CIF TA Facility For Clean Energy Investments

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CIF TA Facility for Clean Energy InvestmentsFirst Call for ProposalsEnhancing the financial regulatory framework for promoting Energy Efficiency and DistributedGeneration Investments through the Green Finance Innovation Laboratory (GFIL) in Mexico & BrazilInter-American Development Bank1

Proposal submission templateCountry/ regionMexico and BrazilProject TitleEnhancing the financial regulatory framework and financial approaches for promoting Energy Efficiencyand Distributed Generation Investments through Green Finance Innovation Laboratories (GFILs)Implementing MDB(s)Inter-American Development Bank (IDB)MDB client 1National Development Banks/Ministry of Finance/Stock market Regulator/Financial Market RegulatorMEXICONational Development Banks Nacional Financiera (NAFIN)* Banco Nacional de Comercio Exterior (BANCOMEXT)* Banco Nacional de Obras y Servicios (BANOBRAS)* Sociedad Hipotecaria Federal (SHF)* Fideiocomisos Relacionados a la Agricultura (FIRA)* Financiera Nacional de Desarrollo (FND)*Regulatory Institutions Banco de México (BANXICO)*Comision Nacional Bancaria y de Valores (CNBV)*Secretaría de Hacienda y Crédito Público (SHCP)*Associations Asociación de Bancos de México (ABM)*Consejo Consultivo de Finanzas Verdes (CCFV)*BRAZIL [For more information on target clients and participants see Annex II] Banco da Amazônia S.A.*Banco de Desenvolvimento de Minas Gerais S.A. (BDMG)*Banco do Nordeste do Brasil S.A. (BNB)*Banco Nacional de Desenvolvimento Econômico e Social (BNDES)*Banco Regional de Desenvolvimento do Extremo Sul (BRDE)*MDB focal point Enrique Nieto, Lead Financial Markets Specialist, Connectivity, Markets and Finance, IDB [email protected];Claudio Alatorre, Lead Climate Change Specialist, Climate Change and Sustainability, [email protected];José Antonio Urteaga, Energy Senior Specialist, Infrastructure and Environment, IDB [email protected](*) Core Targets, as NDBs are policy driven executing actors operating mostly through commercial banks. IDB works hand onhand with these institutions to develop climate related financing programs and capacity building. All of them work with IDB andtogether with and/or through commercial banks to develop targeted programs.12

Arturo Alarcón, Energy Sector Senior Specialist, Infrastructure and Environment, IDB [email protected] description of proposed activityBackground:Increasing private investments in climate action is essential to meeting Latin America and Caribbeancountries’ Nationally Determined Contributions (NDCs). To this end, the Inter-American DevelopmentBank (IDB) in cooperation with local partners and with the support of the German Development Agencyfor Cooperation (GIZ) and the International Climate Initiative (IKI) of the Federal Ministry for theEnvironment, Nature Conservation and Nuclear Safety (BMU) of Germany, established two pilot GreenFinance Innovation Laboratories (GFILs): The Brazilian Lab was created in 2017 to develop innovative sustainable finance instruments enablingpublic and private investments in activities contributing to achieve the country’s sustainable goals andcommitments under the Paris Agreement. The Brazilian Lab brings together various stakeholders ofthe capital and financial markets that would not otherwise engage with each other to identify how toaddress barriers to green investments. 2 The GFIL work is structured around 4 thematic workinggroups, namely: Green Finance, Impact Investment, Fintech and Environmental, Social andGovernance Risk Management and Transparency. The Mexican Lab has been established in 2019 to mobilize financing for climate investments in keysectors of relevance for the low-carbon transition through financial innovation and regulation. TheMexican Lab also brings together various stakeholders of the capital and financial markets to worktogether in addressing key financial and non-financial barriers to climate investments. 3The Mexican Lab is structured around three working groups: Green Banking, Green Investments andSector Green Finance Initiatives.Despite the progress achieved to date under these pilot GFILs, 4 further work is required to address policyand regulatory gaps in financial regulations, develop financial instruments suited to unlock privateinvestments in energy efficiency and renewable energy, and build the capacity required to finance/investin these areas. Additional work is particularly needed for e.g., developing new and supporting theimplementation of relevant solutions developed under the Labs to date, expand activities to new sectorsand review/integrate recent international best practices and standards such as the EU Sustainable FinanceTaxonomy. 5 Furthermore, the COVID contingency calls for enhanced dialogue and innovation to drivegreen investments in areas with high socio-economic impact potential and address the new barriers thatcame to the fore as a result of the pandemic such as the depreciation of local currencies and the reducedcapability and incentives of businesses to invest in climate action.Coordinated by IDB, the Brazilian Development Association ABDE, the Security and Exchange Commission CVM, and GIZ, theBrazilian Lab currently involves representatives from more 150 financial institutions, public and private banks, private sectorcompanies, utilities, government and ministries officials and members from the civil society.3 Coordinated by IDB, GIZ, the banking association ABM, the Green Finance Advisory Council, and six national developmentbanks,3 the Mexican Lab is currently linked to the main actors of sustainable finance in the country, developing a convening powerthat allows designing and executing strategies in an integrated way and avoiding dispersed efforts.4 Progress include, for instance, mapping of barriers and opportunities to issuers and investors on green bonds; development ofa methodology for off-balance sheet financing of energy efficiency; provision of inputs to inform the revision of selected financialregulation such as Decree 8,874 in Brazil.5 See the “Complementarity and Additionality sector for further details”.23

Key outstanding barriers to investments in energy efficiency 6 and distributed renewable generation7Energy efficiency and distributed renewable generation represent for Brazil and Mexico key areas onwhich to advance to improving the long-term sustainability of their industries and urban infrastructures,increasing energy security, and achieving their respective NDCs’ commitments. Nevertheless, investmentsin these areas are not flowing because of the following key outstanding financial and non-financialbarriers: Gaps in financial regulations resulting in mispricing of climate risks by private investors and financiersand in capital allocation decision-making not consistent with emissions-reduction pathways that willenable these countries’ low- carbon transition.Gaps in investors/financiers’ awareness about the business opportunity and know-how to evaluateand finance energy efficiency and distributed renewable generation projects. This is compounded byborrowers’ inadequate capacity to develop pipelines of bankable green projectsViability gaps due to the lack of adequate access to finance and scalable and replicable businessmodels, and high up-front capital and transaction costsTechnology risks perceptions, due to the lack of confidence in project performance which ultimatelydrive up discount rates and financing costs and hold back investments.As a result, there is a disconnect between the supply and the potential demand for finance for energyefficiency and distributed renewable generation in Brazil and Mexico. The financial and capital marketplay a key enabling role to match demand and supply of finance for energy efficiency and distributedrenewable generation.Goals and description of the proposed activitiesWith CIF support, IDB and its local partners aim to leverage the existing GFILs to address theseoutstanding financial and non-financial barriers to private investments in energy efficiency anddistributed renewable generation. IDB and its local partners would do so by:Strengthening existing and proposing new financial policies and regulations, including with a viewof driving investments towards priority areas, fostering greater disclosure of climate risks, andovercome legal hurdles.ii) Building the capacity of, and foster knowledge sharing among, finance and capital market actors –banks, asset managers, pension funds, financial regulators on the business case associated withenergy efficiency and distributed renewable generation, on the technical and financial evaluation ofsuch projects, and how to engage with borrowers/investees to originate, develop and implementbankable pipelines. Capacity building activities will also cover aspects related to the integration ofclimate risks, particularly transition risk, in governance, risk management, strategy and operations, inalignment with the recommendations of the Task Force on Climate-Related Financial Disclosure(TCFD).8 They will also cover the dissemination of knowledge and the promotion of green bond andsustainable finance markets.i)Energy Efficiency includes the reduction of energy losses, efficient heating/cooling systems, high efficiency motors andequipment, high efficiency private sector and municipal lighting systems, and waste heat recovery among others.7 Clean distributed generation includes electrical generation and storage performed by a variety of small, grid-connected ordistribution system connected devices such as PV, or small-scale wind. Fossil-fueled distributed generation is out of the scope ofthis proposal. The expected demand will be mainly in solar as the focus companies are SMEs.8 The TCFD’s recommendations are available here. Transition risks refer to those risks that may arise as a result ofpolicy/regulatory, legal, technology, and market changes to address mitigation and adaptation requirements related to climatechange.64

iii) Developing innovative financial instruments and business models targeting Mexico and Brazil’scontext-specific circumstances and the specific characteristic of energy efficiency and distributedgeneration projects in these countries. After the design and “incubation” stage, these financialinstruments will move into pilots by the Lab’s members and translate into publications for publicawareness and knowledge sharing. These could include the development of technology (e.g. fintechs)to provide proper access to finance instruments.The main activities planned to be undertaken include:1. Development of dedicated Energy Finance working group/activities in each country GFIL to designroadmaps that promotes the collaboration of all relevant industrial, regulatory, and financial sectoractors to participate in the development of financial solutions for energy efficiency and cleandistributed generation. (Target participants in the working group would include representatives fromNational Development Banks, local commercial financial institutions, investors and asset managers,insurance specialists, financial regulators, representatives of key economic sectors including energy,industrial, technology, and housing specialists and providers)2. Market, regulatory and legal diagnostics to map key barriers along the finance value chains3. Assessments of national/regional and international regulatory and market practices to identify, distilland disseminate lessons learned4. Ad-hoc capacity building activities for financial regulators and financial institutions’ technical teamsand C-suite5. Convening and peer-to-peer exchange with other international members of the Network for Greeningthe Financial System 65 financial regulators from across the globe 9 and institutions implementingthe recommendations of the Task Force on Climate-related Financial Disclosures.6. Assessing the portfolios of selected investors/financiers for climate transition risks to improve theirability to price climate risks in energy intensive industries/assets/clients/investees, align theirportfolios with 2 C decarbonization pathways, and capture the related business opportunities7. Development of frameworks and approaches to shape and drive private investments towards energyefficiency and renewable energy – with focus on distributed generation – projects with high socioeconomic impact potential, with a view of supporting the post-Covid-19 recovery agenda. 108. Financial instruments and business models including but not limited to guarantees, insuranceoptions, credit lines, bonds, funds or facilities development support including e.g. green bondseligibility and impact frameworks, financial modeling, documentations, certifications, publicconsultations etc. to finance investments with socio-environmental additionality. In light of the impactof COVID on the Brazilian and Mexican economy, as well as the relevance of capital markets infinancing the energy transition, the Labs are expected to focus part of their activities in thedevelopment of credit enhancement solutions catering the risk/return profile of international privateinvestors/financiers.As of April 16th 2020, the NGFS consists of 65 financial regulators from across the globe (see https://www.ngfs.net/en/aboutus/membership)10 Beyond distributed generation, activities may also focus on investments in technologies enabling the integration of variablerenewable energy into power systems. The relevance of such measures become even more evident with the demand suppressionresulting from factories and businesses halting operations due to the pandemic, which generated further supply-demandmanagement challenges.95

9. Strengthen partnerships between development of finance institutions and Energy Service Companies(ESCOs) to accelerate the implementation of energy efficiency and clean distributed generation byproviding effective operational and financing models10. Revisions of ESCO contracting and operating frameworks with the aim