By Laura Canevari
A new initiative has been established by IDB Invest, in partnership with the Asociación Hondureña de Instituciones Bancarias (AHIBA) and with support of Acclimatise. The initiative will help the banking sector in Honduras identify and appraise opportunities for investment that can help build climate resilience at high-risk sectors. The project has developed an approach that allows banks to evaluate the business opportunities associated with climate-resilient/adaptation financing, building on an understanding of climate risks, and which helps link their management response to physical climate risks with the development of new services.
In this article, we explore the preliminary findings of this project and reflect on what banks in Honduras can do to support resilience building in their country.
The business case for companies in sectors most affected by climate change
Honduras ranks as one of the countries at highest risk from climate change globally and is the most threatened within Central America, according to Germanwatch. Increase in temperatures and the intensity and frequency of droughts threaten the availability of adequate water supplies for sectors such as agriculture and hydroelectric generation, as well as for human consumption. Droughts in particular have become a recurrent hazard, especially along central and western parts of the country (part of “El Corredor Seco”). Higher temperatures and droughts also intensify the incidence of plagues and diseases, reducing the quality and volume of agricultural output and increasing the price of agro-processing supplies. In mountainous areas, for example, they have led to the propagation of “la roya” (or coffee leaf rust), menacing crops, and threatening more than 96,000 small coffee producers and a million workers, according to USDA Foreign Agricultural Service.
Extreme weather events, although less common than incremental changes such as increased temperatures, have also left their footmark in the country. The effects of Hurricane Mitch in 1998, for example, are still strongly recalled by local stakeholders – Honduras was devastated as the hurricane caused over 15,000 deaths and over 1 million people to become homeless. Industries, real estate and services (e.g. tourism, coastal infrastructure) are particularly at threat from the effects of extreme weather events, which can cause supply chain disruptions, damages to infrastructure, and increase maintenance and operational costs.
In order to increase their resilience and mitigate climate impacts, businesses in Honduras will need to take meaningful action. This means investing in products and services that help countering or reducing their vulnerability to climate hazards. If they fail to do so, they could experience significant changes in their cash flows, particularly as a result of a reduction in their earnings, due to lower productivity, a decrease in assets’ value (due to their higher exposure to climate hazards), and an increase in the cost of production. In addition, businesses may also experience greater (and unforeseen) capital expenditure and operating expenses.
The business case for financial institutions
If businesses fail to adapt, they could see a reduction in their creditworthiness, generating credit and liquidity risks for financial institutions. Thus, the reasons for Honduran banks to promote investments in resilient solutions are two-fold. First, investments in resilient solutions offers an opportunity for banks to extend their operations into new markets through the provision of financing products that help businesses invest in resilient solutions. Second, by helping businesses (their clients) adapt, banks also mitigate and reduce climate risks in their own portfolios, reducing the probability of default from businesses in at high-risk sectors.
As part of the IDB Invest project, a team from Acclimatise visited Honduras at the end of February (2020), to better understand the investment outlook for products and services that help businesses in at high risk sectors build their resilience. In order to identify sectors at highest risk, the team first carried out a high-level climate risk assessment using Aware for Projects, our in-house climate risk screening tool, using an aggregate commercial portfolio of credit loans in Honduras. Highest climate risk scores were found in Agriculture, Silviculture, Livestock, Fishing, Services and Transportation and Communication sectors. In addition to these sectors, industries and real estate were also identified as potentially at risk, due to their relevance and weight in the credit portfolio.
Building on this evaluation, the team developed a preliminary list of potential adaptation investments in sectors most at risk. This was followed by a series of consultations with technology providers, financial institutions and government agencies in order to assess the resilient investment opportunities available in the country that could help mitigate climate risks in these sectors. In addition, with the support of IDB Invest and AHIBA, the team organised a workshop for banks in Tegucigalpa, to raise awareness on the business opportunities and build the knowledge required to originate and place climate-resilient credits. During the event, banks were introduced to the risk-based approach proposed by the team for the identification of resilient solutions, helping them to reflect on the importance of incorporating climate considerations into governance and risk management processes. In addition, the event was also an opportunity to discuss key barriers and enablers affecting the development of financial products to support resilient investments.
A key finding from these consultations has been the strong signal from technology providers, who have experienced a significant increase in the demand for their resilient products and services, within sectors already experiencing the effects of climate change and also those affected by the steady increase in energy prices. Some of the technologies that could help actors in at high-risk sectors adapt are already available in Honduras and are being disseminated within Central America in response to food and energy security concerns. These include, for example: drip irrigation; solar pumping; climate tolerant seeds; greenhouses; energy efficient technologies; solar photovoltaic and solar thermal. According to some providers these technologies are already proving successful and profitable. Many businesses have in fact experienced a reduction in production costs driven for example by energy efficiency measures that reduce their energy bill. In addition, providers are also experiencing an increase in the demand for their products and services, which is most notably driven by the steady increase in energy prices, but also caused by changes in climate – in particular the increase in water scarcity in several parts of the country.
These technologies are not entirely new to banks in Honduras. As noted by the workshop participants, banks in Honduras have already started financing these types of products. But the interesting fact is that their perception of the demand for these investments has not led to the development of strategies to promote their uptake. In other words, whilst providers are seeing a steady increase for the demand of their products, the banks are yet to perceive the demand as worthy of a strategic response. And yet, it is clear that, as climate change impacts become more evident, the demand for resilient solutions is likely to increase. This offers an opportunity for banks to be more proactive and define what can they do to help clients become more climate resilient, and to reduce their own risk as well. The more prepared their clients are, the higher their creditworthiness and the lower the likelihood of climate impacts being transferred from clients to banks.
How can the banking sector in Honduras respond?
In order to reduce financial risks stemming from climate change impacts and to take advantage of emerging opportunities, financial institutions in Honduras must first understand which sectors are most at risk and how their clients’ operating in these sectors are affected by climate change and its effects on their cashflows. This is the first and soundest step to take in order to identify the type of services and products that clients need in order to increase their own climate resilience.
Building awareness inside the banks about climate solutions offered in the market is therefore important. In most cases, bank officers are unaware of the risks posed by climate change to their clients (and to the bank), and of the type of innovations that clients could embrace to reduce these risks. Equally, sensitising banks’ costumers about the need to respond to climate threats is needed. The business case of resilient solutions is well evidenced across a number of the existing technologies, but lack of familiarity with these products and lack of government support can make businesses reluctant to invest in resilient products.
To build greater awareness on the business opportunities stemming from resilient investments, banks, AHIBA and IDB Invest can foster partnerships with other key players such as technology providers and universities, in order to better disseminate information on climate risks and resilience needs across different sectors. These actors can also work together in order to support the uptake of resilient investments by generating greater access to technical assistance.
Challenges to support the expansion of resilient investments still remain. In particular, it is still difficult for many actors in the country to comply with loan requirements, especially for small and medium enterprises. Therefore, banks could explore financial products and credit conditions that can align with SMEs capacities and that reflect the performance curves of the technologies financed (e.g. considering grace periods during the installation of equipment or supporting providers in the provision of payment plans). In addition, adequate government support – through higher normativity, legal incentives and tax exemptions for the import and acquisition of resilient technologies– is very needed, in order to build an enabling environment that favours early action.
Our initial assessment has helped build the evidence of the business opportunities stemming from climate risks facing Honduran banks. These banks should embrace these opportunities in order to develop a more strategic approach to management of climate risks, and step into the role that financing has in helping build the resilience of the country. More importantly, the initial assessment is helping banks to understand that the identification and characterisation of resilient investment opportunities ought to be integrated into a wider framework that supports climate change risk management inside the banks. We foresee future exchanges with the banks and providers will help building a clearer view of the roadmap banks should follow to provide better access to finance and information on resilient solutions in Honduras.