“If you really think the environment is less important than the economy, try holding your breath while you count your money.”…………. Guy McPherson, American scientist
Policymakers, 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 change should be maintained below 2°C. This climate change strategy implies a shift to low-carbon investments to allow firms produce different technology with a view to achieving low greenhouse gas emissions.
In order to reduce emissions, academics and policymakers 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.
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). It is financing investments in all financial sectors and asset classes that integrates environmental, social and governance (ESG) criteria into investment decisions, and integrates sustainability into risk management to encourage the development of a more sustainable economy.
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¢115.2billion, indicating the crucial role universal banks are playing in allocating financial resources. In Ghana, like in many developing countries, a significant proportion of projects are being financed by universal banks. However, banks’ funding is sometimes used for activities which impact adversely on environmental quality and social standards. It is estimated that environmental degradation costs Ghana almost 10 percent of the country’s Gross Domestic Product every year (UNEP, 2013).
A sustainable financial system is one that creates, values, and trades financial assets in real wealth-forming ways to meet the long-term needs of an inclusive and well-developed economy that is environmentally sustainable.
The two main goals of green finance are to improve external factors and reduce perceived risk. Promoting large-scale and economically viable green finance helps ensure that green investments take precedence over conventional business investments which cause unsustainable growth patterns. Green finance encourages transparency and long-term thinking about investments that are aligned with environmental goals and include all sustainability criteria defined by the United Nations Sustainable Development Goals (SDGs).
Green finance encompasses a wide range of financial products and services which can be divided into investment, banking and insurance products. The main financial instruments in green finance are debt and equity. To meet the growing demand, new financial instruments such as green bonds and carbon market instruments have been created, as well as new financial institutions such as green banks and green funds. Investment in renewable energy, sustainable infrastructure financing and green bonds continue to be the most interesting areas in green financing activities.
The Case of Banks
The principal motivation of universal banks has always been to maximise 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 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, models, marketing services and business operations of banks. Contextually, it is 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).
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 programmes 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 programme and government policy for achieving a 10 percent energy-mix share 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, and solar water pumps etc.
The Advantage for Banks
- Creation of profitable business models by going green:
According to an IFC report, the market potential for green buildings in cities of developing countries is astronomical – with an estimated US$24.7trillion by 2030. This comprises US$15.7trillion in residential markets and US$9trillion 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; thus ensuring a more continuous revenue stream.
- Supporting the private sector in renewable energy funding:
The US$1.5million 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 requires active stakeholder partnerships and policy buy-in. Commercial banks can therefore leverage this and also partner organisations 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 on the bottom line. With a well-crafted product line in their ‘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 improvements or mortgages. This is done by remodelling the terms of payment, pricing and tenor for such facilities. Investors across emerging markets will be attracted to this and 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.
- Benefitting from a unique brand of talents:
Green financing offers opportunity for banks to attract unique staff with specialisation 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 talent within their human resource base.
Research suggests that Ghana has a well-developed financial services sector. The country has an 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$3.2billion FDI. The banking industry’s gross loans and advances stood at US$7.3billion 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 are 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 that will be enormously beneficial in the long-term, with significant impact not only in their bottom-line to satisfy shareholders but also in making a meaningful contribution to the environment.
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 Writer
Ebenezer worked in banking & NBFIs for close to a decade. He researches, consults, writes, coaches and speaks on access to innovative & sustainable finance and investment for MSMEs, and also women & youth groups in entrepreneurship.
He is a Development Communication professional, Innovative finance & investment analyst, Certified digital marketer, Sustainability enthusiast and Writerpreneur.
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