How banks can foster sustainability financing

A junior colleague in the Stanbic Graduate Programme recently asked me to explain to her what ‘sustainable finance’ means and my engagement with her inspired this commentary.

In my world of investment banking, Sustainable finance is defined as, “an investment decision that considers the environmental, social, and governance (ESG) factors of an economic activity or project.”

 Sustainable financing covers a range of activities, from putting cash into green energy projects to investing in companies that demonstrate social values such as inclusion or good governance by having, for example, more women on their boards.

Some of these investments have however been criticised as ‘corporate makeup’ by ‘green washing’ another popular term lately, referring to public relations efforts meant to position brands as being environmentally responsible. That is a conversation for another day.

Although Sub-Saharan Africa is the world’s smallest contributor to global green-house emissions, it is the most vulnerable to climate shocks.

Currently, concessional climate finance in Sub-Saharan Africa comes in the form of grants or concessional loans, mainly from major bilateral donors, multilateral development banks (MDBs), and multi-lateral climate funds.

In 2020, concessional climate flows received by the region totalled  $15.7 billion, well short of the region’s needs but amounting to 70 percent of the total climate flows.

However, concessional finance is by itself unlikely to meet the region’s transition and adaptation needs, as the amounts required to fund adaptation and mitigation are immense.

Companies find that green capital is still more costly, or sometimes less viable, to raise than traditional forms of finance, in terms of arrangement fees and the cost of capital. So how can these impediments be overcome?

As a result, banks can develop new financial products, services, processes, structures, and tools. With regards to new products and services, banks should look beyond large corporate clients to create flexible climate-aligned propositions for retail, SME, and other customers such as green mortgages or EV insurance, and green deposits.

Banks should continuously engage regulators, supervisors, and governments to encourage lawmakers to establish consistent, supportive policy environments that help mobilise capital within countries and across borders.

Uganda’s central bank will soon roll out guidelines for green financing which shall guide the sector on how to implement green financing.

According to the Marmanie report, there is adequate opportunity and capacity in the market to attract carbon credit financing from local commercial banks. To move along the pathway towards increased carbon credit financing, Uganda’s capacity-building efforts should focus on registering projects under the Clean Development Mechanism (CDM) with a particular focus on the development of Programme of Activities (PoAs), and on the use of standardised approaches.

There must be heightened awareness that leadership from the banks will be crucial in reversing the changes brought about by climate change.

Innovation will also be key for enabling the necessary level of capital mobilisation. Innovation can help banks to  identify demand and supply  and to think more clearly about global capital challenges, among others.

Ms Felista Lutalo Lugalambi  is a Sector Head, Consumer at Stanbic Bank Uganda.