Risk guarantees and innovation key for more lending into green energy projects
Multilateral financial institutions are making changes to their lending patterns, inspired by the need to finance new technologies and innovations that aim to reduce the impact of climate change. Part of that are risk guarantees where projects fails to yield enough capital to repay the loans and capital advanced by the commercial banks.
Multilateral financial institutions are making changes to their lending patterns, inspired by the need to finance new technologies and innovations that aim to reduce the impact of climate change, according to delegates attending the UN Environment Assembly (UNEA) in Nairobi.
Pierre Rousseau, senior strategic sustainable business advisor at BNP Paribas, said the new banking business is now demand-driven by technology.
“The banks need to change as technology advances. The changes would mean banks will not create new lending products but they will create new lending models in order to finance entrepreneurs.”
Rousseau also said banks need to comply with regulations on capital requirement and hence have less money to invest in long-term projects that aim to reduce climate change impact, adding that there was need to ensure money was circulating to the right sectors through innovation.
He said such innovations would include the process of identifying the right entrepreneurs to invest in new technologies required to reduce the impact of climate change by enabling them to access new financial products.
According to the French banker, enabling investors’ access to affordable finance like blended finance and enabling philanthropists and development finance institutions to work together in raising funds to be lent to communities affected by climate change through grants and complimentary finance are ways to save the planet earth.
He said BNP Paribas was providing complimentary grants and guarantees to customers and lenders interested in producing goods and services to enhance the reduction of climate change.
Multilateral development banks such as Asian Development Bank (ADB) currently provide support to local commercial banks in areas where they operate to lend to communities and companies investing in the generation of green energy such as geothermal production through risk guarantees.
According to bankers, risk guarantees include full or partial right offs, in case an investor funded to produce a certain product fails to yield enough capital to repay the loans and capital advanced by the commercial banks.
During the UNEA, bankers and environmentalists agreed that while banks require capital and must secure commitments that funds lent would generate positive profits, the impact of climate change required state institutions to invest in public infrastructure like solid waste management and recycling plants, which have no immediate profits generated.
For instance, the ADB has provided a concessional loan to the Chinese government to help finance public infrastructure improvements to tackle public waste, said Bruce Dunn, director of environment and safeguards at ADB.
Similar initiatives have been offered by the French Development Agency (AFD), which currently invests in sustainable infrastructure through grants and credit lines through local commercial banks, according to Damien Navizet, head of climate division at AFD.