Making green financing a reality

As the curtain falls on COP26, the world is wondering how nations can make good on big promises to pursue development while containing the climate crisis. Rwanda, for example, needs sweeping investment to realise its climate change goals in ways that don’t compromise economic development. As such, making the promises on ‘green financing’ a reality will be essential.

Taking centre stage at this year’s climate conference has been discussions on ‘green finance’ – the financing of sustainable business models and policies – and the goal to secure $100bn in pledges to help decarbonise the world economy. This financing is vital to support countries in the fight against climate change through adaptation and mitigation programmes. But currently, green finance remains an abstraction, with many investors struggling to assess just how green their investments really are.

A new pilot programme that develops tools for banks to assess how green their investments are might be about to change all that, with results that could revolutionise green financing.

Green credit check

An initiative is underway in Rwanda to trial new tools to ‘green rate’ Small and Medium Sized Enterprises (SMEs). SMEs will be assessed according to data held by banks (including development banks) on the businesses they support. This information will then be converted into climate metrics, with the companies rated according to the levels of emissions emitted across all their areas of business.

The process will then become automated, allowing banks to assess the ‘greenness’ of their current portfolio and make future lending decisions based on accurate information on the green credentials of SMEs seeking investment. This makes green financing a core product offering, and could be a game-changer for fund allocation, as it acts as assurance for banks that the companies are climate compliant.

This information will also forge the success of SMEs, enabling them to identify areas where they can make quick wins, and reduce their emissions (such as transport and energy consumption), boosting not only their green credentials but their bottom line. With a green boom underway, over 40 green firms have seen their share prices triple since the start of 2019, according to the Economist Intelligence Unit’s latest figures.

The initiative is born of a partnership between the Green Digital Finance Alliance (GDFA) and the FIFC. The GDFA, a UN-backed organisation set up to harness the digital technologies to boost sustainable development financing, said Rwanda is the obvious launchpad for the move.

“Rwanda is an ideal pilot country because of its commitment to both digitalisation and to using innovative finance to deliver on its national targets under the Paris agreement.”

Rwanda has been the region’s leading environmentalist for decades. It banned plastic bags as early as 2008, and became the first African country to ban single use plastics in 2019. But a national plan – aiming to slash emissions by 38% by the end of the decade and reduce up to 4.6 million tonnes of carbon dioxide – needs $11bn to realise its ambitions. To achieve this, Rwanda established FONERWA, Africa’s largest green fund, in order to be the engine of green growth in the country. The KIFC will be a crucial partner in securing this green investment and helping Rwanda towards its goals.

The KIFC is poised to be a hub of sustainable finance in Africa. It wants to attract investment from businesses bound by the same ethical and environmental commitments as us. We want to land inward investment that changes lives, not just in Rwanda, but the wider continent as well. Being selected to pioneer a project to green rate businesses strengthens our claim that the KIFC, and Rwanda, are ripe for green investment.

In Africa, climate change is a matter of survival. Climate-driven extreme weather, disease and natural disasters are already adversely impacting daily lives with increasing frequency. This is why we don’t differentiate between economic growth and environmental protection. And why the fight against climate change is at the heart of Rwanda’s Vision 2050 programme: the government’s overarching strategy to become an upper middle-income country by 2035 and a high-income one by 2050. These aspirations are also woven into Rwanda’s long-term green growth and climate resilience strategy.

To reach our ambitious goals, our banks – like banks and institutions around the world – need to be able to invest with confidence in pioneering green projects. This confidence will be galvanised by tested and credible ways in gauging the ‘green rating’ of companies. This is why this pilot project is the key for companies to unlock new sources of climate financing, and for countries to turn the solemn pronouncements on green financing into a reality.

Nick Barigye is the CEO of Kigali International Financial Centre and CEO of Rwanda Finance Limited.