the global Financial Sector in the ESG area: from commitment to Necessity

the global Financial Sector in the ESG area: from commitment to Necessity Lawrence Pratt INCAE Business School Lawrence.Pratt@incae.edu

Theoretical Cash, Mgmgt, Deal Flow

Reality Funding

Reality Funding Requirement

Wisdom “In theory there is no difference between theory and practice… ….In practice there is.”

Wisdom “In theory there is no difference between theory and practice… ….In practice there is.” - Yogi Berra

E&S Risk Management • Systems very common among leading T1 banks in most countries • Regional T2 and NDBs, some, but less common • Some regional variation and hot-spots (ex. Latin America) • Drivers • Project finance – EP, IFC Performance Standards • Upstream FI requirements for lines and subordinated debt • Now “calling card” for many relationships • More awareness of real risk and losses • Experience with “A-list” clients

E&S Risk Management • Challenges • IFC PS being “misused” for lack of a common standard • Perception of “uneven playing field” T1 &T2 • Moving beyond “compliance logic” to “risk mgmt” • “2nd tier sandwich” • Cash, cash, cash • Opportunities • Increasing interest of financial regulators • Financing to mitigate identified risks • Trends • Country-wide initiatives (Colombia, Nigeria, Paraguay others) financial-sector led, but multi-sectoral • Greater emphasis on social impact, and new types (Brazil)

Lending Programs • Supply chasing demand • Large pools of capital, much based on national goals and overseas development priorities • Heavily GHG-linked (renewables, efficiency) • T1 FI’s desires to access abundant funding with new products for existing and new markets • Drivers • Country policies • Shift toward renewables, globally • Latent demand becoming more active • Structural changes in energy markets and energy prices

Lending Programs • Challenges • T1: Technically challenging, not that easy or broad • T1 and T2: Lots of “rules” tied to funding • NDBs: Aligning products with country priorities (“sandwich”) • Demand development, market distortions • Regulatory structures – particularly for SME • Opportunities • Going beyond narrowly defined parameters • Financing to mitigate identified risks • Increasing environmental (and social) regulatory drivers • Relative energy prices (solar, biomass) • Trends • Distributed “everything” • Green micro-finance • Residential and consumer • Nuclear • Insurance • Agriculture (but differently)

Mismatches (“sandwich” evidence) • Disconnect between upstream source expectations and on-the-ground reality • Compliance-based approach in T2-T1 relationships • Overuse/misuse of IFC PS • Taking “business logic” out of relationship • Silos, particularly upstream, knowledge needs • Fears and appetite of T1 • ESGS issues: level playing field • Investment logic versus “upstream compliance” • Need for very new products and expertise to market and sell them • New markets – early days, much learning needed

the global Financial Sector in the ESG area: from commitment to Necessity