1. Private Sector Operations Department Asian Development Bank
Green Finance to SMEs
Biao Huang
Private Sector Operations Department
Asian Development Bank

2. Overview Under mid-term review of ADB’s Strategy 2020
Environment is one of the eight core operations areas
Private sector development is one the six drivers of change
At ADB, regional departments and Private Sector Operation Department have complimentary products to support green finance to SMEs
Regional department provide sovereign loans and grants
Example: $6 million grant to Tajikistan for the Access to Green Finance Project in 2012
Private Sector Operations Department undertake non-sovereign projects
Two Infrastructure Finance Divisions directly finance individual (large) projects
Financial Institutions Division works with banks and NBFIs
Investment Funds Division works with private equity funds
ADB has access to a wide range of funding sources, which can be combined or blended with ADB’s own funding and/or risk-sharing instruments.

3. PSOD Potential SME Green Finance Modalities
Financing through financial institutions
Risk-Sharing /credit guarantee
Energy Efficiency Financing
Private Equity Fund

4. Financing through financial institutions
ADB can provide funding directly to financial institutions through term loans or lines of credit earmarked for green projects.
ADB receives interest on debt financing based on the risk of the financial institution (the borrower).
ADB is also looking for equity investment opportunities to green bank

5. Risk-Sharing /credit guarantee
ADB can provide credit guarantees and thereby share the risk of underlying projects/sub-borrowers with financial institutions.
ADB receives a risk/guarantee premium based on the perceived risk of the underlying borrowers.

6. Energy Efficiency Financing: Introduction
Energy efficiency financing generally refers to buyers of energy savings solutions, borrowing money to pay energy services providers for energy savings products and services – and then repaying the loans through energy savings.
Energy savings solutions (such as installation of more energy efficient machinery, change of thermostats and light controls, and improved energy management) typically have short payback period.
Borrowers do not incur additional negative cash flow, as debt service is generally covered by energy savings, often guaranteed by the energy services provider.
Energy services companies (”ESCOs”) negotiate energy performance contracts (“Contracts”) with selected buyers of energy savings solutions.
Buyers (or “Borrowers”) obtain loans from banks to pay for the energy savings solutions (products and services).
Borrowers make debt service payment, which is generally covered by energy savings (typically guaranteed by the ESCOs.

7. Energy Efficiency Financing – Sharing the risk with ADB
In a typical risk-sharing facility, ADB provides a partial credit guarantee to a Partner Bank covering 50% of the credit risk of the underlying borrowers.
The guarantee could potentially be divided into several tranches to accommodate specific risk requirements of the Partner Bank, e.g. ADB could potentially take a larger share of the first 10% loss and a smaller share of the remaining 90% losses, or the guarantee could be back-ended or increase over time.

8. Private Equity Investments in Climate Change Fund
ADB as Limited Partner (LP)
Normal deal sourcing
Call for proposals: clean energy funds and green venture capital funds
ADB as General Partner (GP)
Joint venture with leading private equity fund manager
Mixed of Fund of Fund and direct/co-investment

9. Current projects and challenges
Processing loan facility to banks in Sri Lanka and Bangladesh for financing green initiatives (small RE and EE projects)
EE guarantee program in the PRC
Portfolio of environmental and clean tech funds
Challenges:
Green finance to SME still considered a niche
Difficult to find committed/qualified FI partners
Other supports:
Technical assistance for capacity building
Sometimes blended finance required