What Makes a Project "Green"?
In the case of wind farms or photovoltaic power plants, the answer is obvious. However, other definitions can be more ambiguous. For instance, a bank may grant climate financing to a sheep farm if it respects certain sustainable agricultural practices.
The Rise of Green Financing
After the acceleration of climate change manifestations and regulatory pressures from the northern Mediterranean shore, more and more banks and financial institutions are setting green or sustainable lending targets. However, the definitions of projects or companies that can benefit from this type of lending are often blurry. This could easily turn these initiatives into case studies of greenwashing.
Flexible Definitions
Sustainable finance is a broad definition. It encompasses green bonds, whose funds are allocated to environmental or climate-related projects. For now, no issuance has taken place in Tunisia, although the regulatory framework has been in place for years, including green, socially responsible, and sustainable bonds. Good intentions are not enough, and we are just at the beginning of a long global journey that has led the 24 largest European and American banks to set sustainable financing targets totaling €15 trillion by 2030. This is an ambitious plan, but including transition financing in the calculations should facilitate its implementation.
The Devil is in the Details
We must learn from the experiences of advanced economies, where, despite the progress made, it is curious to note that banks' definitions of transition financing vary significantly. And as the devil is in the details, this is an open door for including the financing of polluting companies. Some ideas may seem surprising. For example, companies eligible for transition financing might include a telecommunications group if it develops a video conferencing software. A cattle farm can be eligible if the cows have better profitability. These are flexible definitions reviewed permanently according to the global evolution of transition criteria.
Tunisian Finance Takes the Path of Sustainability
In Tunisia, we have seen that the Caisse des Dépôts et Consignations, supported by the State, has been one of the first to adopt a sustainable development program. A few banks have taken the lead, and others are catching up. However, comparisons are difficult, as sustainable financing targets can be defined in different ways with varying time horizons. Some banks also include social projects and companies rather than focusing solely on climate.
Beyond Traditional Lending
If traditional lending activities, through bonds and standard loans, constitute the primary method used by banks to promote decarbonization, more specialized niches also have importance. Leveraged financing, international trade financing, and treasury management have always been latecomers in the ESG (Environmental, Social, and Governance) field, but this is changing. Leveraged financing is where companies (usually private equity firms) take on debt to finance their expansion or acquisitions. Integrating sustainability characteristics into loan mandates can push for a broader adoption of ESG standards.
Blended Finance
Blended finance (the use of public funds to attract private investments in developing countries) is a restricted but growing area of climate change financing. It has long been considered a suitable tool for energy transition, and more initiatives are emerging with the support of major international banks. At the end of last year, for example, several governments, including the European Union and the United States, launched partnerships for energy transition to mobilize up to $15.5 billion in Vietnam and $20 billion in Indonesia. The goal is for the private sector to mobilize half of the capital, and several major banks are involved through the Glasgow Financial Alliance for Net Zero.
Conclusion
In Tunisia, we must take advantage of this approach to attract as much money as possible to local businesses. We must be pragmatic and combine the useful with the pleasant: opening up the Tunisian economy to foreign investment within the framework of the national decarbonization strategy. The World Bank's figures evoke a financing need of $35 billion by 2050 if we want to achieve carbon neutrality. Alone, we cannot be good. Policymakers, regulators, and consumers demanding more climate action must accept this reality. Awareness of the role of banks in allocating capital for the transition is necessary. This has already been highlighted elsewhere, and we must not waste more time.
