By Caroline Fouvet and Laura Canevari
Nine months after its launch, the IDB Invest-funded initiative to support Honduran banks identify climate resilient investments, concluded during a well-attended webinar. Organised by IDB Invest and AHIBA (Asociación Hondureña de Instituciones Bancarias) and facilitated by Acclimatise, the event provided an opportunity to go over the project’s methodology to identify resilient investments and to hear national technology providers’ perspectives on market trends for resilient technologies, their benefits and financing challenges. Further, IDB Invest and Bancolombia also reflected on their experience promoting sustainable finance across Latin America and its benefits. Overall, the ultimate objective was to promote a better understanding of the business opportunities arising from financing technologies and products that can increase climate resilience in at-high-risk sectors.
As 60 people, including over 30 representatives from the banking sector, tuned into the webinar to hear about the initiative’s insights and lessons learnt, speakers went through the following key elements:
Financing resilient solutions requires innovation in how investment opportunities are identified and framed
In order to determine how to finance climate resilient solutions, banks should first analyse their investment portfolio to see what sectors are the most relevant, which of them are the most vulnerable to climate change and what climate change risks they are facing. Grounded on this understanding of climate risks in their portfolios, they can then identify those technologies, products and services that could help avoid, minimise and manage those risks. They can also determine what is the market potential for those technologies and carry assessments of the business environment. This is all the more relevant in a country considered one of the most vulnerable to climate change globally.
It is important also for banks to understand that the mechanisms to finance resilient solutions differs from traditional financing in that:
- The purpose of the credits must be clear and demonstrate climate resilience benefits;
- The process for the selection of eligible investments must be transparent and eligibility criteria on the resilience benefits must be incorporated in the credit approval process;
- Resources are administered to ensure traceability of credits and portfolios dedicated to resilient investments
- Monitoring and evaluation is undertaken to ensure access to information on climate resilient credits and their achieved benefits
Similarly, banks must be aware that commercialising resilient products and how to incentivise and increase credit demand also differs from traditional financing and the key role played by technical assistance and strategic alliances with solution providers.
Financing resilient solutions is a business opportunity for banks in Honduras
The webinar has also helped to demonstrate that there is already a market for a number of resilient solutions in the country, driven by companies’ need to improve their competitiveness and ensure their survival in the face of climate impacts. To make the case, Acclimatise presented 11 resilient solutions that were identified and characterised following the abovementioned approach, and reflected on the observed demand and market potential and the return on investment profile of these investment opportunities.
Similarly, representatives from Inelec, Frio Industrial and Durman, which are local providers for some of the resilient solutions identified, took the floor to introduce these technologies, including energy efficient air conditioning, smart cooling solutions and solar irrigation. The providers reflected on the ROI profile of each of these investments, noting a steady increase in the market demand for their products and services; but acknowledging that certain barriers still remain, in particular the high cost of the initial investment and a lack of adequate financial products to support investment in these technologies are obstacles still to be surpassed.
As noted by Sandra Rivera from PESIC (the Energy Efficiency Project in the Industrial and Commercial Sectors (PESIC), a concrete way to push resilient technologies forward is to build up strategic alliances between technology providers, business owners and engineers providing technical assistance and confirming the technologies’ resilience benefits, such as lower energy consumption. PESIC aims both to increase technical and institutional capacities in energy efficiency, and to develop financial instruments that favour investments in energy efficiency equipment and practices.
Another important avenue to promote resilient investments is through the development of strategic alliances between the banks and the different providers and distributors of climate resilient solutions in Honduras. AHIBA, as the national association of commercial banks in the country, has an important role to play in this, as it can support the development of these alliances and the transfer and sharing of experiences promoting resilient investments between the banks.
Practical experiences and lessons learnt in capturing “green” and “resilient” financing opportunities across Latin America
The event also featured reflections from IDB Invest, who described the mechanisms put in place to promote sustainable finance on the region, including green and sustainable bonds. In addition, the Colombia bank Bancolombia share its experience in the development of credit lines to support sustainable and climate resilience investments. Bancolombia highlighted the importance that adhering to international protocols (such as the Equator Principles and CDP) as well as national ones (i.e. the Green Protocol) and the need to have buy in from the board of directors. Moreover, they noted that having an Environmental and Social Risk Management system significantly facilitated the development of a green strategy, as well as the development of a taxonomy to clearly define what constitutes a green and a resilient investment, to provide banks with an operational framework. Many banks indeed already finance climate resilience, but it is likely they are not yet aware of it, given they lack a proper taxonomy and system to track credits that build climate resilience.
Both presenters agreed on the benefits of sustainable finance in general and climate resilient finance in particular. These benefits include, among others, better access to long-term financing in capital markets, improved value of customer franchise and response to demands for socially responsible investments. When it comes to financing climate resilience, this enables banks to avoid losses arising from climate impacts and potential associated default payments on their loans, while also catering to the financing needs of new market segments, and as such expanding their activity.
In the time of COVID-19, the need to foster a green recovery has clearly emerged. This includes the importance of considering climate change resilience to ensure the new economy is built upon climate-proof foundations. Banks henceforth occupy a centre role in this endeavour, in Honduras and across the world.