Emerging Voices features contributions from scholars and practitioners highlighting new research, thinking, and approaches to development challenges. This article is by Heidi Sumser, senior associate at A2F Consulting in Washington, D.C., and former environmental management coordinator at Banco Los Andes ProCredit, Bolivia.
Green finance—banking that takes environmental and energy concerns into account when lending and providing financial services—is taking root in developing countries. At the forefront of this movement is the Frankfurt-based ProCredit group, which includes twenty one development-oriented banks and financial institutions across Latin America, Europe, and Africa. In its pursuit of promoting sustainable development, ProCredit has recently adopted a three-pillar approach to making green finance a company priority. One pillar focuses internally on promoting, implementing, and measuring resource efficiency. The other two pillars target clients: managing the environmental and social risk of lending on the one hand and promoting and granting loans for green investments on the other. Green loans are categorized into three groups of investments: energy efficiency, renewable energy, and environmentally friendly measures.
Banco Los Andes ProCredit, a leading bank in Bolivia where I served as environmental management coordinator until the end of 2013, began adopting this approach in 2011. Doing green banking in Bolivia quickly proved to be a challenge. Energy efficiency, renewable energy, and green technologies are rarely incentivized and are not commonly understood by government leaders, financial institutions, clients, suppliers, and the general public. This is due largely to highly subsidized energy prices, a low level of environmental and energy awareness in the market, and a lack of legislation that promotes energy efficiency, renewable energy, and green technology. As a result, there is little incentive to seek out or offer sustainable energy options. But the need is still there.
Government-subsidized prices mask an energy sector that is increasingly dirty and inefficient. Most machines and equipment used in the industrial, trade, and service sectors are outdated, averaging around twenty five years old, and the main driver of investment decisions is initial cost rather than longer-term value. New, more efficient machines and equipment can be three to four times the price of their twenty-five-year-old alternative, creating the perception among small businesses that energy efficient investments are not feasible. In addition to being less efficient, older machines also cause greater environmental damage. The older machines require larger quantities of fuel and produce higher levels of CO2 emissions. These machines are often manual or semi-automatic, so they are also less productive and more prone to human error, thereby generating more waste. Waste also results from the fact that the machines are increasingly difficult to refurbish or recycle in a low-technology market. Finally, older machines are loud and are often accompanied by poor working conditions, which create noise pollution and health problems.
To promote green investment in this climate, Banco Los Andes ProCredit started internally. First of all, we needed to develop our internal capacity by enhancing our environmental policy and creating the Environmental Management Committee and Department, which included hiring an environmental/energy specialist. We then analyzed the bank´s business strategy and loan portfolio, established and adjusted standards and procedures for green lending, and comprehensively trained staff country-wide on green finance. Training included teaching basic concepts about energy efficiency, renewable energy, fossil fuels, pollution, and climate change; energy and environmental challenges and opportunities in Bolivia; how to identify potential green investments and their benefits; and lending procedures and attractive conditions for green loans. One of the main outputs of this project was the development of a standard internal catalogue of investments with objective eligibility criteria that staff could consult when granting green loans. This has helped branch staff, who are not experts in energy efficiency or green lending, understand the advantages of green investments and link them with customers’ needs.
The bank’s newly developed internal capacity, institutional commitment to green lending, and integration and institutionalization of new policies, procedures, and trainings make the future of environmentally conscious finance bright. At the end of 2013, Banco Los Andes ProCredit had a green loan portfolio of more than 720 loans to small businesses, more than 90 percent of which was for energy efficient investments.
One of the most important lessons I learned while charting the uncertain territory of green banking was that I could not do it alone. Much of my work focused on convincing leaders at the bank and in the financial sector, public sector, and NGO community that environmentally conscious finance was a worthwhile and mutually beneficial enterprise. I approached environmental management as a business and treated green loans as a new product. Another crucial element was personalized communication of the economic, environmental, and social benefits of green lending so that parties inside and outside of the bank understood how green finance fit with their priorities, objectives, and needs. It is through this communication and relationship-building that Banco Los Andes ProCredit, and future enterprises, can make finance an environmentally friendly endeavor.