Why green financing is more than a buzz
Tuesday, October 26th, 2021 00:00 | 5 mins read
The concept of investing in environmentally sustainable activities is getting more attention and experts break down what it entails.
Human activities are likely to further accelerate global warming to 1.5 °C above pre-industrial levels between 2030 and 2052, the latest Intergovernmental Panel on Climate Change (IPCC) 2018 report indicates.
Consequently, to prevent such high temperatures, there is a need for social and business transformations in emission reductions in all sectors. This has led to the concept of green financing.
Green finance is the funding of investment in all sectors and asset classes that incorporate environmental, governance and social criteria into investment decisions and embed sustainability into risk management with the aim of encouraging advancement of a more sustainable economy.
“Green or climate finance is any structured financial activity - a product or service –designed to achieve a better environmental outcome.
It includes an array of loans, debt mechanisms and investments to encourage development of green projects or minimise impact on climate of more regular projects, or a combination of both,” says Ted Otieno, Chairperson of Kenya Green Building Society, a non-profit organisation advocating for environmentally sustainable buildings.
As a result of climate change, banks and financial institutions have a role in assisting businesses transition into the green economy and unlock private investments to bridge supply and demand while considering risks and evaluate projects from environmental and economic perspective.
To support green finance, the government in 2016 unveiled the Green Economy Strategy and Implementation Plan to provide a roadmap for a “low carbon, resource efficient, equitable and inclusive socio-economic transformation”.
“The blueprint has been cited as a key strategic foundation and seedbed for a number of national and local initiatives in sustainable socio-economic development and environmental conservation including the Sustainable Financing Initiative (SFI), under the Kenya Bankers Association (KBA),” notes Ted.
The SFI is a voluntary reporting exercise aimed at establishing a baseline on the progress the banking industry has made in implementing the guiding principles in green financing and sustainability.
As a member of Sustainable banking network (SBN), Kenya is among nations that have embraced these voluntary industry principles.
All SBN members are actively promoting sustainable finance and the country is ranked at the emerging stage, meaning it has started implementing policies and principles on sustainable finance.
“While Corporate social responsibility is done at the periphery when companies have cash and time, sustainability or shared value is at the core of the strategy and encompasses people, social, economic and environmental impact.
While it’s important that an organisation grows in profit, even more desirable is when they have a positive impact on both the environment and the people,” says Jane Waiyaki Maina, head of sustainability and citizenship at Absa Bank, Kenya.
The bank recently received an energy management award for their effort in reducing emissions by retrofitting their buildings to save energy.
Retrofitting is the process of modifying something after it has been manufactured.
For buildings, this means making changes to systems inside the building or even the structure itself after initial construction and occupation.
For instance, repalcing normal bulbs with led or solar power. It could also involve fit in water tanks to capture rain water.
“The amount of carbon emission we reduce is good as it assists in conserving environment.
We realised afterwards many financial institutions wanted to have this done, but didn’t have the capital to start.
We have created propositions that support organisations to do the same because we can lend money to them.
Based on the savings they make every month, they can repay their loan,” says Jane.
The IPCC report projected that approximately $2.4 trillion (Sh265.3 trillion) in clean energy is required until 2035 and between $1.6 (Sh176.9) and $3.8 trillion (Sh419.7 trillion) by 2050.
Considering such significant investment needs, this creates an opportunity for financial institutions to play a pivotal role in offering the required financial resources required for the change.
Not only can they support countries to adapt to climate change and enhance its financial resilience to climate risks, but also assist in minimising risks linked with climate change and reallocating financing to climate-sensitive sectors.
“We are big on reducing inequality and financial inclusivity. We have launched a partnership with Melanin Capital where we are driving funding for women founded start-ups.
We are also working with our suppliers, training them on sustainable development, shared valued principles and the UN global centred principle, but then we are teaching them to communicate this as the new way of doing business,” she says.
Organisations that are sustainable have a competitive advantage over those that don’t.
Another popular trend in green finance is green bonds. Globally, the green bond market could be worth $2.36 trillion (Sh261.1 trillion) by 2023.
It is regarded as a way of meeting the needs of environmentalism and capitalism simultaneously. In Kenya, the programme was launched in 2017 and the first green bond issued in 2019.
The Sh4.3 billion climate bonds certified issuance raised funds to provide 5,000 university students with environmentally friendly, affordable housing in Nairobi, now known as Qwetu housing.
“The programme was an initiative of KBA, SFI, Nairobi Securities Exchange, Climate Bonds Initiative, UK Aid, Financial Sector Deepening Africa, and FMO, the Dutch Development Bank.
It is endorsed by the Central Bank of Kenya, Capital Markets Authority and the National Treasury.
It was borne out of the realisation that despite opportunities in green financing, investors still faced constraints including lack of policy support and limited information on bankable projects,” explains Ted.
Despite that banks are becoming aware of climate change and their impact, the green portfolio is still low.
The International Finance Corporation report in 2016 estimates total green loans and credits of banks in developing countries to the private sector is about seven per cent of total claims .
Experts argue that it is as a result of lack of knowledge and no prioritisation of sustainability.
“Most organisations are stuck at short term benefits whereas in sustainability, you have to be patient as it’s a long term benefit.
Our initial investment for retrofitting our buildings was expensive but we looked at it holistically in terms of benefits we’ll attain all through.
You might have an initial cost but the benefits you get actually surpass it,” says Jane.
She adds that there is also lack of knowledge and education in as far as green finance is concerned.
“A lot of people are not sure of where to start. That’s why we began educating suppliers, and from next year we shall open it to the public mainly for small and medium enterprises.
Corporates such as ours have a responsibility to educate suppliers or people within their ecosystem or value chain to understand and be able to tap into this,” she notes.
Such initiatives on sustainability also have to begin from the board all the way down the institution and not just a department implementing the change.
“Most financial institutions think about the risk part, but the opportunity is much bigger. It’s a multibillion economy which is untapped.
They can fund sectors that haven’t been funded yet such as youths and women, which means growing their business.
There are new market segments, new growth areas, untapped groups of people and there lies an opportunity to grow your business.
Like financing climate smart agriculture which is new technology, green buildings, energy efficiency, renewable energy and health sector too is a place we can drive funding,” she says in conclusion.