EBRD Eyes Ways to Make Green Project Finance Multiply: Q&A

By Vandana Gombar, BloombergNEF editor. This article first appeared on the Bloomberg Terminal

The London-headquartered European Bank for Reconstruction and Development or EBRD is on track to reach 40 percent green financing share in overall operations by 2020, with nearly two-thirds of that going to prevent energy wastage.

The bank has a large portfolio of energy efficiency projects, and is often referred to as the efficiency bank. “That is the predominant climate finance activity, and, in my view, that is very relevant to…bend downward the carbon emissions curve. This is the area in which you can achieve the biggest shift in the shortest amount of time,” Josue Tanaka, EBRD’s managing director, energy efficiency and climate change, said in an interview.

Beyond renewable energy and energy efficiency, how can multilateral development banks, or MDBs, play a larger role in greening finance?

Tanaka said he sees the mobilization of private sector investment, in multiples of what has been happening so far, as the answer. The target should be to have, for each euro invested by a multilateral bank, “a 100, a 1,000 or a 100,000 mobilization ratio in relation to the private sector.”

MDBs can also play a larger role in attracting large institutional investors to green financing, Tanaka said. “Can MDBs develop blended instruments to improve the risk-return equation? Can we provide instruments such as partial guarantees or first loss which mitigate the risk for the [institutional] investor?”

EBRD has 67 countries as shareholders, with the five largest being U.S., Germany, Italy, Japan and U.K., in addition to the European Union and the European Investment Bank. Its 3,150 employees are spread out over its countries of operation, where it usually prefers to have a strong local presence.

Q: EBRD is targeting a 40 percent green finance share in overall financing by 2020, but you already exceeded that level in 2017, when 43 percent of financing was green?

A: In the run up to Paris climate conference [COP 21 in 2015], we set an ambitious 40 percent target. Reflecting a sharp strategic focus and favorable operational factors, we reached 43 percent in 2017. Last year [2018], we reached 36 percent – exactly in line with the target for the year. Operationally, between 2016 and 2020, we are increasing the target share of green finance by 2 percent every year. We are aiming at 38 percent this year, and 40 percent next year.

Q: What after 40 percent? Are you thinking about a 2030 target? Are you discussing what the next level of ambition should be?

A: As announced at the COP24 in Katowice, the multilateral development banks are developing an operational approach for alignment with the goals of the Paris Agreement. Once developed, this could become a powerful instrument looking at all activities rather than focusing only on the green [financing] share.

Q: EBRD’s aims to cross 10 billion euros of financing this year, with close to 40 percent being green. What are the sectors likely to take the bulk of this funding in 2019?

A: You could divide our green finance into three broad categories:
-Energy efficiency
-Renewable energy or greening the energy supply
-Climate adaptation

At EBRD, the share of energy efficiency financing is quite high compared to the renewables share, and this reflects to a large extent the countries and regions in which we work – in central and eastern Europe, the potential for energy efficiency is still very high.

If we are to meet the challenge of remaining within 1.5 degrees [of global warming], if we want to bend downward the emissions curve over the next decade, then energy efficiency is a key instrument.

If you look at the IEA [International Energy Agency] annual assessment, 44 percent of the emissions reduction to 2040 is expected to come – according to their model – from energy efficiency, compared to 38 percent for renewable energy. Technology for efficiency improvement is already available in most sectors. There is not much mystery to the rehabilitation of buildings and housing to make them less energy-inefficient. The big challenge is really one of deployment. How do you reach hundreds of thousands of housing units or factories?

EBRD has developed a specialty in efficiency financing because in our countries of operation, particularly in central and eastern Europe, it is a key area of opportunity. It probably accounts for 60-65 percent of what we do in green financing.

The renewable energy activity has recently been mainly in southern and eastern Mediterranean countries like Egypt, Jordan and Turkey. For example, the EBRD worked with the Egyptian government on the renewable energy policy front, leading to the financing of the largest solar plant [Benban] on the African continent near Aswan. Renewable energy has accounted for about 15-25 percent of our annual green financing.

Climate adaptation is an area of increased focus and activity, particularly in the countries of the southern and eastern Mediterranean, in Jordan for example.

Q: So, it would be correct to say that you are largely still an “efficiency bank”?

A: Yes, that is the predominant climate finance activity, and, in my view, that is very relevant to the increased sense of urgency to bend downward the carbon emissions curve. This is the area in which you can achieve the biggest shift in the shortest amount of time.

If you look globally, you see that the increase in renewable energy investment has been very sharp, whereas the shift in energy efficiency financing globally has been much flatter. There is, in a way, an inconsistency in this situation.

As a development bank, we work closely with governments on the policy framework relevant to both our climate mitigation and adaptation activities, and support the first phase of investment. The market can then take over. Accordingly, if our renewable energy investment in Egypt is less than what it was two years ago, it is, to a large extent, because the market is taking an increasing share of that activity.

Q: And this “market taking over” is not happening in the energy efficiency space yet?

A: The challenge in energy efficiency is that it is everywhere and nowhere. In renewable energy, you essentially have half a dozen technologies like solar, wind or geothermal, whereas energy efficiency for a building is very different technically from energy efficiency for a transport operator or a large petrochemical company. So you can’t really have a one-size-fits-all approach. The challenge is that you need to have a very broad range of instruments that combine technical knowledge with the finance instrument. Our growth of activity in this area has been entirely driven by developing a broad range of financing instruments across an expanding set of sectors.

Q: Which industry has received the largest chunk of EBRD’s energy efficiency financing, and which sector has the biggest opportunity?

A: Let me mention three examples to give you a feel of the diversity of potential and situations. Take energy intensive industries that are very large consumers of energy, such as cement, aluminum or steel production. EBRD financed a complete change in the technology process of a major steel producer a few years ago. It was hundreds of thousands of tons of carbon emissions reduction from a single project. If we are able to, over time, move the technology of these sectors to lower carbon-intensity technologies, that will move the needle.

Secondly, similar in terms of overall carbon emissions, but completely different from an operational point of view, are buildings. They account for a very large share of energy consumption in the world. The issue is then how to have an impact at scale? We are talking here about enforcement of construction codes for new buildings in developing countries and about making the current stock less wasteful in Europe and North America. Buildings represent a huge opportunity but, in practical terms, it literally means working in millions of units to make a big result in the aggregate.

An area where we have been putting a lot of work in our climate action is cities. They account for a huge share of global emissions. We have developed a Green Cities Framework to support environmental investment in cities, including climate mitigation and adaptation measures in their infrastructure, in their utilities and in their buildings. In fact, the largest investment ever approved by our board has been for the Green Cities Framework, earmarking 700 million euros to support our activity in this area. With another 250 million euros approved for the pilot framework, that totals to nearly a 1 billion-euro commitment. We are already active in 21 cities within this framework and are expanding this number across continents.

Q: Do you see EBRD as a bank that operates in a unique niche in the world of multilateral development banks or are you in sync with what other banks are doing?

A: The general trend of MDBs is increasing activity in green finance. At the time of the Paris climate agreement, all MDBs set for themselves higher targets in this area. The new banks – AIIB and NDB [Asian Infrastructure Investment Bank and New Development Bank] – have also put green financing high in their priorities as reflected for example in the initial portfolio of investments of the NDB.

The profile of financing is linked to the regions we work in: each MDB has to reflect in its green activity the characteristics of the climate challenge that is being confronted. The IDB (Inter-American Development Bank) may have more activity in the area of land use and deforestation, for instance.

MDBs also differ on their business models. In the case of EBRD, 70-75 percent of annual investment is in private sector operations. We do not do a lot of investments with the sovereign.

Q: Disruption is the buzzword in every industry. What is the disruption possible or required in the world of development banks, so that they can play a larger role in green finance? Weren’t the two new Asian banks supposed to be disruptors?

A: I don’t see the two new banks as disruptors. I actually see that we are working very well together. There is quite a lot of sharing of experience, and sharing of standards. It is not that these two new banks are coming in with a business model that is completely different from the MDB model. AIIB in fact favors co-financing with existing MDBs, so they are collaborating rather than disrupting.

MDBs have had for over 10 years a coordination mechanism among themselves on climate matters. This circle has been expanded to include AIIB, NDB and the Islamic Development Bank – it is a forum of collaboration to see how we can have an impact on climate.

Q: Does anything need to change in the working of MDBs?

A: MDBs are owned by their shareholders, which are countries. Their strategies and priorities are determined by their shareholders. The joint report on climate finance shows that 2017 was a record year for MDBs, with $35 billion flowing towards climate finance. The important question is: How can we have a more systemic impact? We can finance project-by-project – millions and billions – but the equation on the climate front is really denominated in trillions. It is then our ability to engage and channel the private sector to invest in this at scale that is going to make the difference. To me that is the main challenge: How can we, from the bottom-up experience we have — of sectors, of projects, of policy — move to an action that essentially means that for each euro we invest, we have a 100, a 1,000 or a 100,000 mobilization ratio in relation to the private sector.

Q: We track green finance flow from developed to developing countries. What is that extra ingredient needed to get large institutional investors, say pension funds from developed countries, to take significant exposure to green investments in emerging markets? What is missing?

A: Institutional investors have their fiduciary responsibilities since they are managing, for example, pension fund money. They are looking to guaranteed high return at the lowest risk possible. One of the questions is: Can MDBs develop blended instruments to improve the risk-return equation? Can we provide instruments such as partial guarantees or first loss which mitigate the risk for the investor? The MDBs can play a larger role here.

Q: The footprint of the bank has been expanding to central Asia, Mongolia and I believe Africa is also on the radar. What is the driver of this expansion? Is the task in Europe done?

A: We are completely driven by the priorities of our shareholders. Turkey was initially a shareholder of the EBRD but not a country of operations. The shareholders decided that our business model could be relevant to Turkey and approved the start of operations there. The expansion to southern and eastern Mediterranean countries reflected the perception of shareholders that the experience of the EBRD in supporting the transition of former planned economies in eastern and central Europe could be very relevant to the challenges of these new countries of operations.

Q: What is the significance of having India and China as shareholders? Turkey went from shareholder to an EBRD country of operations. Is that the way forward for India and China too?

A: My understanding is that their membership reflects the increasing role of China and India in the countries in which we operate today. If you look at the Belt and Road initiative of China, there are a lot of projects in countries in which we operate. Similarly, private groups from India are increasingly active in some of the countries we work in.

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