Financing Sustainability

1. Financing Sustainability TiborKludovácz Industry Specialist, IFC South Africa Energy Efficiency Workshop Johannesburg, May 24, 2012

2. Defining Sustainability Introduction to IFC IFC’s products IFC project examples A take-away TOPICS

3. Defining Sustainability

4. What is “Sustainability”? Sustainable development is a pattern of resource use that aims to meet human needs while preserving the environment so that these needs can be met not only in the present, but also for future generations; The term was first used by the Brundtland Commission in 1987 which coined what has become the most often-quoted definition of sustainable development: Sustainable development is a development that meets the needs of the present without compromising the ability of future generations to meet their own needs.

6. Mainstream Sustainability Generation of clean energy More efficient use of limited resources Renewable Energy (RE) Energy Efficiency (EE) Cleaner Production (CP) • The same industrial OUTPUT with less environmental contamination and/or more efficient use of limited resources • Energy saving; • More efficient use of water; • Waste management; • Recycling; • Business process improvement; • Emission reduction; • Reduced noise pollution; • Etc. • Hydropower • Wind Power • Solar Energy • Biomass/Biogas • Geothermal • Biofuels • etc. Same OUTPUT with less energy consumption or increased OUTPUT using the same amount of energy Opportunities exists across all economic sectors: industry, commerce, transport, residential, public, tourism, services, agriculture, etc. KEY ENVIROMENTAL BENEFIT: Avoided Greenhouse Gas (GHG) emissions Carbon Finance

7. Other sustainability areas • ESCOFinance • Performance Contracting • Operating expense as opposed to CAPEX • Savings finance investment • GreenBuildings • EE/RE upgrades to existing buildings • New construction of green buildings • Green mortgages • Standard setting (green building codes) • Sustainable Value Chains • Sustainability in the value chain is increasingly seen as essential to long-term profitability • It has replaced monetary cost, value, and speed as the dominant value chain topic • Sustainable Trade • Short-term finance • IFC guarantees to support imports/ exports of EE/RE equipment • Very significant volume opportunity

8. Introduction to IFC

9. WORLD BANK GROUP International Bank for Reconstruction and Development (IBRD - 1945) International Development Association(IDA – 1960) International Finance Corporation(IFC – 1956) International Centre for Settlement of Investment Disputes (ICSID - 1966) Multilateral Investment Guarantee Agency(MIGA - 1988)

10. IFC’s purpose IFC’s Purpose is to create opportunity for people to escape poverty and improve their lives by Promoting open and competitive markets in developing countries Supporting companies and other private sector partners where there is a gap Helping to generate productive jobs and deliver essential services to the underserved In order to achieve its purpose, IFC offers development impact solutions through firm-level interventions (direct investments and advisory services), standard-setting, and business enabling environment work.

11. IFC at a glance • Launched in 1956: with an original mandatetosupport development by encouraging private investment • Owned by 181 member countries • Today:IFC is the world’s largest multilateral institution focused on private sector development and is the main driver of private sector development in the World Bank Group • Collaborates with other members of the group, including the World Bank (IBRD and IDA) and MIGA • Global: Headquartered in Washington, D.C. • Local: More than 100 offices worldwide in 81 countries • Staff:IFC has 3,449 regular staff, 54% based in field. 76% growth since FY01

12. Strategic Pillars • Frontier markets (IDA countries, fragile and conflict–affected states, frontier regions in Middle Income Countries) • Building and maintaining long-term client relationships • Addressing climate change, and ensuring environmental and social sustainability • Addressing constraints to private sector growth in infrastructure, health, education and food supply chain • Developing local financial markets through institution building, use of innovative financial products and mobilization, focus on MSMEs

13. IFC’s Business Units Infrastructure & Natural Resources Manufacturing, Agribusiness & Services Global Financial Markets

14. To date IFC has provided US$1.8 billion support to local banks for sustainability finance… Country: Russia, 2006 IFC investment: total $150M line of credit to date with 5 partner banks to support EE investments in SME’s Country: China, 2006 PFIs: Industrial Bank, Bank of Beijing and Shanghai Pudong Development Bank IFC investment: $350M in risk sharing facilities to support emissions reduction loan portfolio of more than $500M Country: DR, 2010 Banco BHD $20M SME line of credit Countries: Czech Rep., Slovakia, Hungary, Estonia, Latvia, Lithuania, Serbia, Bosnia & Herzegovina, 2003 PFIs: Multiple banks IFC investment: $321M in lines of credit and guarantee facilities Countries: Egypt, Algeria, Libya, Morocco, Tunisia, 2012 Maghreb Private Equity Fund IFC investment: $3.2M for SE McKinsey (2011): $0.9-1.7 trillion annual investment needed Country: Mexico, 2010, 2009 PFI: Water Capital, Vertice IFC investment: $17.5 M of equity to WCAP. $20M line of credit to Vertice for energy efficient housing Country: Philippines, 2010 Bank of Philippine Islands IFC investment: $22M RS Facility to support portfolio of EE and RE loans Country: Turkey,2009, 2011 PFI: YapiKredi Leasing IFC investment: $75M line of credit PFI: Akbank IFC investment: $75 M line of credit Country: Colombia, 2012 Bancolombia IFC investment: $50M risk sharing facility Country: Thailand, 2012 Mitsubishi UFJ Leasing EE IFC Investment: $37M in risk sharing facility to support up to $70M in EE leases Country: Costa Rica, 2010 S6 M line of SME line of credit to Promerica Country: Brazil, 2005, 2008 PFIs:Banco Real & Unibanco IFC investment: $80M in line of credit Country: Peru, 2007 PFI: BBVA Banco Continental IFC investment: $30M line of credit Country: South Africa, 2011 Merkantile Bank IFC investment: $20M SME EE credit line . Country: Argentina, 2011 Banco Galicia IFC investment: $40M in line of credit for agri-business 14

15. IFC’s Products

16. IFC’s Investment Products Type 1. Type 2. Financial Products • Risk positions at the level of the FI: • Equity; • Credit lines; • Subordinated debt; • Currency swap; Local Financial Institution Bank Loans to Sustainability Projects • Risk positions at the level of the underlying assets: • Guarantees; • Portfolio Risk Sharing; • Mezzanine instruments. Loan A. Loan B. Loan C. Portfolio of Sustainability Projects

17. IFC’s Investment Products

18. IFC’s Advisory Services • Potential Elementsof an AS Program • Development of a sustainability strategy • Sustainability training to bank staff • Technical support for product development & transaction processing • Market outreach & pipeline development • Energy audits • Assistance related to monitoring & reporting on results and environmental impacts • Identifying and developing opportunities for carbon finance Advisory Services Program Funding Financial Products Technical Advisor Local Financial Institution Funding Bank Advisory Loans to Sustainability Projects Loan A. Loan B. Client Advisory Loan C. Portfolio of Sustainability Projects

19. CIPA – Climate Change Investment Program • IFC’s Advisory Services program with the overall aim to increase the capacity of the financial sector in South Africato finance energy efficiency (“EE”), renewable energy (“RE”) and cleaner production (“CP”) projects. Increased lending activity is expected to result in a reduction in Greenhouse Gas (“GHG”) emissions. • CIPA’s objective: • Increase internal capacity of partner FIs in providing financing for sustainability; • Increase the number of Energy Service Companies (ESCOs) and other energy market intermediaries and strengthen their capacity to develop bankable projects for FIs to finance; • Catalyze market demand for EE/RE/CP by creating public awareness, dissemination of information international experience and best practice, and bringing market players together.

20. Project examples

21. ANNEX: IFC Project Examples CHUEE Project - China • Deal Size and Structure • 50% Risk Sharing Facility coupled with Advisory Services to Banks • A total of US$ 1.1 billion in sustainable energy investments facilitated in 127 projects • Two participating banks - Industrial Bank of China and Bank of Beijing • Typical technologies and projects • Technologies: heat/gas recovery, power generation, efficient production systems • Projects: US$4.5 million (avg) projects with medium/large industrial companies (steel, chemical, cement, power) • GHG emissions avoided: 14m CO2 tons per year For Informational Purposes Only

22. Russia Sustainable Energy Finance Program • Program goals • Established in 2005 as an advisory program to advance capacity building of local FIs and market players (consultants and vendors) and to work on the country's regulatory framework and to promote education for Small and Medium Enterprises in sustainability • Results to date • 5 partner banks who have launched dedicated SE finance products • US$100 million for sustainability projects in the SME sector • Average project size: US$ 200,000 • Over 2 million tons of CO2 reduction over the lifetime of the projects • Support to the development of the Russian Law on Energy Saving and Improving Energy Efficiency • Development of specific FI tools for SME sustainability lending (SME energy efficiency calculator)

23. BBVA PERU Energy Efficiency Project • Project results • US$ 35 million credit line to BBVA in Peru for EE and RE projects • Directed to SME projects (average project size US$ 371,000) • Several industrial sectors participating • Full utilization within 1.5 years • US$ 25 million for EE and US$ 10 million for RE • GHG emission reductions 31,463 t CO2 equivalent per year • Consultants helped develop pipeline and product

24. Leading Czech bank looking for new market opportunities in 2003-2004 IFC identified SEF potential in Czech market (10m people) of $7.3 bn/6years Bank embraced opportunity and developed FINESA (Financing Energy Saving Applications) with IFC assistance FINESA means: Product with defined internal procedures Targeted marketing strategy and sales Dedicated Energy team, dealing with sustainable energy projects centrally, supporting credit officers and branches sales people CS now leading bank in Czech SE market Ceska Sporitelna – Czech Republic For Informational Purposes Only

25. US$92m OTP Bank Risk Sharing US$250m in financing • Project Impacts • US$ 250 million financing for municipal ESCO deals (lighting, heating) • Improved health, safety and learning condition for children • Electricity saved on scale of a medium-sized power plant • Lower energy costs benefit municipal budgets • Reduced gas import dependence for Hungary • New GE factory established in Hungary for the purpose of the program ESCO Municipality Suppliers/ Contractors Project Implementation Hungary School Renovation Program

26. A take-away

27. Why? • Expanded market share through new business line • Significant, yet untapped market opportunity • Innovative product/first mover advantage = greater margins/less competition; • Monetize existing client base, attract quality new clients • Improved risk profile of portfolio • Reduced capital charge on the portfolio • Improved cost profile and competitiveness of portfolio clients • Mitigation of environmental risks • Lower risk during early stage of learning curve with AS Program • Positive social and environmental impacts • Positive image and market differentiation by being “green” • Enhanced brand reputation and other PR benefits • Consolidate leading role in innovation within the Colombian financial market

29. Thank You ! TiborKludovacz Sustainability & Climate Finance Specialist International Finance Corporation Global Financial Markets – Sub-Saharan Africa 14 Fricker Road, Illovo 2196 P.O. Box 41283, Craighall 2024 Johannesburg, South Africa Tel: (+27-11) 731-3016 Fax: (+27-11) 268-0074 Email: tkludovacz@ifc.org