Representatives of governments, financial institutions, business, academia and civil society groups from Latin America and the Caribbean met outside the negotiations at the Lima climate conference on December 6, 2014, to share experiences on how finance can be accessed, managed and scaled up to mitigate and adapt to the impacts of a changing climate.WRI, in collaboration with AIDA, Climate Interactive, the Carbon Tracker Initiative, E3G and GFLAC, with the support of Zennström Philanthropies, AVINA Foundation and LARCI, organized the Latin America and the Caribbean Climate Finance Day so a wide range of actors could discuss:
how to create an enabling environment for climate finance;
the role of the Green Climate Fund in promoting transformational change in the region;
lessons for mobilizing private investments, transparency, and accountability for the use of climate finance;
tools to assess climate change risks, and
strategies to spur investment in technological innovation.
One conversation between commercial and development banks provided valuable insights on strategies for scaling up climate finance:
Development banks should offer a portfolio of green products that spurs long-term green investment. They should consider both the financial and non-financial barriers to climate investment facing the private sector, and offer tailored support through a diversified portfolio of financial products, including green credit lines.
Development and private banks need to integrate climate change risks and opportunities into their own business strategies and investments.
Green Investment Portfolios
Public banks need to offer a portfolio of green products that encourage long-term investment. For example, green credit lines spur investment in low-carbon projects by offering loans, often with lower interest rates or longer repayment periods. These credit lines need to be designed to ensure their impacts are lasting and penetrate the market. The long-term goal is to support financially sustainable projects that can attract private investment. This means banks should support projects that combat climate change while also being profitable throughout the supply chain.
One venture where this has been successful is the COFIGAS natural gas program designed by COFIDE, the development bank of Peru, to convert gasoline-fueled vehicles in Lima to lower-emitting natural gas. The program established credit lines for private vehicle owners and for the public sector to convert El Metropolitano, the city’s Bus Rapid Transit system. It addressed the default risk for private vehicle owners by requesting partial repayments when users refueled their tanks; through its design, it also yielded economic benefits to all stakeholders in the supply chain. The goal was to transform 50,000 vehicles to natural gas within five years. It far exceeded that mark, with up to 190,000 vehicles converted before the five years were up. Lima’s market for natural gas in public and private transportation matured over the years and now requires no further support from COFIDE. COFIDE plans to expand the program to other cities.
Technical assistance by and for banks has helped to build portfolios of products that spur investment in low-carbon development. For example, the Inter-American Development Bank collaborated with the private Bancolombia bank to build the capacity of private banks to finance energy efficiency projects in Colombia. The collaboration created a standard contract with lending conditions that redistributed risks and a certification process to boost trust in the technology.
Integrating Climate Change into Bank Operations
Development and private banks should share with their peers the strategies and best practices to integrate climate change into their business strategies and investments, including the ways to mitigate risks and maximize opportunities.
Colombia’s Protocolo Verde (Green Protocol), an agreement between the government and public and private domestic banks, aims to align banking strategies with national environmental policies, including climate change. Bancolombia and FINDETER, a Colombian development bank, are active members of the agreement and organized training about the connection between environmental and financial risks, as well as best practices to address them. Such dialogue between banks and the public sector can increase understanding of risks posed by climate change and build trust for climate-resilient projects. The Green Protocol is now being replicated in other countries in the region.
These insights reveal the growing interest in low-carbon development in Latin America and the Caribbean. Despite the difficult negotiations in Lima, the LAC Climate Finance Day discussions signaled the positive outlook among development banks for expanding climate finance. The region’s increasing low-carbon investments, pledges to the Green Climate Fund, and ambitious renewable energy and efficiency targets demonstrate robust political and financial commitments, building momentum for a strong global response to climate change.