Greening the Financial Sector

Doris Khn
Editor

Greening the Financial Sector

How to Mainstream Environmental Finance in Developing Countries

Editor Doris Khn Senior Vice President Africa and Middle East Palmengartenstr. 5-9 KfW Entwicklungsbank 60325 Frankfurt am Main Germany info@kfw-entwicklungsbank.de

e-ISBN 978-3-642-05087-9 ISBN 978-3-642-05086-2 DOI 10.1007/978-3-642-05087-9 Springer Heidelberg Dordrecht London New York
Library of Congress Control Number: 2011943109
The Editor(s) (if applicable) and the Author(s) 2012. The book is published with open access at SpringerLink.com

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Foreword

In light of a growing number of extreme weather events in developing countries, it is becoming more and more evident that the most vulnerable people at the base of the pyramid will also suffer most from climate change. Climate change is expected to put development successes in jeopardy and makes sustainable poverty alleviation more difficult. Hence, a strategy for adaptation to and mitigation of climate change is indispensable for sustainable development and poverty reduction in emerging and developing markets. Ecological sustainability is also reflected in the Millennium Development Goals: Achieving MDG 7 aims at environmental protection as well as sustainable use of natural resources. I am deeply convinced that ecological sustainability is a major requirement for development and a crucial contribution to the fulfilment of the MDGs. The German Ministry for Economic Cooperation and Development (BMZ) has therefore introduced a climate check to consider climate protection and adaptation aspects in strategies and programmes of German development cooperation. As industrial nations are important drivers of climate change, they bear a historic responsibility. However, global environmental problems cannot be solved without contributions from emerging and developing markets. Sustainable and globally effective solutions can only be achieved through extensive international cooperation and contributions by all stakeholders. Against this background, my ministry is committed to mainstreaming environmental finance in development finance. In 2009 Germany allocated EUR 1 billion for climate protection and adaptation measures in developing countries. At the Copenhagen Summit the German government agreed to provide an additional EUR 420 million annually as part of the EUs fast-start climate funding until 2012. Despite all these efforts, the public sector alone will not be able to handle an order of this magnitude and should, therefore, form strategic alliances with the private sector. Public and private finance should complement each other in order to provide an intelligent mix of financial instruments. In this context, the target is to raise an amount of USD 100 billion per year by 2020 for climate protection and adaptation measures from public and private sources. How can these ambitious goals be achieved? I am convinced that the financial sector in developing and transition countries has an important role to play in this process. Environmental finance markets will need to be established and existing environmental finance instruments will need to be mainstreamed to ensure climate protection. Green finance is one of the answers to obtain the necessary financial resources required. Investing in energy efficiency, for instance, has had encouragV

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Foreword

ing effects both in financial and ecological terms. The financial sector has the potential not only to complement scarce public resources, but also the know-how to combine public and private funds in an intelligent way. It is also important to me to note that financial markets are not only vital for the development of the overall economy sometimes not a very popular argument in these times but can also be important agents of sustainable development. In this sense financial systems development has been and will remain a very important development challenge as well. So why not try to address both challenges at the same time? Green finance tries to do exactly that. KfW has already been very active in promoting environmental finance through the financial sector, particularly in the field of energy efficiency and renewable energy. I am grateful that these efforts have helped to mainstream green finance products into the regular product mix of financial institutions in our partner countries. After setting up a number of green finance projects in late 2008, KfW dedicated its annual financial sector symposium to environmental finance. At this high profile event, public and private sector representatives came together and discussed, inter alia, how to convince financial institutions that financing investments in climate protection is a promising new field of business. I appreciate that the KfW symposium on greening the financial sector has generated a number of contributions from international experts. I am glad that all these have been bundled together in this book which I am sure will be highly valuable for knowledge sharing and forming effective alliances and networks. I would like to thank KfW for all its efforts to support the financial sectors in developing and transition countries to fight the impact of climate change. This engagement has contributed effectively to the efforts from public sources, and I hope it will do so in the future. Tapping the potential of the financial sector has become even more important in the light of public budget constraints after the financial crisis and is a powerful tool to address problems like climate change in a sustainable way. July 2011 Dirk Niebel German Federal Minister for Economic Cooperation and Development

Preface

This book is part of a publication series initiated by KfW on selected topics in the field of financial systems development, which is one of the core competencies of KfW Development Bank. This edition will focus on environmental finance. It will cover a broad range of issues including programmes to promote energy efficiency and renewable energies as well as innovative approaches such as weather insurance. Why is this topic important? Given the manifold deficits of financial sectors in developing and transition countries, one might be tempted to believe that embarking on green finance is not a priority for financial systems development. However, I dont share this view. Environmental finance can and should serve as an interface to other sub-sectors of financial sector promotion such as microfinance, housing finance or agricultural finance. For example, existing clients of financial institutions include small and medium-sized enterprises and households, and these are often suffering from high energy prices or have no access to sustainable energy supply. At the same time, these clients are vulnerable to extreme weather events, and often hit hardest by the impact of climate change. There are many other examples which show that the financial sector has an enormous potential to support green investments. However, in order to tap this potential on a sustainable basis, it is important to have a sound understanding which role financial institutions can and should play. Likewise, financial institutions need to understand the demand side of environmental finance markets and the framework conditions in order to be able to design adequate financial products. For many years, KfW has been financing green investments in Germany. In particular, KfW started its promotion of energy efficiency in housing in the early 1990s. KfW has significantly contributed to set the standards for Low Energy Houses in Germany. Support is provided if the refurbished or new home meets KfW Efficiency House standards, which set limits based on the energy consumption and heat loss values. Higher energy efficiency is rewarded by better conditions. Likewise, KfW Entwicklungsbank has embarked on financing energy efficiency and renewable energy investments through the financial sector in developing and transition countries. The total active portfolio in environmental finance sums up to EUR 789 million (as of end 2010), of which EUR 651 million have been committed in 17 countries and EUR 138 million in regional and global funds devoted to environmental finance. But finance is not enough! We continuously encourage our partner governments to ensure conducive framework conditions for environmental investments such as cost-covering energy tariffs, appropriate legal terms and law enforcement.
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Without such a sound environment, neither financial institutions nor their potential clients are likely to get involved in these promising markets. So I think we are well placed and this is our clear objective to share our competence as an environment bank as part of our long-standing co-operation with our partners in developing and transition countries. I am happy that a number of internationally renowned experts have contributed to this book, besides two contributions from KfW. May this book contribute to share knowledge and provide new insights for the different stakeholders. As this publication is also available online, my special wish is that it contributes to a fruitful learning process around the globe and to familiarize financial institutions in KfWs partner countries with the financing potential for green investments. Banks need to be convinced that this product is a profitable business line in order to get involved in a sustainable way. My sincere hope is that this book can contribute to this vision. I would like to thank the authors for their efforts in preparing and revising the papers and not least my colleagues who made this publication possible, especially Matthias Adler and Beate Knigsberger. July 2011 Doris Khn KfW Entwicklungsbank Senior Vice President Private and Financial Sector and Africa and Middle East Regions

Table of Contents

Foreword ........................................................................................................V Preface .........................................................................................................VII Abbreviations............................................................................................... XI

Chapter 1

Mainstreaming Environmental Finance into Financial Markets Relevance, Potential and Obstacles..............................................................1
Peter Lindlein Chapter 2

Mainstreaming Framework Conditions for Environmental Finance The Role of the Public Sector....................................................31
Wolfgang Mostert Chapter 3

Mainstreaming Environmental Finance Markets (I) Small-Scale Energy Efficiency and Renewable Energy Finance .................................53
John MacLean Chapter 4

The Roles of Weather Insurance and the Carbon Market ...................111

Jerry R. Skees and Benjamin Collier Chapter 5

Mainstreaming Impact over Time Who Measures What for Whom?.........................................................................................................165

Renate Schubert, Markus Ohndorf, and Moritz Rohling Chapter 6

UNEP Perspectives.....................................................................................191
Paul Clements-Hunt
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Table of Contents

Chapter 7

Trading of Emission Certificates for Climate Protection: Using Markets and Private Capital for Development ......................................207
Rainer Durth Chapter 8

Microfinance and Climate Change: Threats and Opportunities .........215

Paul Rippey Chapter 9

Environmental Finance Through the Financial Sector An Approach with Growing Potential Experiences of KfW Entwicklungsbank......................................................................................241
Klaus Pfeiffer, Matthias Adler, and Constanze Kreiss

Index of Regions, Countries and Organisations.....................................247

Abbreviations

ADB ADEME Ag DSM ANME AREED BEA BEE BEEF BfAI BIO BNDES BRL C/I CABEI CAREC CBP CCX CDF CDM PD CDM CEA CEB CEEF CER CFI CFL CFU CIA CLO CME COP CSB CT DBP

Asian Development Bank Agencie de lEnvironnment et de la Matrise de lEnergie (French Environment and Energy Management Agency) Agricultural Demand Side Management Agence Nationale pour la Matrise de lnergie Africa Renewable Energy Enterprise Development Berlin Energy Agency India Bureau of Energy Efficiency Bulgaria Energy Efficiency Fund Bundesagentur fr Aussenwirtschaft Belgian Investment Company for Developing Countries Brazilian National Development Bank Brazilian Real Commercial/industrial Central American Bank for Economic Integration Central American Renewable Energy and Cleaner Production Facility Cooperative Bank of Palawan Chicago Climate Exchange Cash Deposit Fund CDM Project Designer Clean Development Mechanism Cambridge Energy Alliance Ceylon Electricity Board Commercializing Energy Efficiency Finance Certified Emission Reduction Commercial Finance Institution Compact Fluorescent Light Carbon Finance Unit, The World Bank Central Intelligence Agency Collateralized Loan Obligation Chicago Mercantile Exchange Conference of the Parties Cseka Sporitelna Bank Clean Technology Development Bank of the Philippines

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Abbreviations Development Credit Authority Department of Alternative Energy Development and Efficiency Development Finance Institution Department for International Development Dutch International Guarantees for Housing Detailed Project Report Demand Side Management Developing World Markets European Bank for Reconstruction and Development Energy Efficiency Energy Efficiency and Small-Scale Renewable Energy Environmental Finance Environmental Finance Group Energy Conservation Fund (Thailand) El Nio Southern Oscillation Emission Reduction Purchase Agreement End-user Agreement Energy Service Company Electricity Supply Commission (South Africa) Emission Trading System European Union Emissions Trading Scheme Financial Institution Finnish Fund for Industrial Cooperation, Ltd Facility Liability Limit Netherlands Development Finance Company Gross Domestic Product Global Environment Facility Guarantee Facility Agreements Greenhouse Gas Global Index Reinsurance Facility Global Energy Village Partnership Gigawatt Gigawatt hours Hungary Energy Efficiency Co-financing Program Housing Energy Efficiency Financing Facility Information and Technology Broker Inter-American Development Bank International Bank for Reconstruction and Development International Council for Local Energy Initiatives Inter-American Development Bank International Energy Agency

DCA DEDE DFI DFID DIGH DPR DSM DWM EBRD EE EERE EF EFG ENCON ENSO ERPA ESA ESCO ESKOM ETS EU ETS FI Finnfund FLL FMO GDP GEF GFA GHG GIRIF GVEP GW GWh HEECP HEEFF I&T Broker IADB IBRD ICLEI IDB IEA

Abbreviations IFC IIED IPCC IPP IREDA ITL KfW kW kWh LECO LLDC LNG LPG LRF MDG MEDREP MFI MIF MSME MW NAFINSA NOAA O&M OECD OTC PCD POA PPP PROSOL PSOD PV R&D RE REC REEEP RFP RFQ ROI SEA SEB SEEDS International Finance Corporation International Institute for Environment and Development International Panel for Climate Change Independent Power Producers Indian Renewable Energy Development Agency International Transaction Log KfW Bankengruppe Kilowatt Kilowatt Hour Lanka Electricity Company Least Developed Country Liquefied Natural Gas Liquefied Petroleum Gas Loss Reserve Fund Millennium Development Goals Mediterranean Renewable Energies Programme Microfinance Institution Multilateral Investment Fund Micro, Small and Medium Enterprise Megawatt Mexican National Development Bank National Oceanographic and Atmospheric Administration, United States Operations and Maintenance Organization for Economic Cooperation and Development Over-the-counter Project Cash Deposit Programmes of Activities Public Private Partnership Programme Solaire (Solar Program) Private Sector Operations Department (of ADB) Photo-voltaic Research and Development Renewable Energy Rural Electric Cooperatives Renewable Energy and Energy Efficiency Partnership Request for Proposal Request for Qualification Return on Investment Sustainable Energy Authority State Electric Board Sarvodaya Economic Enterprise Development Services

XIII

XIV SELCO SEWA SHS SIDBI SME SMEs SSPC SST STB STEG

Abbreviations Solar Electric Light Company (India) Self Employed Womens Association (India) Solar Home Systems Small Industries Development Bank of India Small and Medium Enterprises Small and Medium Enterprises Shell Solar Philippines Corp. Sea surface temperature Societ Tunisienne de Banque (Tunisian National Bank) Societ Tunisienne de lElectricit et de Gaz (Tunisian Electricity and Gas Company) Solar Water Heater Technical Assistance Transaction Guarantee Liability Limit Triodos Renewable Energy for Development Fund United Nations Development Program United Nations Economic Commission for Europe United Nations Environment Program United Nations Framework Convention on Climate Change United States Agency for International Development US Dollar Value Added Tax Variable Speed Drives World Bank World Energy Council Watt peak World Resource Institute South African Rand

SWH TA TGLL TREDF UNDP UNECE UNEP UNFCCC USAID USD VAT VSD WB WEC Wp WRI ZAR