Riding the green shift with sustainable finance

Riding the green shift with sustainable finance

  • By Dulguun   -   Apr 30,2021
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Most people are aware of the growing challenges from climate change, social inequality, environmental degradation, greenhouse gas and exhaustion of national resources, but not everyone is able to act responsibly and make an effort to address, mitigate and eliminate these challenges. As our financial systems can influence the current economic model and shape the world we live in, finance is found to be the primary lever to achieving sustainability. With this knowledge, governments, corporations, organizations and associations are pivoting toward sustainable finance and environmentally positive business practices.

Sustainable finance refers to the inclusion of environmental, social, and governance (ESG) criteria in business or investment decisions for the long-lasting benefit of clients, partners, stakeholders, and society at large. Such eco-friendly business practices can cover a broad spectrum of business, from internal strategies to business projects to green financing and investing. Businesses worldwide are increasingly looking for ways to integrate sustainability performance into their core business strategy.

“While some individuals and businesses see the transition to green production as an additional cost, sustainable finance can help break this trend and make the transition to environmentally positive business practices and consumption a new opportunity, not a cost,” says the Financial Regulatory Commission.

Businesses need to embrace sustainability for their future success. Without a doubt, some might stop before trying as they fret the journey of seeking out sustainable finance, especially in Mongolia where the culture shift is just budding. However, it’s rather the opposite. Financial institutions and organizations are more likely to ramp up their support for businesses that incorporate ESG and contribute to the prevention of undue environmental and societal damage in the long run.

In September 2016, Mongolia ratified its Nationally Determined Contributions (NDC) to the Paris Agreement on Climate Change in accordance with the Green Development Policy (2014) and its Action Plan (2016). In December 2020, Mongolia revealed a new ambitious target to reduce 27.2 percent (previously 14 percent) of greenhouse gas emissions by 2030. The government of Mongolia has adopted a vision to mobilize increased green financial resources from climate-related funds.

The energy and agriculture sectors are the largest greenhouse gas emitters in Mongolia, contributing to more than 80 percent of the coun- try’s total emissions, according to studies. The energy sector accounts for half of the country’s total emissions according to the National Statistics Office’s 2018 data. The government plans to reduce emissions by increased renewable energy sources and improved the efficiency of energy production. The Ministry of Energy is targeting to uptick renewable energy sources to 20 percent by 2023, and to 30 percent by 2030.

The agricultural sector and transport sector account for 48.5 percent and 6.2 percent of total emissions in the country. The Ministry of Food, Agriculture and Light Industry is currently up-scaling the manure management while regulating and reducing the number of livestock to promote more efficiency in livestock production. The main tactics for mitigating emissions in the transport sector are to switch from automobile to railway in the transportation of coal, transition to Euro-5 standard fuel and the installation of electric heating in the trains. The ministry is also working to regulate the import of pre-owned cars.

Commercial banks made an initiative for sustainable finance and formed a working group with representatives from all local banks at the Mongolian Bankers’ Association in 2013. Since 2015, banks have been conducting environmental and social friendliness assessments in lending. Last year, commercial banks, financial institutions, and savings and credit cooperatives issued a total of 18.6 trillion MNT in loans, with 2,463 green loans worth 48.4 billion MNT approved to businesses and individuals, according to the central bank. While 95 percent of green loans went to businesses, 5 percent went to individuals.

These sustainable loans supported environmentally and socially friendly business practices and projects in eight different areas. Details are as followed:

  • 54 percent of green loans were for sustainable water and waste management
  • 25.8 percent for green facilities
  • 13.3 percent for sustainable agriculture, land use, forestry and eco-tourism
  • 3.2 percent for energy conservation
  • 2 percent for low carbon transport
  • 1.1 percent for pollution prevention and mitigation activities
  • 0.5 percent for clean energy
  • 0.2 percent for renewable energy

Financial institutions have common criteria for issuing loans, including the ability to guarantee income, the financial capacity to repay the loan, and financial discipline. As for sustainable, green loans, the most important criterion is that the proposal be environmentally and socially sound.

“Sustainable finance has the advantage of providing long-term financing on concessional terms. Commercial banks evaluate this type of loan application in conformity with eight guidelines for sustainable finance and five guidelines for construction, mining,  agriculture,  processing, and textile sectors. These guidelines can be found on the website of the Mongolian Sustainable Finance Association,” said N.Narantuya, an officer at the Market Research and Development Department of the Financial Regulatory Commission. “The weighted average interest rate of green, sustainable loans was 13.2 percent in 2020, while the weighted average interest rate of ordinary bank loans was 16.2 percent, indicating that green loans are 3 percentage points less costly.”

The following green and sustainable loan funds are presently offering financing for eco-friendly initiatives in Mongolia:

  1. The Ulaanbaatar Green Affordable Housing and Resilient Urban Renewal Sector Project by the Asian Development Bank

2. The project on the establishment of the Mongolian Green Finance Corporation, running since 2016, was approved project preparation funding by the Green Climate Fund in November 2020. The project aims to enable access to financial resources from the Green Climate Fund to other local financial institutions in Mongolia. Its loans will be primarily dedicated to energy-efficient housing, eco-friendly insulation, and other green development projects.

3. The Swiss Agency for Development and Cooperation is carrying out the Energy Efficient Building Refurbishment in Mongolia Project to introduce transparent, effective and gender-sensitive public investment management in Ulaanbaatar through the case of energy efficiency in buildings. It will provide a 20 percent down payment for people seeking energy-efficient housing.

4. The EU-funded Sustainable Textile Production and Eco Labelling project is being implemented from 2018 to 2022 to promote sustainable production in the wool and cashmere value chain.

5. XasBank and Trade and Development Bank are accredited by the Green Climate Fund to submit funding proposals for the Green Climate Fund-backed projects and programs.

There is a range of challenges that hinder sustainable finance, including those that affect all transactions (generic) and those that relate particularly to the sustainability aspect of investment, according to the 2019 “National Sustainable Finance Roadmap of Mongolia: Unlocking Mongolia’s Potential to Become a Sustainable Finance Knowledge Centre in the Region” report by the UNEP, International Finance Corporation and Mongolian Sustainable Finance Association. Generic barriers include high-interest rates and lack of access to finance, whereas barriers to sustainable finance are due to several intersecting factors, such as the nexus between lack of clarity on what constitutes a “green” project, which hinders internal budgeting, accounting and performance measurement, and complicates the measuring of environmental risks.

Sustainable finance barriers:

Limited capacity: Due to the lack of common understanding about green assets and low capacity to implement green projects, financial institutions (FIs) find it challenging to develop new financing instruments to build their green pipeline. As a start, definitions and criteria for green assets need to be developed. Furthermore, the ESG capacity of FIs needs to be enhanced to understand climate and environmental and social risks as an integral part of credit risk that could cause negative implications if not managed properly.

Policy alignment: To date, sustainable finance developments in Mongolia have been mostly led by banks on a voluntary basis. To ensure the alignment of all actors in the financial sector, mandatory sustainable finance policies, guidelines, and frameworks need to be introduced and engagements could be initiated in sectors such as microfinance, insurance, and capital markets. Inter-agency coordination is important in these efforts guided by the National Sustainable Finance Roadmap.

Underdeveloped sustainability toolkit for financial decision-makers: The lack of clear definitions and clarity over what a “green” project or asset is throughout the Asian region increases pipeline development costs for investors, banks, and companies looking to invest. Without clarity on what is, and what is not green, internal budgeting, accounting, and performance measurement functions will struggle to allocate capital towards green projects and assets. The lack of clarity will also hinder the measurement of environment-related risks. Even where asset or enterprise-level data is available, the lack of common standards and metrics makes comparison across a universe of green opportunities challenging.

Despite these challenges, Mongolia remains committed to realizing its sustainable finance targets by increasing access to green finance. For example, it has secured funding for setting up the Mongolia Green Finance Corporation, which could act as an intermediary to funnel private, public and international funding sources. Regulatory framework and policies need to be developed in this area, but one thing is sure: sources for and access to sustainable and green financing will increase amid the growing concerns of climate change and environmental pollution. Sustainable finance will drive positive environmental, social and economic development in the future. To keep pace with global trends and build forward for the post-COVID-19 world, Mongolian businesses need to make the green shift.

Dulguun Bayarsaikhan