight partner banks have now provided over with over 50 percent of capital held by AAA/AA US$100 billion to green projects, per China’s sovereigns; Banking Regulatory Commission. • Strong financial profile with substantial capital and • IFC partnered with the Agricultural Bank of high liquidity; China (“ABC”), which is the 3rd largest bank in • Consistently rated AAA/Aaa (stable outlook) by China by asset size with 23,670 domestic branch Standard & Poor’s and Moody’s; and outlets and more than 500,000 employees, to • Highly diversified global portfolio with debt and sign an agreement to provide advisory services equity exposure in more than 120 countries and over that will help the bank increase its green finance 2,000 private sector clients. portfolio by a minimum of US$23 billion. The program is expected to reduce greenhouse gas Case studies—IFC’s experience in climate-smart emissions by 50 million metric tons CO2e p.a. within financing through financial institutions in emerging the next three years. To achieve this target, IFC and markets ABC will develop a multi-million-dollar pool of The following are some examples of IFC’s investment high-quality loans for EE and RE projects. Some of and advisory support to scale climate-smart as well these loans will be securitized in secondary markets. green finance activities through financial institutions: On August 26, 2016, as ABC’s green advisor, • In China, IFC’s CHUEE program was started in IFC provided 3rd Party verification on the issuance 2006 at the request of China’s Ministry of Finance of green Assets-Backed Securities, the first such (“MOF”) to IFC to support the implementation securities in China. Green ABS were issued on of energy efficiency (“EE”) and renewable energy the Shanghai Stock Exchange for Goldwind (“RE”) projects in China. While financial institutions Science and Technology. The Green ABS of value in China were highly liquid, they were risk averse US$190 million (CNY1.275 billion equivalent) and access to EE/RE credit was limited especially were issued with terms of one to five years and for SMEs due to lack of access to finance and lower issuance rates of 3.4 to 4.5 percent. awareness for EE/RE. By June 2016, projects directly • Besides being an early issuer of green bonds, IFC supported by IFC’s China Climate Finance Advisory has also been an early investor in green bonds for its program have reduced CO2e emissions by about clients. In 2014, IFC became the first international 22 million p.a., and mobilized over US$2.3 billion investor in a developing market Green Bond when to finance over 231 EE/RE projects. In addition, it subscribed to a US$50 million equivalent Indian CHUEE partner banks have become more confident Rupee Green Bond issued by YES Bank, a leading 22 Indian private sector bank. This was IFC’s first Green Issuer Yes Bank, India Bond investment, and first green bond investment denominated corporate bond investment and local Issuance Status Green Bond, Senior Unsecured currency in India. The investment helped establish Issue Date 16 April 2014 a Green Bond program in YES Bank, to diversify Size INR 3.15 billion (approx. US$49.2 million) its funding sources and tap into the nascent Green Bond capital markets (see Table 2 below for further Maturity April 2024 details). Tenor 10 years • IFC has since engaged with 12 more financial Coupon 8.95% Fixed institutions in 8 different countries investing US$1.25 billion in their respective first ever green Listing Not-Listed bond issuances, expected to reduce green-house gas Arranger Citi emissions by about 1.4 million tCO2e pa. TABLE 2  Investment Summary of YES Bank Green Bond Source: IFC Compilation 23 ANNEX 3 A Simplified Schema on Broad Terms of Sustainable Development Source: Definitions and Concepts Background Note, UNEP Inquiry Working Paper (16/13)5 24 ANNEX 4 Summary of Green Business Opportunities for Banks in Emerging Markets 25 26 references 1 International Energy Agency, World Energy Investment Outlook, 2014; access at https://www.iea.org/publications/freepublications/publication/ WEIO_2014_ES_English.pdf 2 Climate Investment Opportunities in Emerging Markets, An IFC Analysis, 2016; access at https://www.ifc.org/wps/wcm/connect/ 51183b2d-c82e-443e-bb9b-68d9572dd48d/3503-IFC-Climate_Investment_Opportunity-Report-Dec-FINAL.pdf?MOD=AJPERES 3 Climate Investment Opportunities in South Asia, An IFC Analysis, 2017; access at http://www.ifc.org/wps/wcm/connect/ be4dacbd-18d1-4159-b9e9-e6a95e094d7a/Climate+Investment+Opportunities+in+South+Asia+-+An+IFC+Analysis.pdf?MOD=AJPERES 4 Sustainable Finance: Commission’s Action Plan for a Greener and Cleaner Economy, March 2018; access at http://europa.eu/rapid/ press-release_IP-18-1404_en.htm 5 Definitions and Concepts Background Note, UNEP Inquiry Working Paper (16/13), September 2016; access at http://unepinquiry.org/ wp-content/uploads/2016/09/1_Definitions_and_Concepts.pdf 6 IMF: International Financial Statistics, Yearbook 2017; access at https://www.bookstore.imf.org/books/title/international-financial-statistics- yearbook-2017 7 Input Paper for the G20 Green Finance Study Group - Greening the Banking System - Experiences from the Sustainable Banking Network; access at: https://www.ifc.org/wps/wcm/connect/da980744-987e-496d-82e8-e5f146895165/SBN_PAPER_G20_updated+08312016. pdf?MOD=AJPERES 8 Measuring financial resources allocated to the Green Economy, November 2017; access at https://cmsportal.febraban.org.br/Arquivos/ documentos/PDF/-L04_Mensurando_recursos_ING.pdf 9 IFC works with its bank partners to support the trade of goods and services that enable their corporate clients to adopt energy efficient technologies, cut carbon emissions, and ensure the sustainability of their operations and their supply chains. Through IFC’s Climate-Smart Trade initiative, IFC provides a price incentive or longer tenors for equipment and projects guaranteed under the Global Trade Finance Program (“GTFP”) that have clearly defined climate change benefits; access at https://www.ifc.org/wps/wcm/connect/industry_ext_content/ ifc_external_corporate_site/financial+institutions/priorities/global+trade/gfm-tsc-gtfp-ee-info 10 While banks are increasing their commitments to climate related lending, they continue to have significant exposure to high GHG emitting projects. In 2017, the world’s biggest banks increased their financing of “extreme fossil fuels” by 11 per cent, committing US$115 billion to fund projects in tar sands, Arctic and ultra-deepwater oil extraction, liquefied natural gas export, coal mining and power; access at https://www.business-humanrights.org/en/global-funding-for-extreme-fossil-fuels-increased-by-11-in-2017-new-report-finds 11 This is an average across all 21 countries. However, there are countries in which the climate investment opportunity is larger than the bank lending to the private sector. For those countries, the importance of non-bank lending and direct capital market financing becomes even more important. 12 Report on Green Finance Reveals Multi-Billion Dollar Opportunity for Latin America Banking Sector Study by FELABAN, IFC and EcoBusiness Fund Also Recognizes Regional Leaders in Climate Finance; access at https://ifcext.ifc.org/ifcext/Pressroom/IFCPressRoom.nsf/ 0/E19540BCB622A7E0852581D9006E462E?OpenDocument 13 The Federation of Latin American Banks (“Felaban”) is a non-profit entity founded by banking associations and other agencies from 19 Latin American countries in Mar del Plata, Argentina, in 1965, and it includes over 500 regional banks. Its goals are to promote and facilitate communication, understanding and relationships between financial entities; to support the coordination of criteria and the unification of general banking and financial practices in Latin America; to cooperate with economic development; to promote well-being; and to procure greater access to financial services for low income populations. For more information; access at www.felaban.com 14 The eco.business Fund is spearheading the promotion of business practices that contribute to the preservation of biodiversity, the sustainable use of natural resources, and climate change mitigation and adaptation through private enterprises. By providing financing for business practices that conserve nature and foster biodiversity, the fund seeks investments with both financial and environmental returns. The eco. business Fund is structured as a public-private partnership (BMZ, European Union, KfW, FMO, OeEB, GLS Bank, Calvert Foundation, ASN Bank, and Conservation International), and it was co-created and advised by Finance In Motion. 15 SBN Global Progress Report, IFC, February 2018; access at http://www.ifc.org/sbnreport 16 Measuring financial resources allocated to the Green Economy, November 2017; access at https://cmsportal.febraban.org.br/Arquivos/ documentos/PDF/-L04_Mensurando_recursos_ING.pdf 17 IMF: International Financial Statistics, Yearbook 2017 and Climate Investment Opportunities in Emerging Markets, An IFC Analysis, 2016. Also, the climate-smart lending data for India and Bangladesh is sourced from the Climate Investment Opportunities in South Asia report, An IFC Analysis (2017). 18 Bank of International Settlements; access at https://www.bis.org/statistics/about_securities_stats.htm?m=6%7C33%7C638 19 For more information, access at https://www.ifc.org/wps/wcm/connect/corp_ext_content/ifc_external_corporate_site/home 27 IFC 2121 Pennsylvania Avenue, N.W. Washington, D.C. 20433 U.S.A. ifc.org Contacts PEER STEIN | pstein@ifc.org GURSIMRAN ROOPRAI | grooprai@ifc.org