Green Shift gains momentum
The demands for more sustainable investments and green energy have never been higher.
Recent weeks have seen a dramatic increase in demand for green energy in Central and Eastern Europe (CEE) and South Eastern Europe (SEE). As events cause a reassessment of dependence on Russian oil and gas, local governments are racing to reduce energy consumption and boost investment in renewable energy. Commercial banks and multilateral development banks (MDBs) say Russia’s actions have accelerated the transition to sustainable energy highlighted at the COP26 summit. Along with the recognition of the need to improve efficiency, especially as these countries are among the least energy efficient, comes an urgent need for greater energy security.
“We simply cannot rely on a supplier that explicitly threatens us,” European Commission President Ursula von der Leyen said in early April. “The sooner we switch to renewables and hydrogen, combined with greater energy efficiency, the sooner we will be truly independent.”
For their part, banks expect a strong upturn in green and sustainable projects in the region. “The demand for a decoupled and more local energy supply will drive sustainable energy generation,” says Dominic Pfisterer, Head of CEE Finance at UniCredit. “This has been underlined by the Commission’s REPower EU programme, which will lead governments towards… new investments in renewable energy.”
Simona Miklošovičová, spokeswoman for Slovakia’s Tatra banka, whose first green bond in April 2021 raised some €300 million, sees another driver at work: fossil fuel costs being pushed up by the conflict.
“Awards dramatically change the cost-benefit analyzes of green investments and significantly improve the return on investment of projects,” she says. Citing numerous alternative energy projects announced just in March 2022, she notes, “The mood seems to have shifted from wait-and-see to faster action.”
She points to coal-intensive Poland as a place that “still has a lot of fruit within reach”, while in the wider region domestic heating, usually with gas, remains an environmental challenge: “The electrification of heating, preferably via heat pumps, and the development of renewable energy sources would greatly contribute to reducing CO2 emissions in the CEECs.
Bankers are working with their clients to advance sustainability in a way that takes full advantage of EU recovery and resilience funds. Pfisterer claims that UniCredit has taken the initiative to finance projects such as the privatization of Sofia airport, the waste-to-energy project in Belgrade and the deployment of the fiber optic network in Bucharest. He argues that “green” should be defined broadly and include energy transition initiatives, digital infrastructure, transportation, healthcare, water and wastewater management.
Other bankers echo this need for a broad definition of “green”. “Generally, there are many opportunities in the real estate, power generation and energy efficiency sectors in all countries of Central and Eastern Europe,” says Markus Ecker, Head of Sustainable Finance at Raifeissen Bank International (RBI). “With rising energy prices, the switch to renewable energy generation is the most attractive to our customers, followed by energy-efficient buildings.”
RBI is one of the major players in the region when it comes to sustainability bonds: the leading issuer of green bonds in Slovakia, Romania and the Czech Republic. It launched a green bond program in 2019 to help redirect capital flows into green real estate, energy efficiency in real estate, clean transport and renewable energy. By the end of 2021, RBI Group had issued €1.3 billion in six currencies across 15 bonds.
Multilateral development banks took green finance seriously long before it became fashionable. Last year, the European Bank for Reconstruction and Development’s (EBRD) sustainable initiatives accounted for €5.4 billion, more than 50% of the bank’s total investments of €10.4 billion . The bank has a three-pronged approach to working with commercial banks on financing green projects, and most funds have been disbursed through its Green Economy Financing Fund (GEFF), the Green Economy and the Climate Action (GECA) and Green Cities programs.
The GEFF, launched in 2004 to finance the sustainability of small and medium-sized enterprises (SMEs), has since become one of the EBRD’s flagship projects, lending some €1.4 billion last year. He plays a key role in working with local banks – some 170 in the region with a strong focus on SEE – to identify green projects and how to finance them.
“The GEFF helps banks understand how sustainable finance works and how they can issue bonds in return,” says Ian Smith, Head of Intermediate Green Finance and Policy in the Energy Efficiency and Climate Change team at the EBRD. “At the same time, we advised them to broaden the definition of green beyond the obvious to include things like flood resilience, using waste with less environmental impact, and adopting sustainable business practices.”
Local banks say the programs have been very useful, with Ömer Tetik, CEO of Banca Transilvania Romania, calling them an excellent mechanism that supports customer awareness and assessment of investment opportunities. “It is of the utmost importance to cooperate with the aim of raising awareness of sustainable practices, increasing local market knowledge and helping to unlock more green financing opportunities,” he adds.
The EBRD’s Green Cities programme, launched five years ago, pools knowledge to provide investment and other forms of support to municipalities. It has mobilized some €5 billion in sustainable investments for 53 cities in 23 countries. For local banks, under pressure to look green by doing green, the EBRD’s involvement is reassuring, as is the fact that municipal loans tend to be safe, with low NPLs. At the same time, cities increasingly recognize that they have a key role to play in reducing CO2 emissions.
“MDBs such as the EBRD or the EIB have a positive impact in supporting green investments, either in the form of granting guarantees on the loans granted or in the form of direct financing of such projects”, says Simona Miklošovičová of TatraBanka . “Both lead to more favorable financing conditions for end recipients, such as reduced collateral requirements, lower interest rates, etc.”
However, in recent years, as awareness of sustainability has grown, financing options have also increased, reducing the importance of MDBs. “Direct financing can still be considered the most viable solution in many cases, although access to investors in international capital markets has become an attractive alternative for large corporations and institutions,” says UniCredit’s Pfisterer. . “Recently, we have seen a first wave of successful capital markets transactions involving institutional investors, primarily through sustainability bonds, SDG bonds and private placements.”
Yet, as the demand for financing green and sustainable projects grows, there will likely be a renewed need for MDB involvement. This will be particularly the case for small projects initiated by SMEs for which green bonds or direct financing may not be the most appropriate. “Supranationals and development banks play an important role in financing the transition to a more sustainable society in CEE/SEE,” says RBI’s Markus Ecker. “They influence the setting of priorities, and their focus on green projects is crucial for the sustainable development of [these] Regions.”
Given the scale of investments needed to successfully transition the region to sustainability, banks and private sector actors will need to support government and international efforts. “It is simply impossible for the EBRD and multilateral agencies to undertake what is needed alone,” says Nigel Jollands, Associate Director of the EBRD’s Green Cities Programme. “Private capital is needed more than ever.”
Yet governments can be expected to take the front seat. It seems likely that many Central and Eastern European and South Eastern European countries will seek to follow the example of countries like Mexico and Uzbekistan, issuing bonds aligned with the United Nations Sustainable Development Goals United Nations, bringing together private and commercial funds in national projects reflecting the objectives of the Paris Agreement. Commercial banks will continue to play the key role. And as demand continues, expect new innovations.