Greening a Portfolio

Tuesday, March 05, 2019

At a time when climate change is headline news, it may seem like a no-brainer for a financial institution to offer green loans. But it’s not as simple as just launching a new product. As an official at the Grenada Development Bank explained, it’s important to first understand the market and the technologies available and then identify solutions that will work locally and meet customers’ needs.

“One of the things we don’t want to do is to come up with products and projects that we think might be of benefit, but then all the other supporting structures aren’t there to ensure success,” explained Natasha Joseph, Business Support and Development Officer at the Grenada Development Bank (GDB).

To use a hypothetical example, say a bank is looking to offer loans for customers to buy solar water heaters. First, it would need to answer all sorts of questions: What’s the potential demand? Where will the supply come from? Who can install the heaters? Are there trained technicians who can maintain them? How big are the energy savings? How soon will the customer—and the bank—see returns on the investment? In the context of the local economy, is this a good value?

“It’s critical for us to understand what the market needs,” Joseph said. Banks don’t want to simply make assumptions but need hard data on which to base decisions, she added—data on climate, on market demand, on supply, on support systems. And the data must be location-specific. It’s not enough to know that sea levels are rising; it’s also important to know how many people live or have businesses on a particular waterfront, and what problems they might already be seeing.

“The information that’s needed to support a product to mitigate those risks is what we need to make sure that we have,” Joseph said. “The danger is that you go ahead and select something and then it fails in the market. That would be a bummer. So we want to make sure that we have everything in place before we go down that road.”

The government-owned Grenada Development Bank is one of several Caribbean financial institutions that will benefit from a technical assistance grant from the EcoMicro program run by IDB Lab. (See related story in this issue.) The grant will allow GDB to explore the best green finance options for its customer base and “build credibility and experience in handling climate financing,” Joseph said.

The chance to apply to participate in the project came at a time when GDB was looking to venture into green finance products, she said in a phone interview from GDB headquarters in St. George’s. “It was an opportunity for us to build on what our vision was in terms of long-term development of the country, bearing in mind that climate resilience is one of the critical areas that has been identified for national sustainable development,” she said.

Grenada has been taking numerous steps on this front. Last year, the government created the Ministry of Climate Resilience, the Environment, Forestry, Fisheries, Disaster Management and Information, which consolidates efforts being undertaken in various ministries. In addition, the country has among its strategic climate policy instruments the National Climate Change Policy 2017–2021, which builds on the foundation laid by the National Climate Change Strategy and Action Plan, 2007–2011, and the National Adaptation Plan 2017-2021.

GDB, meanwhile, is in the process of seeking accreditation as a National Direct Access Entity to the Green Climate Fund, which would give it direct access to financing for local climate-related resilience projects. Joseph hopes that the EcoMicro project will help the bank develop products that can later be scaled up with support from the Green Climate Fund.

In a small country such as Grenada, with a population of just over 100,000 and a per capita income of under $15,000, microfinance opens the door to make green loans available to families and businesses that probably would not qualify for loans from commercial banks, Joseph said. “The impact is greater when it’s spread across a wider cross-section and area,” she added. “Microfinance is a very important contributor to our economic development.”

GDB has a diverse portfolio that includes home mortgages as well as different types of businesses in tourism, agriculture, manufacturing, transport, and other sectors. The bank is looking to develop special loans to finance both mitigation and adaptation measures, or some combination of the two. (In the context of a building, mitigation might include installing solar panels or replacing a cooling system; adaptation might mean adding hurricane-proof windows or doing outside drainage work.)

In addition to benefiting from the expertise of energy consultants through the EcoMicro project, the bank can draw on its own experience. In recent years, it has renovated its building, replaced its central air conditioning system, changed its light fixtures, and encouraged behavioral changes such as adjusting temperatures and turning off light switches when appropriate. The result: a 60 percent savings in electricity. As Joseph explained, the bank can now confidently tell customers, “Hey, this is real.”

In addition to the assistance GDB will receive in developing green finance products, Joseph said the review of the bank’s portfolio will be helpful in assessing climate-related risk going forward. “Typically, we’re accustomed to looking at financial risk,” she said. “Climate risk is new, in terms of how you build that into the projects that we approve.”

Climate risk has to be seen as a growing factor in all financing, according to Joseph. “The climate has changed, and so climate considerations must be built into any project that you’re looking at, not just ones that might be purely climate-specific,” she said.