Chalchat, Head of Company Engagement for BNP Paribas CIB, was a member of the
panel discussing frameworks and partnerships to finance sustainable
infrastructure at a One Planet Summit
event. She believes that blended finance will play a decisive role in accelerating the
project development phase in developing countries.
How could blended finance be further leveraged to accelerate sustainable infrastructure?Constance Chalchat: As this year’s leader in renewable energy financing in EMEA (Dealogic, January-September 2019), we are involved in a wide range of sustainable energy infrastructure financing, from the 1.1 Gigawatt Sweihan solar farm in the UAE to blended finance-enabled projects in developing countries.
The most frequent challenge is financing renewable energy infrastructure in developing countries with perceived or real credit risks. Based on our experts’ feedback on our most recent project experiences with export credit agencies (ECAs), the World Bank and African development finance institutions (DFIs), we see three main levers to de-risk and accelerate the building and operation of infrastructure with positive social and environmental impact.
1. Blended finance, leveraging each stakeholder for the best they can offer:
- DFIs and international agencies for de-risking or longer-tenor financing
- ECAs to provide insurance and/or guarantees
- Foundations (such as our partner the Bill & Melinda Gates Foundation or the Rockefeller Foundation) or impact funds, which could complement ECA tranches on projects with high percentages of local costs as opposed to equipment
- Government grants
- and of course private capital (asset owners, pension funds) and commercial banks like BNP Paribas.
2. Blended use/blended clientele
When the beneficiaries of the infrastructure are a mix of bankable Corporates and populations, this transforms part of the country risk into Corporate risk, possibly with a better rating.
” By financing a larger number of smaller projects, we not only spread our risks better, but we can also accelerate the build-up of agile renewable energy infrastructure. ”
For example, we co-financed a solar farm in Burkina Faso with the
International Finance Corporation (IFC), a DFI, taking into account the fact
that a company with a good credit rating was a captive client of the energy
3. Favouring smaller-scale projects
Technology now allows developing countries to move from almost no energy infrastructure to small–scale, very efficient renewable infrastructure. Smaller-scale projects are less complex, and have less stakeholders. As a result, they can be implemented within a shorter timeframe, with lower project costs. Additionally, they do not necessarily need a grid connection, which again lowers costs. By financing a larger number of smaller projects, we not only spread our risks better, but we can also accelerate the build-up of agile renewable energy infrastructure. Of course, this requires the development of financial aggregation tools.
What are your expectations for other partners, including development banks and governments, to develop such projects – particularly in the field of renewable energy?C.C.: We lack governance at an operational level. We need to move from the current situation, where each of the stakeholders (DFIs, ECA, commercial banks) studies each project, to working together to optimise collective financing for all projects, in “task force” mode.
Ideally, to fully optimise funding and time for the structuring and implementation of positive infrastructure, we need forums where a country (or group of countries) can share their medium-term infrastructure plans and bring all potential actors (DFIs, international agencies, ECAs, foundations, impact funds and commercial banks) together around the same table. This could and should allow us all to act in sync and in full complementarity.
Secondly, BNP Paribas is seeking to proactively channel more of our ECA covered loans into sustainable infrastructure projects. One way to achieve this would be for ECAs to provide better conditions for these projects (under current OECD rules).
Is blended finance only an issue for the financial sector?C.C.: At BNP Paribas CIB, half our client base is Institutionals and the other half large Corporates. Based on our experience, Corporates can be a strong driving force to accelerate transition.
” A key mitigant would be the industrialisation of blended finance structuring, by launching sector and/or region-specific sustainable finance facilities. Projects meeting certain criteria would be eligible to use these facilities. ”
What works best is when blended finance enhances the impact of
Corporates that are already engaged in supporting sustainable growth.
Our best example of this is the Tropical Landscapes Finance Facility (TLFF), launched two years ago as a financing tool to fight deforestation and stimulate sustainable rural jobs in Indonesia. The TLFF brings together a whole range of expertise: the UN Environment Programme (UNEP), the World Agroforestry Centre, Hong Kong-based investment manager ADM Capital, BNP Paribas and the World Wildlife Fund.
Leveraging on this facility, Michelin, as Corporate pioneer in the sustainable supply chain, decided to develop a new kind of rubber plantation in places ruined by rampant deforestation. By planting sustainable, high-yielding rubber trees, it is creating 16,000 jobs, improving lives and enabling sustainable economic growth. And at maturity, the plantation will account for 10% of the global natural rubber purchased by Michelin.
So this ticks a lot of boxes from an environmental and social point of view, and everyone – from nature to local populations and private corporations – wins!
How can we make it easier for project developers to access climate finance?C.C.: There is probably more than enough liquidity in the world to decarbonise energy production and consumption. Yet each project is complex to structure, therefore more costly than it should be.
The first logical answer is for key development finance actors to reduce their own complexity, as acknowledged by Yannick Glemarec, CEO of the Green Climate Fund, in the October 2019 One Planet Summit. Second, certain risks – long-tenor risks, local currency risks and technology risks – remain largely insufficiently covered. This is where we need development finance to help, by taking or insuring these risks.
At BNP Paribas, we also strongly believe that a key mitigant would be the industrialisation of blended finance structuring, by launching sector/region-specific sustainable finance facilities. Projects meeting certain criteria would be eligible to use these facilities. Each eligible project could then tap into the facility for a given percentage of the financing, with the rest being provided by ECAs and private capital, including Corporates that will benefit from these projects.
Constance Chalchat is Head of Company Engagement for BNP Paribas Corporate and Institutional Banking and is a member of the CIB Executive Committee.
As environmental and societal issues are at the core of BNP Paribas’ strategy, CIB Company Engagement works closely with all business lines and functions to accelerate sustainable finance activities.