Future of Banking:…the future is Green- why financial institutions should invest in green business

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Ebenezer ASUMANG &Yaw YEBOAH

“Green is a process, not a status. We need to think of ‘green’ as a verb, not an adjective.”

——Daniel Goleman, PhD., Science Journalist & Author

Origins

Policy makers, in the last decade, have put a lot of effort into enhancing green financing with the main purpose of achieving economic growth together with environmental policies that aim to reduce pollution and greenhouse gas emissions. The Paris Agreement stipulated in 2015 that the global average temperature should be maintained below 2°C. This climate change strategy implies a shift to low-carbon investments to allow firms to produce different technology with a view to achieving low greenhouse gas emissions.

In order to reduce emissions, academics and policy makers have suggested the imposition of prices on carbon dioxide and other greenhouse gases either through price instruments (i.e. a carbon tax) or quantity instruments (i.e. cap and trade). However, green energy sources are expensive and could lead to losses for companies using renewable resources. There are two major barriers associated with green energy projects: a) a lower rate of return compared to fossil fuel projects; b) a higher risk of investment compared to fossil fuel projects (Yoshino and Taghizadeh-Hesary; 2018). Because of the associated risk and due to the Basel capital requirements, many banks are not interested in lending to the green energy sector. Hence we need to look for various financing tools and methods (banking and nonbanking solutions) in order to secure the flow of funds and growth in the green energy sector.

Case of Banks

The principal motivation of universal banks has always been to maximize shareholders’ returns until recent times. However, the 2016 United Nations Sustainable Development Agenda (SDG), the Paris Climate Declaration, the inherent environmental and social risks in banking business, the reality of global warming and climate change coupled with the rising civil society actions as well as pressure from Development Financial Institutions (DFIs), have necessitated the need for banks to explore and act upon the profound linkages between a healthy financial system, transition to green economy and the pursuit of long-term sustainability (BOG guidance notes for sustainable banking principles; 2019 P.2).

Sustainability is about meeting the needs of the present without compromising the ability of future generations to meet their needs.  It is also about guaranteeing human rights and a life in dignity, free from want and poverty for all. Therefore, the sustainable banking concept is essentially about contributing to making this happen, through the financial products, model, marketing services and business operations of banks. Contextually, it was necessary that our approach to sustainable banking must respond to the desired banking industry contribution to the economic, social and environmental development nexus issues in Ghana (Sustainable Banking Principles & Sector Guidance Notes;2019).

Green Financing

Green finance is defined as financial investment flow (from banking, micro-credit, insurance and investment) from the public, private and not-for-profit sectors to sustainable development projects and initiatives, and policies that encourage the development of a more sustainable economy (Lindenberg and UNEP-FI (2014); G20 G F S G, 2016).

In the September 2019 Monetary Policy Committee’s press release, the Bank of Ghana (BoG) reported that banks in Ghana hold a total asset of GH¢115.2 billion, indicating the crucial role universal banks are playing in allocating financial resources. In Ghana, like in many developing countries, a significant proportion of projects is being financed by universal banks. However, banks’ funding is sometimes used for activities which impact adversely on the environmental quality and social standards. It is estimated that environmental degradation costs Ghana every year almost 10 per cent of the country’s Gross Domestic Product (UNEP, 2013).

Opportunities

Significant green finance opportunities exist across several sectors including but not limited to:

  • Energy: renewable energy resources particularly biomass, solar, wind energy, steel kilns, charcoal production, biomass power plants, biogas power plants, wind power, solar photovoltaic, improved cook stoves and LPG stoves.
  • Agriculture: afforestation programs in deforested lands and in the cocoa sector.
  • Transport: rail, water and bus rapid transit (BRT) among others. Ghana’s transport policy which seeks to promote emissions reduction from road transport supports private sector participation.
  • Waste: composting technology, biogas power plants, large municipal landfills, composting plants and wastewater treatment facilities.
  • Industrial building: The energy-for-all program and government policy to achieving 10 per cent energy mix provides greater opportunity to green the building sector. There is high demand for energy efficient appliances in homes and industries due to the high cost of electricity in Ghana compared to other countries in the sub-region.
  • Water resources: management of infrastructure, design of technological solutions, conservation and water quality, solar water pumps etc.

Source: unep.org

The big advantage for Banks

  • Creation of profitable business models by going green:

According to an IFC report, the market potential for green buildings in cities in developing countries is astronomical with an estimated $24.7 trillion by 2030. This comprise $15.7 trillion in residential markets, and $9 trillion in commercial markets (B G B; 2020, July 1). Emerging evidence indicates that green buildings are a higher-value, lower-risk asset than standard structures. Besides lowering energy consumption, and therefore operational costs, greener buildings typically achieve higher sale premiums and attract and retain more tenants, ensuring a more continuous revenue stream.

  • Supporting the private sector in renewable energy funding:

The US$1.5 million grant from the Sustainable Energy Fund for Africa(SEFA) initiative of the African Development bank, was approved to assist Ghana`s renewable investment drive which has seen several policies including the Renewable Energy Act 2011 (Act 832) come into force. This require active stakeholder partnerships and policy-buy in. Commercial banks can therefore leverage this and also partner organizations like PIRON Global Development (www.piron.global) to push private investment into the sector which has huge potential going forward.

  • Portfolio growth and diversification:

Banks stand a greater chance of diversifying their assets and liabilities portfolio as emerging markets experience exponential growth with “going green”. Their clientele base can grow exponentially in the medium term with huge investment in “green assets” and can enjoy the multiplier effect in its liabilities with a positive impact in the bottom line. With a well-crafted product line in its “green financing”, banks can mitigate risks and largely prevent or reduce possible NPLs.

  • Rebranding of Construction Projects:

Green financing can offer banks the opportunity to change the face of financing construction projects such as home improvement or mortgages. This is done by remodeling the terms of payment, pricing and tenor for such facilities. Investors across emerging markets will be attracted to this and will offer a rich value chain at different stages of financing. A dedicated unit in place to cater for this will help drive the bank`s performance with profitability in the medium to long term.

  • Benefiting from a unique brand of talents:

Green financing offers opportunity to banks to attract unique staff with specialization in the sector. It also affords the opportunity to train and retain existing staff in this unique ‘sub-sector’ and that can be very beneficial to the institutions as they can boast of rich talents within the human resource base. 

Conclusion  

Research suggest that Ghana has a well-developed financial services sector. The country has extensive collection of financial institutions operating in the country and attracts a significant share of Foreign Direct Investment (FDI) flows into Africa. In 2017, Ghana attracted US $3.2 billion FDI. The banking industry’s gross loans and advances stood at US $7.3 billion in October 2018, representing a 7.5 percent year-on-year contraction. Although the banking sector is doing well in terms of lending to other sectors of the economy, there is still low lending rates to agriculture, forestry and fishing which serve as a barrier to scaling-up green finance (GFS, 2019). Therefore, there is a need for financial institutions in Ghana to take advantage of the emerging green economy opportunities and expand access to low interest green agricultural loans, environmental bonds in the fisheries, venture capital for renewable energy projects in the electricity subsectors and certified emission reductions (UNEP,2013).

The above clearly show that banks can a have a paradigm shift which will be enormously beneficial in the long-term with significant impact not only in their bottom-line to satisfy shareholders` but also make meaningful contribution to the environment where they operate from and eventually mother earth.

Credit:

Yoshino, N. and Taghizadeh-Hesary, F 2018, The role of SMEs in Asia and their difficulties in accessing finance, https://www.adb.org/sites/default/files/publication/474576/adbi-wp911.pdf

Karembu, A. 2018, African Development Bank Supports Ghana’s Renewable Energy Sector with $1.5 Million Grant, https://www.afdb.org/en/news-and-events/african-development-bank-supports-ghanas-renewable-energy-sector-with-1-5-million-grant-18520

Lidenberg, 2014; G20 Green Finance Study Group, 2016; UNEP-FI2014, Green Finance Study in Ghana; Baseline Report, https://www.unpage.org/files/public/green_finance_study_ghana.pdf

Bank of Ghana Sustainable Principles and Sector Guidance Notes, https://www.bog.gov.gh/wp-content/uploads/2019/12/Ghana-Sustainable-Banking-Principles-and-Guidelines-Book-1.pdf

UNEP, 2013, Green Economy Scoping Study: Ghana

About the Writers:

Ebenezer is a Development Communication Researcher, an SDG Market Building/Retail & SME nomad. He serves as Senior Project Manager with PIRON Global Development, Ghana.

Contact him via PIRON Global Development ( [email protected] , www.piron.global)

Yaw is a Green Business Development Practitioner and serving as International Coordinator with PIRON Global Development, Ghana. Contact him via PIRON Global Development ([email protected], www.piron.global)

SOURCEBy Ebenezer ASUMANG &Yaw YEBOAH
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