Role of Green Investment Banks in Scaling Up Climate-Smart Investments – Part 2


The need for innovative and bold solutions to implement new technologies on a large scale is evident. Green Banks have been developed with this purpose in mind, raising and blending capital to finance local climate infrastructure while driving a surge in private investment. These institutions can play a significant role in mobilizing finance to support low-carbon and climate-resilient development, while promoting private investment. Green Banks have a track record of effectively channelling climate funds, encouraging private investment in clean technology, and cultivating new green markets.

Green Banks can be a potent tool in developing economies, particularly when combined with national Green Funds. However, it is crucial to customize the design of Green Banks to suit local market conditions instead of adopting a uniform approach. The establishment of Green Banks should be tailored to complement existing development finance capacity, with a specific mission, investment criteria, and a monitoring and evaluation process. In developing countries, the most effective approach is to integrate Green Banks within an existing host institution that has a clear mandate and focus on creating value-added markets. This tailored approach is essential to address capacity constraints, establish project pipelines, boost the green financing capacity of the commercial financial sector, and overcome significant obstacles to private investment in developing countries.

Green Banks, also known as Climate Finance Facilities, provide financial support for clean energy technologies that are not attracting sufficient funding due to high costs or short repayment periods. These banks work in collaboration with private investors to address market gaps and make clean energy markets more efficient. Green Banks are self-sufficient and offer financing options that generate enough revenue to cover their operational costs. Their primary focus is to mitigate and adapt to climate change, and they use blended finance to de-risk and encourage private investment. They also provide a variety of financing instruments for sustainable and gender-inclusive projects. Green Banks are adaptable and can tailor their financing options to meet the needs of individual projects and complement existing funders and programs.

To achieve their objectives, green banks use a range of financial tools including loans, equity investments, grants, and guarantees, with loans usually having more favorable terms than those available commercially. Some green banks also provide technical assistance and advisory services, which can help build expertise and capacity across financial institutions in the country, thus accelerating the growth of low-carbon markets.

The governance structures of green banks can vary depending on the legislation that created them, which can affect their funding, investment sectors, and long-term viability. Most national green banks were established by governments to increase the flow of climate finance in support of achieving Nationally Determined Contributions (NDCs) and mitigating the effects of climate change. As a result, existing green banks invest in a range of low-carbon, climate-resilient technologies, including renewable energy, energy efficiency, and sustainable agriculture.

Key points to consider when deciding whether to establish a new Green Investment Bank (GIB) or incorporate green policies into an existing institution include time and costs, flexibility, mandate, and financing approaches.

Establishing a new GIB may involve more time and costs than greening an existing institution, and it may be seen as increasing bureaucracy or creating redundant government services. However, creating an independent GIB can provide more flexibility to experiment and adapt to market developments, allowing for a targeted focus on specific objectives.

National Development Banks (NDBs) may lack a clear mandate to promote national climate change mitigation and may support both renewable energy and fossil fuel projects, while GIBs exclusively focus on green investment and face fewer competing agendas.

Furthermore, financing approaches for GIBs and NDBs differ significantly, with Infrastructure Development Finance Company (IDFC) members primarily using concessional and non-concessional loans rather than other financial instruments such as equity and guarantees.

GIBs have a tendency to focus on speeding up investors’ willingness to take risks by using demonstration, co-investment, and sharing risks with investors through guarantees and other risk mitigating methods. Nevertheless, certain NDBs like KfW and multilateral Development Banks, such as the European Investment Bank, are also developing and utilizing creative instruments to upscale private finance from multiple investor classes. Some GIB-like entities rely heavily on concessional loans while others only use them in a limited, targeted way.

To increase the flow of capital, GIBs use transaction enablers such as bundling small-scale projects also known as “warehousing”, securitization, co-investing, on-bill financing, and leasing to achieve scale and lower transaction costs. GIBs work with various private investors, including large institutional investors, community banks, and local contractors. The types of co-investors that GIBs target vary depending on the market gaps and obstacles they’re addressing, as well as whether they’re following a wholesale or retail approach.

A wholesale approach involves combining public and private capital to attract large amounts of investment for on-lending or investing in funds. On the other hand, a retail strategy involves providing funds directly to project developers or individuals, such as for energy efficiency retrofits or residential rooftop solar PV. Wholesale lending is useful for moving large volumes of investment, while retail lending can be beneficial for initiating activity in new markets. Retail strategies typically involve partnerships, outreach, and co-investment with local banks, contractors, and individuals. In either strategy, Green Investment Banks (GIBs) may assist investors in bringing their investments to secondary markets through bond issuances, securitization, or private placement.

GIBs prioritize accountability to taxpayers since they are established with public capital. They measure their performance based on various metrics such as investment and economic results, climate-related outcomes like emissions saved, leverage/mobilization, co-investors, job creation, and waste. Green banks can enhance the attractiveness of new technologies or industries by addressing market obstacles, promoting standardization, and reducing the time and effort required to identify innovative ventures. They can also provide market insights and connect potential projects to investors.

Author: Victor O. Nyakinda