NDF - Financing for climate change and development projects

Forty years of experience has proven its point: Sustainable financing actually works

Phto credits: HKL (NIB), Patrik Rastenberger (NEFCO), Heli Sinkko (NDF)
31.10.2019

The road towards a sustainable future is not a straight line, but a whole network of different paths that all lead to a common goal. Sustainable financing is one of these paths, and its impact is felt in many areas of our society. How can this be, you might wonder? Please read on to understand why sustainable financing is crucial to our future.

What do projects like energy efficiency in day care centres and schools in Ukraine, wind farms in Denmark and gender equality in developing countries have in common? First of all, they all contribute to a sustainable future. Secondly, they get financing from three Nordic finance institutions.

The Nordic Investment Bank, Nordic Environmental Finance Corporation and Nordic Development Fund are frontrunners in different areas of sustainable finance. They have been at it long before sustainable finance was even established as a term, and with quite remarkable results. Today, there is an urgent need for sustainable finance, because of the economic, environmental and social challenges we face.

Today, the global community has acknowledged that there are no alternatives to sustainable development. The UN 2030 Agenda for sustainable development sets integrated goals that aim to achieve a balance between economic, social and environmental dimensions. As agreed at the UN’s Climate Change Conference in Paris in 2015, a green transition is required to limit the increase in average global temperature. In 2018, the European Commission also issued an Action Plan that sets out an EU strategy for sustainable finance. To achieve these aims, private actors and governments need to co-operate to steer finance flows into sustainable projects.

One way of doing this is for governments to involve international financial institutions with clearly defined mandates, such as the Nordic Investment Bank, Nordic Environmental Financial Cooperation and Nordic Development Fund.

But more is needed. In September, Denmark’s Prime Minster Mette Fredriksen said that her government needs private investors to get on board if Denmark is to reach its goal of reducing CO2 emissions by 70% by 2030.

Danish pension funds answered the Prime Minister and are prepared to allocate 350 billion Danish kroner to green investments by 2030.

At the same time under the UN Climate Action Summit United Nations launched the Principles for Responsible Banking, with 130 banks collectively holding USD 47 trillion in assets, or one third of the global banking sector, signed up.

In the principles, banks commit to strategically aligning their business with the goals of the Paris Agreement on Climate Change and the Sustainable Development Goals, and massively scaling up their contribution to the achievement of both.

By signing up to the principles, banks said they believed that “only in an inclusive society founded on human dignity, equality and the sustainable use of natural resources” can their clients, customers and businesses thrive.

Sustainable growth
Sustainable finance is not just about green solutions. There is a common understanding among the Nordic governments that sustainable financing has to cover a broad pallet of tools with different focus and target groups. Let’s start at the top with the Nordic Investment Bank (NIB).

NIB operates in the Nordic and Baltic countries and grants loans on sound banking principles to projects that improve productivity and benefit the environment. The main challenges for NIB when considering a project is sustainable growth, climate change, marine environment, pollution prevention and productivity improvement. The bank is owned by the eight Nordic and Baltic states.
According to NIB’s President and CEO, Henrik Normann, the Nordic and Baltic countries recognise that they are a bunch of small countries in a big world.

“Alone we can only achieve so much, but together as a region we carry weight. We have a brand. We have developed sustainable solutions that can be replicated and scaled in other parts of the world. That is the added value of our cooperation,” says Normann.

Renewable energy
One example of a project that fits the bill is Anholt Wind Farm in Kattegat between Jutland and the island of Anholt. NIB has, over the years, invested heavily in Denmark’s transition from coal and fossil fuel based energy production to renewable wind energy.

The offshore wind farm consists of 111 wind turbines, each with a capacity of 3.6 MW, making it one of the largest offshore wind farms in the world. The offshore wind was commissioned in 2013.
With a capacity of 400 MW, Anholt wind farm provides CO2-free energy corresponding to the annual power consumption of 400,000 Danish households, or 4% of Denmark's total power consumption.

NIB also provided partial financing of the Skagerakk 4 interconnectors, a project owned by Norwegian Statnett and Danish Energinet.dk. Basically, it is an underwater power cable enabling both Denmark and Norway to exchange power when the windmills in Denmark experience little wind, or when Denmark has a surplus of energy they need to distribute elsewhere.

This is also an example of how the Nordic countries can have an impact on a global scale. The report “Nordic Economic Policy Review 2019” argues that promoting the development of clean technologies is likely to be the most effective way of reducing global emissions. An example of such an area could, according to the authors, be Danish
wind power, perhaps in combination with Norwegian offshore technologies.

Leave no one behind
In the increasingly polarized debate on climate action, Normann is concerned about the victims of green solutions. His argument is that when industries are challenged by green change, we must not forget those who stand to lose their jobs. He compares it to the effects of globalisation which have lifted millions of people out of poverty in poor countries. At the same time, globalisation is immensely unpopular in, for example, the USA. The reason for this is that many US industrial workers feel that they lost their jobs to cheap labour in third world countries. US workers therefore see themselves as victims of a policy that did not consider the consequences for them. That again paved the way for populist politicians who now lead the resistance against climate action claiming that US workers will once again pay the price.

“When we now see a growth in sustainable finance, I think it’s quite important that we look to see if there are victims in this process of green transition. Therefore, we at NIB focus not only on the environment, but also on productivity, the latter covering social dimensions, such as equal economic opportunities. When those factors work together, we achieve sustainable growth. That way, we create new jobs and prosperity also for our children in a sustainable way. To leave people behind can jeopardise the change we need,” Normann points out.

For Henrik Normann sustainable finance means that we must measure more than just risk and return. He urges investors as well as politicians to measure impact.

Medium to small and with higher risks
While NIB is the big brother among the Nordic financial institutions and mainly focuses on large projects, the Nordic governments (Denmark, Finland, Iceland, Norway and Sweden) saw the need for a finance institution that could focus on small- and medium-sized green projects with somewhat higher risks, in both the private and public sector. For 30 years, the Nordic Environment Finance Corporation (NEFCO) has been this tool, providing loans, grants and equity-type financing, but focusing on the environmental side of projects rather than the economic side. In addition to its own capital, NEFCO also manages a number of trust funds to develop and de-risk green investments. 
NEFCO has been engaged in 80 countries all over the world in a total of 1300 projects.

“We are an organisation that is set up to focus on environmental and climate projects and nothing else. Each project might be small, but what we are aiming for is replicability and scalability,” says NEFCO Managing Director Trond Moe.

From freezing cold to state of the art
Could you imagine sending your child to a day-care centre or school where the indoor temperature drops to below 15 °C in the winter?
In many municipalities in Ukraine, parents do not have any choice. Most schools and day-care centres in Kyiv, the capital of Ukraine, were built back in Soviet times. These buildings are a far cry from modern standards, especially with regard to energy efficiency. This means high energy consumption to heat the buildings and very low indoor temperatures in many of them.

“In Ukraine the municipalities have no experience of private financing and borrowing from the private sector. In the past they only got money from the central government,” Moe explains.

In order to solve this problem, the Kyiv City State Administration initiated cooperation with NEFCO, which finances a wide range of energy-efficiency projects in Central and Eastern European countries, including Ukraine. The aim was to implement energy-efficiency measures in more than 200 public buildings, primarily day-care centres and schools.

“We saw a need for alternative ways of financing. At the same time there was a huge need for improving the energy efficiency. Since climate action is one of our main goals it felt natural to start with financing the renovation and improving energy efficiency of these buildings,” says Moe.

One example of a refurbished building is day-care centre No. 431 located west of the centre of Kyiv. It was in almost full decay. Now it is difficult to believe that it was built in 1964.

“There were cracks in the façade, the tiles were falling off and the visual appearance in general was unattractive. Our roof was full of holes. We had temperatures of 15-18 °C and we could only raise it by using electrical radiators, but then the wiring would start burning,” says Acting Head of Day-care Centre 431 Olena Patrik in an interview after the opening last year.

With the thermal rehabilitation, it was possible to get rid of all the defects in the old building. The construction works lasted for only six months and were completed in April 2018.

“Our main goal with this project was to demonstrate the ease and effectiveness of such projects. With relatively simple means, the municipalities can finance and implement similar projects all over Ukraine. It’s replicable and scalable to the need of each municipality and they can do it themselves,” Moe points out.

Small and agile
Poor people are the ones most vulnerable to the consequences of climate change such as hurricanes, flooding or drought.
According to the Managing Director of the Nordic Development Fund (NDF), Karin Isaksson, the impact of an escalating climate crisis will be immense. Her organisation’s mandate is to work towards development and getting people out of poverty. Through the years, the NDF’s mandate has shifted so that they have moved from a development only focus towards a mandate that puts them in the nexus between development and climate.

It’s quite important to remind yourself how these two aspects are interrelated. If we don’t try to fight climate change, it will mean that another 120 million people will not be able to get out of absolute poverty,” Isaksson states.

NDF is the smallest of the three Nordic finance institutions, but also the most agile. NDF finances projects focusing on climate and development in Asia, Africa and Latin America, usually in cooperation with bilateral, multilateral and other development institutions. NDF provides a broad palette of financing instruments ranging from grants to different kinds of reimbursable instruments”. NDF’s operations started in 1989 with lending operations. Since the introduction of the climate and development mandate in 2009, the accumulated volume of climate focused commitments amounts to around EUR 400 million.

“To us, sustainable finance is to pay attention to the environmental, social and governance (ESG) aspect. This is an area where both the public and private sector has found common ground in the last 10 years or so. ESG is something that should not only be seen in a compliance perspective, but as a value creator for everyone,” says Isaksson. 

NDF is engaged in a variety of different projects, one being the West Africa Coastal Areas Program (WACA). The objective of the NDF funding is to improve climate resilience in the coastal regions of Benin and Senegal.

“This is a really good example of how we work to help people and regions to adapt to the consequence of climate change. This area is the home of millions and millions of people and they are already affected by the impact of climate change,” says Leena Klossner Deputy Managing Director at NDF.

In the beginning, NDF provided an early stage grant for the preparation of the program. The whole program has now grown to a multimillion project where the World Bank and a number of international investors are also involved in financing the projects.

“In fact, this was one of the fine examples mentioned by the President of France Emmanuel Macron as part of his Planet One Summit just some years ago,” Klossner says with pride.

How gender equality affects the climate
Another project NDF is involved in right now is the Energy and Environment Partnership Trust Fund for Southern and East Africa.
It might come as a surprise to some but having gender equality top of mind in development projects has proven to have a positive impact on the environment as well. The reason is quite simple.

“Women are often more reliant on energy when cooking and doing other household chores and all of this is made much more efficient if clean and reliable energy is made available to them. And of course, it has huge implication for education, which can be understood as an important tool to empower women,” Isaksson explains.  

Also, approximately 600,000 women and children die each year as a result of inhaling toxic fumes from cooking over open fires inside houses. Therefore, NDF is engaged in a project that promotes and distribute clean cook stoves and biogas solu¬tions. Engaging women as sales agents has also proven to be very effective.

“Women can provide valuable inputs in the design, manufacturing, sales and distri¬bution of these products. Women have had particular success in the sales and distribu¬tion of such products, in many cases, out¬performing male counterparts. Being female and a sales agent selling to other women lends to their credibility to promote and sell cooking products”, a report issued in 2017 stated.

Written by André Jamholt, Senior Communication Adviser at Nordic Council of Ministers