Financing green projects: scarcity relative to needs, but also limited demand

Financing green projects: scarcity relative to needs, but also limited demand

For three days, with the participation of over 130 panelists from 10 countries, for the third consecutive year Dir.bg and 3E-news organize the largest regional forum on Green Transformation, innovation and tomorrow’s Industries – Green Week 2023. Commissioners, ministers, leading experts, business leaders, MEPs, representatives of NGOs discuss the challenges and opportunities facing our economies and societies through climate policies and the Green Transition.

The focus of the second day of Green Week 2023 is on financing green transformation in Central and Eastern Europe, environmental, social and corporate governance and the circular economy, as well as accelerating innovation and the future of artificial intelligence and disruptive technologies.

Participants in the discussion “Financing the Green Transformation in the CEE Region”, moderated by Sofia Kasidova, Head of the Strategic Development and Green Policies Team at the Bank, included EIB Vice President Liliana Pavlova, Jeff Gottlieb, IMF Senior Regional Resident Representative for Central, Eastern and South-Eastern Europe, and Tsanko Arabadzhiev, Executive Director of the Bank, Patrick Darowski – Director of Industrial Risk and ESG Development Bank of Poland, Alan Herjavec – Member of the Board of Directors of the Croatian Development Bank, Larisa Manastirli – Director of Financial Institutions at the Black Sea Trade and Development Bank, Nadia Dankinova – Executive Director of Flag Fund, and Tsvetanka Mincheva – CEO of UniCredit Bulbank.

First to speak was Jeff Gottlieb, IMF Senior Regional Resident Representative for Central, Eastern and South-Eastern Europe. He said that the IMF finances and supports specific policies concerning the green transition and gave an example of how macroeconomic stability issues are affected by climate change.

According to carbon intensity data, if we look at the last 200 years, the impact is not very serious, including on temperatures. Scientists calculate that the earth’s temperature since before industrial development has increased by 1.1% The point is that we are on track to exceed the critical threshold of a 1.5% increase in this temperature very soon. As a result of this critical proximity, more and more extreme manifestations of weather are being observed. Of course, there are also slight temperature lows at certain times, but all of this brings in its wake a tail of serious and dramatic weather events, Gottlieb explained.

Policies directly relevant to the climate transition are policies to adapt to and mitigate (or slow down) climate change and then for an equitable transition. “That is, we have direct and indirect costs. Secondary costs come from mitigation measures. These will be needed especially in poorer societies where there are many people who will suffer the most. The greater volume of harmful emissions is produced by the well-developed economies, and it is important to find who will pay for all this. Half of the funding in this direction will have to be directed to developing markets and economies. The faster an economy moves towards adaptation and mitigation, the higher the costs of this transition will be and the more groups will be affected, exposed to carbon generating sectors,” said the IMF’s Senior Regional Resident Representative for Central, Eastern and South-Eastern Europe.

He also explained that most of the debate on green financing is about the private sector issuing such green debt. Gottlieb focused on the need for public and private sector financing. Private financing should cover about ¾ of these costs, but an important place is set aside for public financing.

The EU already imposes a carbon tax in the form of emission trading allowances, meaning the public sector is already taking care of financing the green transition, the expert said.

Regarding the IMF’s green instruments, Gottlieb pointed out that there are basically two: a contract on how these green shares will be used and how the funds collected from financial penalties for pollution will be used.

“Budgets in developing economies are quite limited, it is difficult for governments to allocate sufficient fiscal resources to green measures. There are also restrictions in the EU to prevent extensive funding through state aid. There are also not enough green instruments that can be traded by banks. The main constraint concerns financing, but there is also limited demand for financing. In addition, even if there are green projects that are bankable, for some reason they may not be eligible for investor financing. In developing economies we have less progress on green targets – on good environmental governance in the social sector and in business,” explained Jeff Gottlieb.

“There are a lot of private companies that have started issuing green bonds and sustainability-related ones, especially in 2021. We’re also seeing it in terms of venture capital, especially low carbon funds, which are starting to grow faster and faster in developing economies especially, which are currently getting the lion’s share. There is a funding gap relative to the needs available in Central and Eastern Europe. As I have said, the lion’s share of the costs and the need for urgent action on climate change mitigation falls on the developing economies, which are the big polluters, especially the Asian countries, but they are also the countries that suffer most from climate impacts’.

Gottlieb also highlighted several of the priorities regarding green financing.

“We need to ensure that countries use these ETS (Emissions Trading System) instruments to invest in climate action. In CEE, we are still not seeing enough reduction in fossil fuel subsidies in these countries. 50% of ETS revenues will be directed to green projects and this percentage will jump over time,” he said. It is very important, according to the expert, that governments take advantage of the funds allocated under the recovery and resilience plans to invest them in measures to mitigate the impact of climate change, with this funding ranging from 1.5% to 4% of GDP.

“For the first time, we have a long-term instrument that is climate-focused,” the IMF representative boasted at the forum, “It’s designed to help countries deal with long-term issues that are not necessarily climate change related – they may be COVID-19 recovery issues. In May, €70 million have already been allocated. This is funding that can also be used to accelerate the green transition. The volume of financing available from multilateral development banks is also increasing substantially, thanks in part to the catalysis of co-financing of private sector client incentives.”

It is important to have a good information dissemination architecture. Often it is believed that when funds are allocated, everything will go as it should, but this is not exactly the case due to the lack of adequate information, the expert pointed out.

European Investment Bank (EIB) Vice President Liliana Pavlova, who also took part in the discussion “Financing the Green Transformation in the CEE Region”, stressed that the first and foremost commitment of the institution she represents as a “climate bank” is to support decarbonisation and all green investments – to mobilise €1 trillion by 2030.

“The crisis over the war in Europe has become an accelerator for more investment – energy efficiency, green energy, etc. Last year alone, we invested over €19 billion in green transformation. We also have a commitment to REPowerEU, which we are working on as a major funder. We will add an additional €30 billion to what has been provided so far under REPowerEU in order to attract private capital and to mobilise our commercial bank partners, which will mobilise a resource of over €115 billion of additional investment, which is crucial in the region,” Pavlova explained.

Innovation is another element she highlighted as important.

“If we want to achieve the goal of carbon neutrality, we need to invest not just massively, but in new technologies and innovation. Existing innovations today do not enable us to achieve carbon neutrality 2050. Only half are available – the rest are in development, testing phase, etc. So the priority is to turn the focus to innovation and technology.

The big problem in Europe, compared to the US and Asia, is that we are not the fastest in terms of rapid investment in promising start-ups, and even if we did, by the time they can raise the resources and grow that investment, there is not enough fast capital available for already nascent, growing investments, and innovators mostly go to the US. That is, we need to keep them in Europe. An initiative in this direction is the EU Startup Initiative.”

Pavlova also highlighted the STEP initiative, “behind which the EIB will be a key player”.

According to an EIB study, there has been a 10% increase in companies investing in green investments and decarbonisation in CEE. In Romania and Croatia, firms are much more ready to invest in the sector, while in Latvia and Bulgaria they rank much further behind in the relative share of businesses realising the need for these investments. For firms in CEE relative to those in the US, 2% of European GDP is less investment in decarbonisation and green technologies, which is a big missed opportunity. The reasons are uncertainty, lack of skilled labour, high energy prices, Pavlova explained.

She was followed by Alan Herjavec, member of the Board of Directors of the Croatian Development Bank, who spoke about his experience in the field.

“We have a 30-year history. 20 years ago we started financing renewable energy projects as well as energy efficiency projects. That’s how we attracted support from partners like the EBRD. Of all the loans approved last year, 80% were for sustainable development, energy efficiency or renewable energy projects.”

Since 2020, the Croatian Development Bank has a business strategy within which the green transition of the national economy has fallen as a strategic goal for the institution, Herjavec said. We did not give up during the pandemic of financial products and instruments aimed at the private and public sector with a focus on the green and digital transition. Our bank has been involved in the development of our CVA. With line ministries, we have also developed new financial instruments under the plan that will be along the lines of green and digital investments.”

Tsanko Arabadzhiev, Executive Director of the BDB, said that it not only can, but should be the green bank in Bulgaria: “Our goal is difficult, but simple – to make sure that the instruments that the big financial organisations talked about before me can reach the small and medium businesses in Bulgaria – both the family company in Montana and the entrepreneur in Varna can de facto benefit from this financing for the green transition of their company”.

There are two problems that Arabadzhiev pointed out:

Scarcity of green projects. Businesses don’t yet know how to prepare them and we need to help, especially small businesses, he said. The bank is combating this problem with a project with technical assistance from the EIB. We at the BDB are building internal capacity and a comprehensive framework for sustainable finance. “The idea is to be able to guarantee and evaluate such projects and to be able to get funding to small businesses. I announced my idea at the same event last year and a year later the project is running at full steam. Next year I am here again and I hope to talk about the results of this,” said Arabadzhiev.
Lack of sufficient funding. “Again with the help of the EIB, we are about to finalise a new loan agreement in the amount of BGN 350 million, which will be made available to the Bank in a month or two. Normally, market-based financing works in such a way that projects with the least risk and the highest return are selected. And it comes down to the question of who will finance the slightly riskier and longer-term projects. I believe that this is where the role of the BBR comes in,” the expert further pointed out.

Larisa Manastirli, Director of Financial Institutions at the Black Sea Trade and Development Bank, said that their bank is smaller than other similar institutions, but that they are strongly committed to implementing environmental and social sustainability standards in their financial decision-making. “These institutions need to play a catalytic role in these green processes. This is our role. We incentivise stakeholders to invest more in the green economy.”

She noted as important that development banks have been collaborating very closely of late, developing common standards and opportunities for collaboration, for screening, for accountability, for financial stability and compliance with environmental and social governance standards.

“It is important to know how what we are trying to do fits into the objectives of the Paris Agreement. Internally, we are applying environmental and social management to update our risk assessment methods. We have three stages of risk assessment when a project arrives – at an early stage we assess the environmental and social risks of that project. If there are opportunities to reduce them, we try to propose them. We also look at the climate scenario – what is the protection, what to include so that the project enjoys protection in terms of environmental risks. Accountability in terms of carbon emissions is important, we want to see how emissions are saved through the project, and we have a framework drawn up by international experts with whom we are monitoring this. We don’t just offer certain products, we take a holistic approach to support them in setting up their own risk assessment systems in their respective areas.”

Patrick Darowski, Director of Industrial Risk and ESG Development Bank of Poland, which has more than 100 years of history, shared observations that he sees changes in the Bank’s policy.

“Within the last two years we have worked as consultants, we have received a grant from the EC and we have been consultants to the Bank to develop some methodologies and policies and issues and organisational changes. It is a challenge for financial institutions how to work on these issues and achieve results. We completed the project in March, and from January we started to introduce an environmental and social management questionnaire, which contains 40 to 60 questions, based on the answers that the client gives, we do a risk assessment in terms of environmental and social management. Our team assesses the risks in the client’s operations,” he said.

Add that they have a separate team and committee on environmental issues and social management and are constantly discussing sustainability and all aspects of environmental and social management. “We offer different questionnaires in different markets. It is very important to build awareness among our customers. Bigger companies find it easier because they have employees with the right training and qualifications, but it’s not so easy for smaller companies and our job is to prepare and educate them on what environmental and social management is. It is also important to have awareness in the municipalities,” he concluded.

And what does the private banking sector think? This is what the moderator Sofia Kasidova asked the representative of UniCredit Bulbank – its CEO Tsvetanka Mincheva.

“When we talk about the green transition, before policies and what we do, we have to talk about people. In this regard, she asked the attendees in the Sofia Event Center room if they were sensitive to the change in temperature and how many of them felt the rainfall last week? “Personally, I had water coming out of the basement of my house for three nights. This will probably be felt more and more often on all of us as well as the temperatures rise if we don’t do something. So when we talk about green transition, it’s really about something personal.”

She quotes economist and essayist Naseem Nicholas Taleb as saying that for companies to be successful in these challenging times, they need to have skin in the game, that is, take things personally. “It’s a recipe to walk the green transition path all together and the challenges facing commercial banks and the financial sector as a whole is important,” she believes.

What does UniCredit Bulbank do? “Firstly, we are part of a large group and we have the opportunity to draw experience from other markets very easily and implement them in Bulgaria and we use this. We already have CEE countries where we have issued green bonds – in the Czech Republic and Romania, and I hope we will soon see this type of instruments in Bulgaria. We are ready to offer this type of financing, and we expect projects to be able to apply for this type of financing,” Mincheva said.

She added that in our country, what they have done has to do with people and personal commitment. “We started by educating people on what we were talking about. Green projects are not new, but not at this scale and concentration. When people started talking so much about ESG and how important the transition is, how it needs to happen the right way and fairly for all the players in the market and looking at the social side and not just the green energy transition, we started training our people.” Started at the top:

“First our board became part of a series of training sessions to understand what regulators want from us and how to get that information to the grassroots. Then, with our partners at SU, we created the first ESG certified academy in Bulgaria. We enrolled all 4,000 of our colleagues who had at least one training related to the topic. Our aim then was to embed ESG policies and ways of working into our business. That is, not to have the new model be a regulatory control that monitors whether or not customers are complying with the rules, but to be part of the business itself that creates products that help customers make their transition journey. This has started to happen.

Last year, we launched the first green mortgage on the market with not very good success – because we are talking here about whether there is data on the buildings, on the housing, whether they meet, whether there is sensitivity of the Bulgarian customer to whether his existence meets these standards, green leasing for cars, etc. That is to integrate the products into the core business that we do.”

The CEO of UniCredit Bulbank also said that in the last five years they have reduced energy consumption in their buildings by 30%, which is just one part of the difficult personal green transition of employees. She is adamant that for this transition to happen at scale, it requires the role of all players – government, politicians, regional banks, commercial banks and businesses.

Nadia Dankinova, Executive Director of the Flag Fund, focused on something the fund has been supporting for 15 years.

“Implementing a project that we won through the EC funded LIFE programme, we are currently structuring a targeted green tool for green transformation, using LIFE’s technical assistance resource to prepare for staff training, with a view to structuring policies, evaluation documentation and not unimportant technical assistance for project preparation. These are the few most important things. In making the path to green transformation here on our territory and with our realities, to overcome the delay in a good, successful and faster way.”

Clear and as simple as possible systems for project appraisal and preparation, especially where small investors are concerned, are necessary, she believes. “We think the point is to get to the small projects. To be successful on the path to a green transition, we need to support SMEs, public investors and the people because we are extremely behind and we need to think together about how to build those sustainable financing mechanisms that get to housing renewal, to small and medium businesses and to the public sector.”

Her final appeal was that “we can do it if we do it together”.

“All of us who are here, representatives of different institutions, all of us in this room and all of us who are listening, must have a goal and it must be clear. Every company must have a purpose. From there on it is important that the path is steady, that we walk it with perseverance and together. And it seems to me very important that the experience that exists in Bulgaria of institutions like ours and of private investors be used and multiplied and then the goal will be achieved,” Dankinova is convinced.