Mexico could be a test case for green financing in Latin America, with securitization at its centre.
A project backed by the Inter-American Development Bank involves energy service companies that work on increasing energy efficiency.
Loans by these companies, known as Escos, are repaid from energy savings, but they are too small to attract capital. The IDB aims to change this with a two phase approach, first aggregating the loans and then securitizing them.
Amal-Lee Amin, chief of the IDB’s climate change and sustainability division, said the new facility would be around $1bn and was part of a broader effort to push green financing into the mainstream.
“This facility is significant when you consider that this is for small scale energy efficiency loans, but it works because there are many small loans that are aggregated to a size sufficient to scale up so that you can securitize,” said Amin.
The IDB, which has the backing of different climate funds for the project, plans on replicating the Esco model, first in the Dominican Republic and Jamaica and later in Colombia.
Amin called the securitization “an innovative way of doing green financing, because you are actually exposing investors to the underlying assets”.
She said the real issue was “scaling up investment in low carbon and climate-resilient technologies, infrastructure and manufacturing, and to scale up it is necessary to attract capital from where the really big pools exist in the institutional investor community.”
CATALYST EFFECT
Paul Tregidgo, vice-chairman of debt capital markets at Credit Suisse, said multilateral institutions like the IDB “have had a catalyst effect that has been fundamental in developing the green financial market. The multilaterals have kick-started this and corporate issuance is going to follow.”
He said the market would come around: “If we are going to serve the millennial generation and we do not include green financing, they are not going to buy our products.”
As green financing goes mainstream, the IDB is encouraging countries to look at China, where the government has been adopting policies to spur the financial sector to do more green financing. The policies not only encourage investment, but increase regulation, making financing for dirty projects more difficult.
China is using its chairmanship of the G20 this year to move forward the green financing agenda, after taking a strong role in the climate change agreement reached in Paris at the COP 21 summit in December.
Amin’s division has taken the Chinese approach and started to work with central banks in the region “to better understand what climate risk means for them and what that means in terms of the sorts of risks across the economy.
“A green bond is a useful tool for attracting new sources of capital that otherwise may not come in, but ultimately over time we need to redirect all flows of finance to be consistent with low carbon and [climate] resistant investments,” she said.