January 31, 2017 By Jennifer Delony Associate Editor
With global commitments to reduce greenhouse gas emissions set, funding those commitments will require new, unique financial models, such as ones used by the handful of green investment banks in operation today.
In the year following the signing of the Paris Agreement in 2015, there was an increased interest in building a broad spectrum of financial solutions that can both deliver on commitments to reduce global greenhouse gas emissions and deliver in the unique markets of disparate countries. If those solutions are going to fulfill the needs of the commitments made under the Paris Agreement, then they have a lot of work to do. Data behind the climate change economy are staggering.
A November 2016 paper, Green & Resilience Banks, said $13 trillion in investments is required just to meet the pledges made by countries supporting the Paris Agreement. The paper added that, for a complete “low-carbon, climate-resilient economic transformation,” the world must invest $6 trillion per year by 2030. Green & Resilience Banks was developed by Coalition for Green Capital (CGC), Natural Resources Defense Council (NRDC), and Climate Finance Advisors, with financial support from ClimateWorks.
The paper highlights one solution to climate finance — the green investment bank — which has been steadily gaining traction for several years.
Jeffrey Schub, executive director of CGC, said that “we’re at a point now where a lot of people are interested in the idea of a green bank, but they still don’t know exactly what it is and how you create it.”
CGC is a nonprofit founded in 2009 to develop and aggregate know-how around green banks and help policy makers and other key stakeholders understand the concept of green banks. CGC and NRDC are co-administrators of the Green Bank Network, which was founded by green banks as a hub of information about this unique financial institution. The six founding members of the Green Bank Network closed transactions worth $22 billion as of November 2016, according to Green & Resilience Banks.
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Brought To You ByCGC also has been collaborating with the Organization for Economic Co-operation and Development (OECD), based in Paris, for a number of years on the topic of green banks.
So What is a Green Bank?
A green investment bank is a public entity established specifically to facilitate private investment in domestic low-carbon, resilient infrastructure. Currently, there are 13 green banks around the world, according to the OECD. Seven of the 13 are located in the U.S., and there is one each in the UK, Switzerland, Japan, Malaysia, Australia and the United Arab Emirates. Schub said that, in the U.S., we will see more state green banks coming online this year, and we will see more innovation in the model of the institution itself.
The green banks in New York and Connecticut, for example, “are purpose-built, public or quasi-public entities that are heavily funded by state government,” he said. “I wouldn’t be surprised if we start seeing green banks that are private, nonprofit organizations that are funded by state governments but also funded by foundations.”
He said that creative applications will arise in the U.S. in an attempt to move more quickly and to make the institutions better-suited to draw on different capital sources.
Schub also said that the CGC, through the Green Bank Network, has had conversations with individual nations and development banks that are interested in understanding how green banks could be implemented in their markets. He said that, in 2017, those conversations are going to mature.
Substantial progress already has been made in India to develop a green bank, and Schub said it is likely that one will be formally established there this year. CGC, in cooperation with its partner, NRDC, has been developing the green bank opportunity in India. Schub said that an existing entity, called the Indian Renewable Energy Development Agency, is creating a green bank wing of the organization that will engage in innovative public-private partnership structure financing that is designed to leverage private investment with public dollars and take on more creative risk mitigation structure.
“India, as the third largest emitter in the world, would send a really powerful signal to have an institution like that,” Schub said.
Green Banks in Action
Green banks have the opportunity to focus funding on gaps in local investment by using a wide range of tools and approaches to attract and deploy capital, according to Green & Resilience Banks.
The paper provided the following tools as examples:
Co-investment through debt and equity; co-investments involve direct green bank investment in a project alongside a private investor
Risk mitigation and credit enhancements; green banks use a range of credit enhancements, such as loan loss reserves, loan guarantees and risk sharing mechanisms
Aggregation, warehousing and securitization; these solutions are critical to supporting small, disaggregated projects
While developed nations are making strong progress in green bank creation, identifying whether the above – or other – financial products can work in emerging markets is key to accelerating the green bank concept globally.
It is important to ask what market challenges exist in emerging markets that are not an issue in developed regions, Schub said.