The COP 27 summit in Sharm El Sheikh, Egypt addressed climate variabilities facing communities across the African continent. While it is worth noting that adaptation financing is continually increasing through efforts of various development partners and donors, it’s of paramount concern that these funds need to be channeled into projects that cushion the most vulnerable to the catastrophic consequences of climate change. To attract these and other sustainable financing opportunities, businesses and project developers need the tactics and strategies which will make them investor ready for sustainable finance. Intelligence on the sources and the requirements for unlocking such funding will also be key to success.
The importance of funding sustainable projects cannot be underestimated. Finance is a big influencer of sustainability from two fronts- financiers will be able to vet and fund sustainable projects as well as provide more readily available and cheaper funding for projects which prove to be sustainable. This will be key to the achievement of the UN Sustainable Development Goals which need to be met by 2030.
Environmental and socially responsible behavior is already expected of institutions including banks and other financial institutions by various groups of stakeholders-customers, regulators, communities, credit rating agencies, and investors who are demanding an assurance that organizations are taking ESG factors into account when deciding to which investment decisions to make as well as the loans and another financing to be offered on a day-to-day basis.
For sustainable projects, there is a wide variety of sources for cheaper funding available for projects provided there is a clear demonstration of the level of sustainability of the project. The funding options available vary depending on the nature, location, and structuring of the project. Some of the major sources include green bonds, sustainable development bonds, Green lines of credit, green loans, and loans with sustainability-linked pricing among others.
Sustainability as a path to lower borrowing costs could be a game changer that businesses should explore. Green bonds as an example are making headlines in the world of sustainable finance due to their rapid growth in the recent past. Development financial institutions are also setting up specific funds aimed at financing sustainable businesses and are providing reasonable pricing for such financing. The pricing is going beyond the traditional internal rate of return and covers the impact rate of return.
Another option available for organizations looking for funding is the exploration of green and sustainability loans. Green loans are to exclusively finance or refinance new or existing “green projects” while sustainability loans are contingent facilities that incentivize borrowers’ achievement of ambitious sustainability objectives with no specific need requirement for use of proceeds. The attractive feature of these loans is that they are tied to lower lending rates for companies that improve their performance on sustainability matters. In the recent past many commercial banks have introduced green loans as a funding category. For seekers of funds, it is important that they can package their projects to meet the criteria for green loans if they are going to benefit from this movement.
The capital markets are playing a crucial role in financing the transition to sustainable economies. Even in developing countries where such capital markets are relatively underdeveloped, there has been great traction toward regulations that support the sustainable transition. In Kenya as an example, the financial regulator (CBK) has introduced regulations around financing and climate change which is resulting in lowering the carbon footprint of rapid growth by redirecting capital flows to environmentally responsible projects and innovations.
Other than packaging projects to be able to attract sustainable finance, it is important for projects to have reporting frameworks that support the requirements of the funds. The positive impact of the funding from an environmental and social perspective is key and must be reported using the right framework. This is new for many in the private sector and hence the need for technical assistance for seekers to be able to measure and demonstrate their impact beyond the economic impact of the sourced funds.
The private sector needs to explore blended finance as a way of funding sustainable projects. Blended finance should be viewed as an enabler for accelerating capital flows toward sustainable projects. Blended finance is a combination of commercial funding by investors and concessional funding provided by development partners and donors. For this to be a success, the private sector needs to map and package their projects to be attractive to the available concessionary funds which will help in blending their overall financing.
When done in the right way, a blend of development finance and philanthropic funds will encourage private capital flows to sustainable projects, reducing the risks and creating a lower blended cost. This will help in providing comfort to private investors and addresses their concerns about market and project risks.