Financing Climate-concious Investments in Latin America
Philip Killeen, Worldwatch Institute
March 20, 2015 | 2 Comments
PrintFollowing the conclusion of the United Nations climate negotiations in Lima, Peru, last December, a busy schedule of breakout sessions has begun for Latin American business and political leaders in early 2015.
Building on the Lima Call for Climate Action, these summits have the important objective of creating functional and market-based mechanisms to achieve "intended nationally determined contributions" of emissions reductions. The meetings are of special significance as participating countries prepare their positions leading up to major negotiations at the November 2015 climate talks in Paris.
Formulating sustainability-focused finance and investment networks for businesses in developing countries is an essential component of the UN Framework Convention on Climate Change's (UNFCCC's) objective for the Paris talks: to establish a legally binding, global agreement on emissions reductions that will limit global temperature rise to within 2 degrees Celsius above pre-industrial levels. The fourth annual Latin American Impact Investment Forum (FLII), held in Mexico City from February 24 to 26, presented a unique opportunity to promote these networks.
As an initiative under the Inter-American Development Bank (IDB), the FLII offers participant environmental enterprise ventures the opportunity to vie for the resources of the newly capitalized $10 billion UNFCCC-created Green Climate Fund. Supplementing this financing, the IDB has pledged to commit 25 percent of its total 2015 lending toward environmental sustainability and renewable energy projects in the private sector, a total of $3.5 billion.
Typically, businesses in developing countries lack the demonstrable credit-worthiness or collateralizable assets to compete for financing in open capital markets. This is particularly the case for non-vetted, environmentally conscientious enterprises. Development-focused finance networks, however, are particularly beneficial for small enterprises and risky ventures, as they are tailored to ensure long-term financial viability rather than to maximize investor returns.
For example, the IDB offers equity investment and direct loans that are coupled with local technical expertise services in an effort to both build capacity and strengthen credit-worthiness. The sustained involvement of these financing networks serves to improve scalability potential for business growth and to guarantee transparent corporate governance structures that are compliant with legal, environmental, and social standards.
The environmental and societal impacts of these investments are substantial on both the local and regional scale. In 2013, the IDB contributed a total of $3 million in loan and grant awards to the Colombian venture capital fund, Fondo Inversor. This fund has supported the implementation of numerous climate-aware projects, such as Waya, a hotel that has achieved Leadership in Energy and Environmental Design (LEED) certification.
Also in 2013, IDB financing of $1.18 million through FOMIN, an IDB subsidiary multilateral investment network, funded implementation of a low-carbon development strategy for small businesses in Guyana. More substantially, IDB loan assistance of $200 million in Uruguay contributed to the development of the Montes del Plata eucalyptus plant-based biomass electricity generation facility in 2011. This remains Uruguay's largest-ever private sector investment.
Given the IDB's reputation for due diligence, regional venture capital partners are able to attract new investors with the Bank's backing. With $30 million provided in loan and equity investment from the IDB, the IGNIA Fund venture capital group in Mexico raised over $100 million for small and medium-sized enterprises, providing sanitation and health services to low-income groups. Beyond their health impacts, these investments demonstrate how by expanding lending operations into previously untapped markets, IDB financing opens pathways for other lending networks to follow.
Whether these investment commitments will serve to sufficiently catalyze sustainability entrepreneurship and environmental impact is yet to be seen. With an annual gross regional product of $5.7 trillion in Latin America, businesses will require substantially more financing to be directed toward sustainability than the so-far modest contribution of these investment networks. These efforts are further nuanced by the development of robust trade and investment relationships for non-renewable energy sources and resource-extractive industry in Latin America. Amid these relationships, China has rapidly emerged as an influential economic partner to the region and will play a central role in directing the trajectory of development.
Trade between Latin America and China has grown dramatically, from $12 billion in 2000 to $289 billion in 2013. This rapid growth can be accounted for almost entirely by increased Chinese demand for commodities such as oil, metals, and soybeans — products with high carbon footprints. However, given the enormous potential for growth in Latin America's renewable energy sector, there appears to be a sizeable role for a country like China in investing in low-carbon development.
The 2013 IDB report Rethinking Our Energy Future estimates that Latin America's renewable energy endowment is large enough to meet domestic electricity demand through 2050, 22 times over. Representing a diversified energy pool, the region could produce over 78 petawatt-hours annually from solar, wind, marine, geothermal, and biomass sources.
During talks with Costa Rica at the January 2015 China-CELAC Forum — which brought together China and the 33-member Community of Latin American and Caribbean States — Chinese President Xi Jinping indicated a commitment to increased financial and technical cooperation on clean energy and climate issues. He also pledged $250 billion in investment in Latin American energy, infrastructure, agriculture, and manufacturing projects. The greatest beneficiaries of this support are Venezuela and Ecuador, receiving credit lines from China's Export-Import Bank of $20 billion and $5.3 billion, respectively, to stabilize their oil price-shock affected economies by subsidizing the export of hydrocarbons to China.
As the formative UN climate talks in Paris draw closer, the development of sustainability-related microfinance schemes in Latin America is crucial to demonstrating regional commitment to emissions reductions while balancing the need for growth. The China-CELAC forum represents an untapped source for potential growth for both parties, particularly if they can successfully integrate China's domestic "Green Credit Guidelines." Outlined in February 2012 by the China Banking Regulatory Commission, these guidelines require investor banks to "effectively identify, assess, monitor, control, and mitigate environmental and social risks."
Through these and other initiatives, environmentally conscientious investment and microfinance opportunities, such as those showcased during the fourth annual Latin American Impact Investment Forum, will become much more appealing and cost-efficient targets for investment capital.
This article was originally published on the Worldwatch Institute blog and was republished with permission.
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