By Alfred Nyakinda
New approaches in identifying and funding sustainable production and consumption projects are necessary to increase investment according to experts at a forum during the United Nations Environmental Assembly (UNEA) in Nairobi.
The panel emphasized the importance of partnerships and called for a re-evaluation of risk assessment practices used by banks.
Current trends discussed included the movement towards blended financing for development projects, which combines public and private financing to mobilize investment by new actors. This involves attracting different sources of funding, such as large philanthropic investors who prioritize social impact over monetary returns and lower the risk for other interested parties.
“The philanthropists see a solid project and they will all concentrate their money on that project instead of splitting it on any other project,” said Pierre Rousseau, strategic advisor, National Bank of Paris- Paribas. “You create scale by attracting the money around the big project, and you enlarge your fund.”
The need for capacity building within the banks themselves to enable them to assess the risks and rewards of new technologies was another issue raised by the panel.
Damien Navizet from the French Development Agency (AFD) said that if you take a bank with its usual rules and present your more sustainable project they are likely to shy away from it.
“It’s important to bring some training to bring a new perspective on technology, on how to appraise and where the cash flow will come from,” he said, “for example, if you finance an energy efficiency project the cash flow is in fact savings; so it’s not new business, and this is something that is very hard to understand for a banker the first time they see this.”
Commercial Bank of Africa’s Mukiri Muthuri said the bank benefits from technical assistance from AFD in checking some projects. This has enabled them to advise their clients on the viability of their projects using information they would not normally possess as a bank, adding the partnership has given them access to greater financial resources.
“We are able to benefit from cheaper funding; the cost of funding locally is quite high,” she said, “we are able to pass the same benefit of the cheaper funding to the ultimate customer.”
To ensure that funding is not exclusively directed to large projects the AFD, in accordance with the mandate of the African Guarantee Fund to serve small and medium enterprises (SMEs), visits its local partners quarterly to see what investments are being made.
The Kenya Banker’s Association (KBA) chief executive Habil Olaka stressed that capacity building is important on the part of both the lender and the borrower.
“A number of these SMEs have a problem in terms of capacity. So they do not have a bankable proposal to send to the bank,” he said. “We have got an online platform where the SMEs can be able to go online and get the necessary capacity building but we also have a face to face option.”
Dr. Jane Nyakango, President of African Roundtable on Sustainable Consumption and Production noted that an information asymmetry exists between the financial institutions and the takers of these finances, which has created a need for better engagement between the two.
She added that there was also a lack of understanding concerning tested technologies or prototypes on the part of banks, including that most of such innovations are financially attractive in their own right.
In regard to regulation, Olaka said that governments could make rules requiring banks to invest a certain percentage periodically in priority areas of the economy such as agriculture, putting any remaining money in an organization like an Agricultural Finance Corporation that exclusively invests in that sector.
“The bank would make more profit from investing directly rather than through an intermediary, creating an incentive towards internal capacity building to meet regulatory objectives,” he noted.
Greater accountability can also be achieved through public reporting on individual banks, according to Mukiri, who said that only two banks in the country are members of the United Nations Environmental Program Finance Initiative (UNEP FI), which has promoted sustainable finance for 27 years.
Bruce Dunn from the Asian Development Bank added that governments should provide stimuli like tax breaks to encourage developments around sustainable consumption which in the current market can be more costly, giving the example of virgin plastics which remain much cheaper than recycled plastics.