Why we must transform technical assistance to accelerate sustainable finance in emerging markets

Scientific evidence demonstrates how sustainability and climate-related risk issues have accelerated in recent years. Due to potential damage to productive assets or disruption to business continuity, distribution networks and worker productivity, these issues impact the conventional risks that businesses and banks consider. Yet, aside from the downside risk, the transition towards low-carbon and sustainability-friendly business models is likely to unlock significant opportunities.

Agile players in competitive markets may leverage these to gain growth in market share, revenue, margins and brand recall. In some emerging and developing economies, such as India, Mexico and Egypt, the scope of opportunities is already driving startups to grow exponentially.

While these emerging risks and opportunities are driving banks to transition to sustainability and climate-smart practices, banks in emerging and developing economies face constraints in the availability, access and affordability of the technical capacity, know-how and required technologies. This is particularly relevant to advanced analytical areas, like climate risks, product development in green or transition finance and taxonomy alignment.

In Europe, these capabilities were led by specialized climate sciences, modelling or academic institutions. They were put into practice by corporates and funded by financial institutions. Institutions in emerging and developing economies are inculcating such new capabilities, but there is a need to hasten the low-carbon transition process given the speed of climate change. Banks in emerging and developing economies need support to help them overcome the obstacles they face.

Even regulatory developments in these regions are moving in this direction. In India, current and expected regulations in climate risks indicate the changes required by banks, while the expected green finance taxonomy indicates changes in channelling capital. Again, building regulatory preparedness implies a need to hasten the transition and support emerging and developing economy-based banks.

In response, European development agencies and finance institutions launched technical assistance programmes, to transfer technical expertise to emerging and developing economies. These aim to enhance the preparedness of banks in these areas for addressing climate and sustainability risks and opportunities, including responses to expected regulations. There are several examples in the market, however, which are mostly standardized capacity-building offerings rolled out across all financial sector players

GIZ, the German technical assistance agency we work for, went a step further. On behalf of the German Federal Ministry for Economic Cooperation and Development (BMZ) and the European Union (EU) and as part of the EU-led Sustainable Finance Advisory Hub, it developed a targeted approach for its sustainable finance advisory programme, currently underway in high-impact emerging and developing economies, like India, Mexico and Egypt. Similar to the Voice-of-Customer (VoC) method used in the manufacturing sector, including in Germany’s car industry, the GIZ programme adopted a demand-driven approach to identify areas of intervention for each bank following extensive need-analysis interactions and an expression of interest process.

This aimed to ensure interventions were relevant as per the stage of maturity of the respective bank in terms of sustainability integration and its strategic priorities. It led to interventions that require complex analytical and innovative approaches, unlocking an opportunity for banks to create a differentiation relative to peers and earn material business outcomes. This is unlike supply-driven technical assistance programmes where interventions may be decided in advance, irrespective of the varying needs and wants of the players.

This demand-driven approach has been successful in identifying interventions across risks and opportunities, with some commencing execution. Within financing, these range from developing transition and green loan products, green bonds, alignment of lending criteria with green or transition taxonomy, adaptation financing frameworks and product development. Within risks, these include environmental and social risk governance, climate risk analysis of portfolios, estimation of financed emissions or E&S risk assessment frameworks. Some of these interventions might be first-in-the-market, offering an opportunity for that bank to gain a business edge within competitive markets. Further, expectations of enhanced preparedness or ‘greening’ of banks in target countries have resulted in GIZ exploring the potential for a larger technical advisory to promote bank-led green bond issuances in such markets, thereby scaling up the financing of ‘green.’

While a demand-driven approach might be operationally heavy to roll out, this was complemented by impact-related requirements, to ensure ROI on technical assistance-euros invested. This meant only those interventions that could be executed by the bank on a standalone basis, even after the technical assistance period, were eligible. The impact would be long-lasting, since it would build the bank’s internal capacity to repeatedly execute the task in practice, enabling climate and sustainability-smart banking practitioners in the target markets. Due to this, the programme also saw a high rejection rate of applications. And, to again ensure ROI on technical assistance-euros invested, the programme sought to create synergies with existing projects within GIZ. An intervention selected for an Indian bank, for example, aims to build its ability to act as a co-lender for a farm-focused renewable energy financing programme that GIZ India has successfully rolled out with microfinance institutions. This ensures programmes can scale up further by leveraging the outcomes created by other funded programmes.

This demand-based and ROI-centric approach used in this technical assistance programme demonstrates the transformation it aims to create within banks in high-impact emerging and developing economies, like India, Egypt and Mexico. Moreover, it highlights a transformation in how technical assistance could be delivered to ensure targeted and long-lasting impact. It may offer a template to promote similar practices within banking and business circles through technical transfer.