GLC Building Green Finance Instruments and Systems in LAC from the experience of China

Landing page for Building Green Finance Instruments and Systems in LAC from the experience of China (ESI) The program Building Green Finance Instruments and Systems in LAC from the experience of China (GLC) promotes green finance by fostering the institutional capacity building of national development banks (NDBs) and financial market regulators in Latin America and the Caribbean (LAC). LAC institutions have the opportunity to learn about successful methodologies and policies from China to support their efforts in the development of local financial systems, including regulation, capital markets, financial instrumentation and risk sharing mechanisms for green finance.

This south-south collaboration works on two levels: ESI enhances:
I) Knowledge Sharing – GLC shares best practices and experiences in promoting green finance among Chinese and LAC NDBs, financial institutions,regulators and other relevant stakeholders. The project uses regional networks (e.g. ALIDE - Association of Latin America Financial Institutions) to share knowledge in a variety of forms, from analytical studies, virtual presentations, to the organization of global events that bring together representatives from LAC and Chinese NDBs and regulatory bodiesto foster the development of green finance.
lI) Knowledge Sharing – GLC shares best practices and experiences in promoting green finance among Chinese and LAC NDBs, financial institutions,regulators and other relevant stakeholders. The project uses regional networks (e.g. ALIDE - Association of Latin America Financial Institutions) to share knowledge in a variety of forms, from analytical studies, virtual presentations, to the organization of global events that bring together representatives from LAC and Chinese NDBs and regulatory bodiesto foster the development of green finance.

 

Why GLC?

The "Chinese Green Finance Task Force" is a government initiative that has been successful in stimulating the growth of a green financial market in China. Through its "Guidance on Building Green Finance System", a variety of reforms are being implemented, from national green bond standards to new green funds and subsidy programs to the development of green insurance mechanisms. The result is a booming green finance market that issued more than one-third of green bonds globally in 2016.

Meanwhile, LAC countries face a lack of integrated green financing strategies despite immense opportunities for “green” investments. These countries’ capital market regulatory frameworks currently lack the depth and sophistication to encourage private investment and implement green finance at scale. As is the case in China, though, financial market regulators and NDBs in LAC are in a unique position to engage local financial institutions (LFIs) and private investors, align development financing with national priorities, and canalize international climate funding to promote and scale up investments. The Chinese experience in developing green finance frameworks and mechanisms can therefore prove valuable for NDBs and regulators in LAC who are seeking to develop and integrate new green finance strategies in their countries.

 

Global Collaboration

In May of 2018, 120 policy makers, financial regulators, and practitioners from over 35 countries in Asia, Africa, and Latin America met for the Global Green Finance Leadership Program (GFLP) in Beijing and formed nine working groups to continue discussing possibilities for greener economies and to debate innovative financing and policy tools. The Center for Finance and Development at Tsinghua University will serve as the secretariat of the groups. IDB participates alongside other institutions in six working groups on green finance taxonomy, financing green SMEs, financing green agriculture, fintech for green finance, green infrastructure pipelines, and incentives for green finance.



Overcoming barriers to a dynamic green finance market, such as:




■ Limited availability of investment credit at adequate terms and conditions.
■ Lack of knowledge of the risks and returns of green projects.
■ Little experience in marketing, analyzing, structuring and financing green projects.
■ Lack of of long-term loans and challenge to fund green projects with long pay back periods.
■ Perception that green projects are not “business as usual” investments.
■ • Lack of financial capacity of local energy technology or service providers.
 

Who is Supporting GLC?

The Inter-American Development Bank with funding from the Institutional Capacity Strengthening Thematic Fund (ICS) partners with several institutions including the Center for Finance and Development, Tsinghua National Institute of Financial Research and Boston University, and other key ‘green’ stakeholders to develop knowledge-sharing formats for an exchange of ideas with LAC regulators and financial institutions.

Research on the possibilities and benefits of different public funding models is also being conducted in partnership with Boston University.

 
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Where is GLC Being Implemented?

GLC is supporting the open exchange of knowledge and experiences between China and the LAC region. A variety of webinars and academic studies are geared at adapting the lessons learned in China to LAC countries, but are also being made available to the public at large.

The GLC Furthermore, GLC is specifically focused on supporting the development of national green finance strategies in 4 LAC countries Argentina, Ecuador, Mexico, Ecuador, Uruguay,. This includes a series of events, workshops, and bilateral meetings in LAC capitals and in Beijing.

 

This project supports Banco de Inversión y Comercio Exterior (BICE), a first- and second-tier Development Bank in Argentina, in their efforts to raise private funds at adequate maturities in local and international capital markets through the issuance of green and sustainable bonds. BICE will receive technical and promotional assistance required to: (i) structure their first green bond issue backed by potential green loan portfolios, (ii) receive the necessary second party independent review and verification of adherence with the chosen set of principles and/or standard; (iii) market those new securities; and (iv) disseminate the results of these experiences and share the lessons learned and best practices among other National Development Banks and relevant public and private stakeholders in the region which have expressed interest in getting technical and logistical support, in order to structure a first sustainable bond issue to be placed in the national or international markets.

As part of the initial stage of this process, IDB supports the institutional diagnostic and screening of BICE’s green and social loan portfolio and its positive environmental and social impacts, in order to determine a set of loan sub-portfolios susceptible to be securitized through sustainable bond issuances and to support the preparation of a sustainable bond framework in order to facilitate the green bond second party review and certification. The work shall be based on the Green Bond Principles and on the Climate Bonds Standards.

GLC will work together with Mexico’s Banco Nacional de Comercio Exterior S.N.C. (BANCOMEXT) to support its green banking activities. BANCOMEXT is mainly a first-tier bank, with the mission to contribute to development, generation of employment, foreign investment, and infrastructure in Mexico. The bank works to support Mexican businesses in growing their productivity and competitiveness and is looking at green finance as an opportunity to modernize the local economy. BANCOMEXT wants to involve a variety of private and public actors throughout this process and is particularly interested in the potential impact of:

• Green bonds in traditional and exotic markets.

• Export credit guarantees from new markets like China.

• Intraregional knowledge sharing, both virtually and through events in Mexico, Latin America, and China.

This project supports Ecuador’s national development bank, Banco de Desarrollo de Ecuador B.P (BDE) in defining a business model strategy around green finance and identifying opportunities for action that BDE can implement. These results will complement BDE’s strategic institutional plan for 2016-2018, which aims to diversify its financial sources and products which seek to promote equity across different regions.

GLC will support the bank to channel national and international funds to climate change mitigation and adaptation initiatives at the subnational level. The new business model will guide BDE’s outreach to address market gaps in this area in Ecuador.

These efforts will involve not only conceptual work but also the active engagement and involvement of bank staff to ensure that all new initiatives are feasible and operable within the bank.

This project supports Banco De La Republica Oriental (BROU), in their efforts to design a green financing business model for the Institution, based on the identification of areas of opportunity and action pillars. One of the main objectives of the project is to identify BROU as one of the main actors in the country and region for the support of sustainable finance. The project will also cover the management of environmental and social risks within BROU portfolio. In short, the project aims to support BROU in the design of a “green strategy”.

An initial roadmap has already been developed with a variety of defined objectives. In the coming months, GLC and BROU will collaborate on the following topics:

• Establishing BROU as a pro-sustainability bank.

• Identifying opportunities for efficiency improvements.

• Analyzing and identifying high-risk areas and sectors.

• Exploring the development of financial products that mitigate risks while allowing increased lending.

• Advancing BROU’s Environmental and Social Risk Management System (ESRM) to identify and mitigate these risks in credit activities.

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