Role of National Development Banks in Promoting Climate Finance IDB has an extensive experience in working with National development Banks in Latin America, being the largest lender to these institutions in the region. It has been working with many of them in integrating environmental and climate change concerns in their operations. As part of this support IDB has been assessing and piloting the particular role NDBs can play in promoting scaled up climate investments - in particular from private sector. IDB is finalizing a report analyzing the unique role National Development Banks can play at the national level to scale up private sector financing for climate change mitigation projects through the intermediation of international climate finance in their respective local credit markets. The report should be available by end of 2012.   The report, mainly aimed at NDBs themselves and climate finance decisions makers, was prepared based on the following key sources of information: A survey undertaken on April 2012 to nine (9) National Development Banks from the Latin American and Caribbean region; The database of ALIDE members; Results and insights from a series of workshops and dialogues organized by the IADB in 2011-2012; Existing literature on climate finance. This presentation will present some of the initial findings from this report as well as lessons learned from the experience from IDB in supporting NDBs to integrate climate change I their operations. Maria Netto – mnetto@iadb.org Capital Markets and Financial Institutions Inter-American Development Bank

Low Carbon Financing Challenges Government priority / policy orientation - host driven - ensure close link of international finance to national development goals Need for scale / programmatic approaches – ensure large, transformational and long term impacts in the economies How to mobilize / leverage private sector investments / participation Have “real” environmental results that are monitored, verified and reported

Some tendencies in the LAC region… National commitments and targets towards UNFCCC COP 21 (2015) Readiness initiatives to access international climate finance – prioritization of sectors and channeling models National coordination efforts and national “Green” Funds to promote climate finance Financial markets initiative (“green protocols”, stock markets sustainability indexes, national carbon markets) Increased role of regulations (of IFIs – Central Banks, and of sectors – corporate responsibility and price signals)

Role of National Development Banks Development Mandate Promotes financing and associated market development in underserved sectors Public Sector Entity Can interact with different levels of governments and potentially influence policy-making Financial Institution Is in the business of financing and risk taking, particularly in support of long term investments Mobilizer Works with private financial institutions and seeks to mobilize or attract co-financing Project Structurer Understands the risks and barriers and can shape and influence the project structure Risk Taker Can identify, manage, mitigate and assume risks that the private sector LFIs cannot Incubator and Aggregator Can develop innovative and catalytic financial instruments and can manage small scale projects International Partner Has access to long-term hard currency borrowings and work closely with the MDBs, bilateral DFIs and foreign ECAs Connector Has connections to all of the relevant public and private sector actors NDBs are government-backed, sponsored or supported financial institutions which have a specific public policy mandate. NDBs have a privileged position in their local markets and, given a number of characteristics that are commonly associated with them, can have a potentially crucial role to play in facilitating climate investments and delivering climate finance directly or leveraging private capital.   This slide highlights the various features of a typical NDB which make it well-suited to the requirements of climate finance.

NDBs are government-backed, sponsored or supported financial institutions which have a specific public policy mandate. NDBs have a privileged position in their local markets and, given a number of characteristics that are commonly associated with them, can have a potentially crucial role to play in facilitating climate investments and delivering climate finance directly or leveraging private capital.   This slide highlights the various features of a typical NDB which make it well-suited to the requirements of climate finance.

Why to engage in green finance? Business opportunities Benefits $ / Revenues Environmental services Environmental markets Renewable energy sales Certified products Savings and Cost-reduction Energy efficiency Water savings Efficient use of land Co-benefits Productivity Quality improvements Modernization Competitively and trade opportunities

Sectors supported Sectors NDBs Countries Energy Efficiency BNB, Bancoldex, Findeter, Nafin, Fira, SHF, AFD Brazil, Colombia, Mexico, Paraguay Renewable energy Bandesal, Nafin, BROU, AFD El Salvador, Mexico, Uruguay, Paraguay Sustainable Transport Bancoldex Colombia Waste Management BNB Brazil AFOLU AFEAM, BNB, Banco Agrario, Financiera Rural, Fira, Finagro Brazil, Colombia, Mexico The support by IDB to NDBs has been ¨demand driven¨ and as shown in this table, there have been a broad spectrum of areas / sectors of work that vary according to the line of business of the banks and needs of countries in question. The different sectors and lines of work require a broad set of technical expertise (both local as well as international) - NDBs in LAC region have often been developing their programs with alliance and support from MDBs like IDB and other multilateral (e.g. UNEP) and bilateral (e.g. KFW, AFD) agencies.

Defining priority sector interventions Alignment with national priorities Market Studies Addressing non financial barriers: Structuring of Demand for Finance Support technology and service providers Promote business models and project incubation Capacity building of financial institutions Awareness raising and standard practices Addressing financial barriers: Development of adequate financial instruments Credit / collateral guarantees Performance Guarantee Insurance Medium and long term concessional credit The ultimate goal of the marketing strategy for the project will be to motivate more clients and financial institutions to participate by creating awareness of the programme, establishing trust in the technologies and the energy savings and by making EE a priority. As I mentioned, the strategies we would use to achieve those goals would be demonstrating the savings achieved in the pilot, using comparison with industry benchmarks and demonstrating the participation of leading hotels and hospitals. The specific activities for marketing would need to be defined with the Bancoldex marketing team, but we could envisage creation of a brand, training of sales staff, brochures, a web page, public relations activity, site visits to the pilot hotels and hospitals...

NDB Green Instruments in LAC NDBs Grants / TA Tier 2 loans (via LFIs) Tier 1 loans (Direct) Guarantees Other contingent facilities Equity Manage-ment of funds Co-finance with other funds Direct Equity Equity into Funds LT Inv’t loans ST working capital loans Other AFD √ BANCO DEL ESTADO BANCOLDEX BANDESAL BNDES COFIDE FINANCIERA RURAL FINDETER FIRA   All of the nine NDBs of the Latin-American and Caribbean (LAC) region which were surveyed are involved in climate financing to different extents, with different instruments, and at diverse stages of ‘readiness’ for playing in this area. Some NDBs have only recently become involved in this area, while others have already accessed international climate funds from bilateral and multilateral entities. To incentivise “green” investments and address their specific financing needs, all the selected NDBs have in place dedicated programs and toolboxes to finance climate-related projects. Enhancing the role of NDBs could go a considerable way to filling the investment gap. At the end of 2011, NDBs in the LAC region had outstanding assets of nearly USD 1 trillion and a capital base of USD 100 billion, that combined with their capacity to leverage resources makes them unique players in scaling up private investments for climate change mitigation.

Example of Financial Strategies – EE for SMEs with Bancoldex Performance Contract (optional) Validation and Verification Service provider accreditation Credit Line Bancoldex EE Insurance Policy (Optional) Project validation Validation of energy savings and arbitration Energy savings verification

NDB leverage Potential Category of Instrument NDB Theoretical Leverage Factor Tier 1 Non-concessional debt 2-5 x Debt financed via grants 8-10 x Tier 2 1 x 4-8 x Direct Equity 12-15 x Equity financed via grants 20 x   N/A Guarantee at non-concessional rates Guarantees financed via grants 25 x Based on the AGF approach, one can see that NDBs have a high potential to intermediate and mobilize climate finance.

Example of Leverage - CTF-REFF and NAFIN US$ 70m CTF concessional loans Debt and Private Equity IDB lending to NAFIN US$ 220m   NAFIN US$ 250m US$ 1,190m - 1,540m IDB co-financing Resources Mobilized Technical Cooperation and Grants IDB US$ 1.3m Renewable Energy Financing Facility (REFF) was established within NAFIN to fill the financing gap of renewable energy by private sector through the provision of: direct loans with long repayment terms (about 10-15 years) and fixed interest rate to project developers, to finance the construction of new RE projects and support their financing needs during their life; and contingent credit lines to cover transitory cash flow shortages during the project life cycle (e.g., due to lower than expected energy generation or prices) up to the volume needed to service senior debt. The ultimate terms and conditions for end-borrower will depend on the characteristic of the project, its internal rate of returns and risk profile. Nafin was chosen because best positioned to channel (directly or indirectly) international partners’ resources – along with its own ones – to local players, ultimately enhancing the overall leverage impact of the initiative. In fact, the initial USD 70 million of CTF concessional resources are going to be leveraged of, at minimum, USD 220 million from IDB co-financing from an existing credit line, and of a similar amount (USD 125 million) from Nafin own resources. Hence, for a combined total of at least USD 540million! Nafin will then leverage the overall USD 540 million facility at the project level, by catalysing private capital. Given that a single project will not be entitled to more than USD 10 million and 50% of the total investment needs, of CTF and REFF'’s funds respectively, this will allow maximising the potential leverage effect, as well the number of projects that will benefit from the Facility. IDB estimates that to cover the investment costs of the projects about USD 1,190-1,540 million will have to be mobilized, assuming a 30/70 equity to debt ratio.

Conditions for effective scale up of private climate finance   Policy development / Enabling Environment Demand creation Feasibility studies / Project preparation Internal capacity National dialogue Project proponent education and awareness raising LFI education and awareness raising Develop feasibility study for large projects Prepare Project / investment plan for smaller projects Pre-investment phase Financial structuring Debt on market terms Equity on market terms Investment Phase

Strategy for supporting pre-investments and investments in public lighting – Findeter 1. Diseño/ingeniería y análisis económico Pre-propuesta técnica y económica hecha por empresas proveedoras 2. Aspectos legales Definición de esquema de contrato. Negociación con concesionarios. Arreglos sobre el financiamiento. Solicitud de financiamiento 3. Financiamiento 4. Licitación y contratación Procedimiento de licitación y contratación del proveedor Contratación de seguros 5. Construcción Compra de las lámparas Instalación del sistema 6. Operación Interventoría para verificar el proyecto

Integral Approach Short and Medium term: Long Term: Implement and Environmental and Social management System (ESMS) Reduce environmental and social risks Identify environmental business opportunities Short and Medium term: Improve financial and non financial performance Reduce costs and liabilities Attract new clients and tap new markets Long Term: Enhance reputation Strengthen brand value Attract partners and financing Develop Innovative products Increase commitment and awareness of environmental and social issues

Lessons learned from NDBs Supported High potential of leveraging public and private finance to address climate change Innovation and piloting of green products Large potential of supporting programmatic / sectorial approaches (versus project by project) Key to understand what are financial barriers (versus other barriers) and segment specific market support (focus) Key to understand non financial markets and support market development, including development of bankable projects and coordination / participation of relevant actors Increasing importance of developing risk mitigation tools – particularly in liquid markets Learning by doing process – tailored solutions for specific needs Lessons learned with the work undertaken so far with NDBs on climate change financing include: As shown in the example of NAFIN, NDBs, when programs are structured in the right way leverage considerable investments from private sector. International climate finance has allowed the NDBs to develop new green products and innovative new financial instruments, which can be then replicated for various sectors. NDBs by mandate work with a broad set of clients and projects – the green financing programs developed by them allow programmatic and sectorial approaches from both investment and methodological / design point of view. Support to effective deployment of climate finance requires to address both supply and demand of investments – structuring demand for investments is a key element of successful green lines. NDBs can play a unique role as coordinator of various actors to make it happen. Sectorial finance programs need to be tailored for different needs of countries. As shown before areas / sectors of work vary according to the line of business of the banks / countries in question and need a broad set of technical expertise (both local as well as international). Given the complexity of this new line of business, the support provided has more leverage potential in NDBs with relatively higher institutional and financial capacities. The cost of capacity building support and technical backstopping for project incubation can vary according to the institution and country. Given that NDBs in most LAC countries are “development arms” of governments, the support to NDBs to integrate climate change concerns in their businesses respond to countries’ goals to mainstream climate change considerations in their development objectives and provides for an effective mechanism to leverage private sector investments. The more NDBs were aware and involved in the national discussions and decision making regarding climate policy the more effective was the promotion of climate finance programs. Mexico provides a good example of using NDBs as means to support private sector to implement climate policy.

2013: 2014: - CFIs community of Practice Web Platforms - CFIs community of Practice - New Good Practices Platform – KLAVE Publications 2013: - Social and environmental risk management - Case studies 2014: - FI’s experience with EE and RE - Use of guarantees for green markets Events - Green finance experience – Rio de Janeiro, BNDES/ALIDE - LAC FORUM VI– Rio de Janeiro -Financial Instruments to Manage Risks Associated to Green Projects, Cartagena - Global experiences with green financing lines – October

Porque apoyar finanzas verdes? Oportunidades de negocio Beneficios $ / renta Servicios ambientales Mercados de activos ambientales Venta / disponibilidad de energía renovable Productos certificados Ahorro / diminución de costes Eficiencia energética Uso eficiente de agua Manejo eficiente de uso de la tierra Co-beneficios Productividad Mejor calidad de productos Modernización Competitividad y oportunidades en comercio internacional