Bankrolling the green economy
As climate change continues to rear its ugly head, a drastic shift in championing sustainability measures has been observed in multiple sectors. Increasingly crucial to this fight is the financial industry, which has been making strides to influence the shift to green economy.
International Finance Corp. (IFC) has been doing its part to enable financial institutions to do so. Most recently, the World Bank’s private sector arm launched the “30 by 30 Zero” program, whose goal is to provide financial support to accelerate the financial industry’s integration of green financing into their investment plans as a way to cut greenhouse gas emissions.
The program, jointly developed by IFC and the World Bank, is funded by the German government’s International Climate Initiative. It enjoins government regulators, international finance institutions and commercial banks, among others, in ramping up the promotion of a low-carbon economy.
“The goal is to work with financial institutions to strengthen their role as aggregators of climate financing by growing their climate-related lending to 30 percent of total portfolio (on average) with near zero coal exposure by 2030,” IFC explains.
In line with this, IFC has teamed up with local microfinance institution Card SME Bank to extend funding for “climate-smart” agricultural solutions that will benefit over 3,000 farmers across the country.
The thrift bank, which has a growing presence in the Calabarzon (Cavite, Laguna, Batangas, Rizal and Quezon) region, is set to start the financing program this October.
Apart from the Philippines, the program also rolled out in Egypt, South Africa and Mexico.
China Bank chief sustainability officer William Wayne Quesang, in an interview with the Inquirer, says financing the agricultural sector will help in promoting inclusive growth and rural development.
In the long run, he points out that extending credit to farmers and rural entrepreneurs will “lift more people out of poverty.”
“The partnership would help bring [credit] to the grassroots level, especially in the rural areas,” Michael Ricafort, chief economist at Rizal Commercial Banking Corp., tells the Inquirer.
Ricafort explains, “This would help accelerate the pace and send a stronger message to put into the business mainstream adoption of green financing, in view of increased adoption of ESG (environmental, social and governance) standards in investment decisions.”
Indeed, financing can move the needle for the green initiatives, but there is more that IFC is set to offer.
“While any kind of support is welcome, IFC’s financial support usually comes with a technical advisory as part of the package, which is very much needed especially for financial institutions that may not have a dedicated team of experts in a specific field,” Quesang says.
“For example, while there are opportunities in renewable energy such as solar power, not all banks have the resources to dedicate a team of experts in solar power, and thus may benefit from the technical advisory from IFC as part of its support in providing green financing,” he adds.
IFC is also set to provide scholarships along with Berlin-based Renewables Academy as a capacity-building opportunity for financial institutions intending to go into green energy and climate finance.
Prior to this, the World Bank Group member also previously launched in 2021 the “Scaling Up Climate Finance through the Financial Sector” program in the Philippines, Egypt, Mexico and South Africa. This aims to reduce their exposure to financing coal projects, in line with the Paris Climate Agreement.
The Washington-based institution earlier said that banks should ramp up climate financing to 30 percent of their portfolio in the next 10 years in order to support renewable energy, energy efficiency, green buildings and sustainable transport infrastructure.
‘Green’ and ‘blue’ bonds
IFC, in a recent report, notes that the Philippines and three other emerging markets across East Asia and the Pacific region will gain $5.1 trillion in fresh investments should they incorporate green initiatives as part of their recovery plan from the pandemic.
Meanwhile, IFC has been aiding the growth of the climate-themed bond market in the country through its investments.
In 2017, for example, IFC extended $150 million to BDO Unibank Inc. for its first “green” bond issuance. It also supported the bank’s “blue” bond offer earlier this year, which sought to raise funds to address marine pollution and preserve clean water resources.
BDO aims to reduce “coal exposure by 50 percent by 2033, while ensuring that its coal exposure does not exceed 2 percent of its total loan portfolio by 2033.”
“The BDO Energy Transition Finance Statement is the bank’s holistic and realistic approach on the energy transition that considers the bank’s economic, environmental and social impact, anchored on good governance,” says Federico Tancongco, senior vice president and head of compliance group at the Sy-led bank.
“We want to make our intentions very clear in taking steps to lower greenhouse emissions,” he stresses.
In addition, BDO is committed to providing capital that enables clients to invest in technologies aimed at reducing carbon emissions.
“We see the social impact of the energy transition as equally important, if not more critical, as the economic and environmental impact, if we are to achieve a truly just and equitable transition in the Philippines,” Tancongco says.
China Banking Corp., which is also part of the Sy-led SM group, raised $150 million in 2018 from its first green bond offering, with IFC as the sole investor.
Rizal Commercial Banking Corp. earlier this year announced its goal of fully eliminating exposure to coal-fired power plants by 2031 as part of its sustainability efforts. To recall, the Yuchengco-led lender had committed back in December 2020 to halt financing for new coal projects.
Bank of the Philippine Islands, meanwhile, has set sights on unwinding its coal financing facility by 2033. This was an accelerated timeline from the original commitment of halving its coal financing by 2026 and full eradication by 2037.
Private sector’s role
Jean-Marc Arbogast, IFC country manager for the Philippines, recognizes the need for the private sector to step in.
“Achieving the country’s climate targets requires massive financing, which cannot be met by the public sector alone. Private financing is therefore crucial,” Arbogast stresses.
“The financial sector, especially commercial banks, can play a key role in greening the economy by addressing climate-related risks, promoting sustainable development, and decarbonizing industries through financing,” he adds.
China Bank’s Quesang underscores that banks have an influence over the development of the green economy.
“For example, banks may decide not to lend to certain sectors that contribute harm to the environment or society, causing the cost of borrowing for that sector to increase and effectively not financially viable in the long run,” he says.
But Quesang advises banks to ensure that their efforts in funding sustainability projects would not be tagged as “greenwashing” or the act of appearing as environment advocates even though they are not in reality.
He says this can taint a financial institution’s reputation, leading to loss of investor confidence.
“It is therefore encouraged that each bond issued for sustainability be assessed by a third party and be very transparent and clear in terms of impact,” Quesang explains.