Author: Eriola Bibolli, General Manager, ProCredit Bank Kosova
It is a well-known fact that climate change, environmental protection, energy transition, and carbon neutrality have dominated the headlines in recent years, both in the public and private sectors. Urgency has grown in recent months, as the COVID-19 pandemic and the attack on Ukraine by Russia have laid bare the dependence on fossil fuel-based sources of energy and the corresponding geopolitical vulnerabilities. Within this complex setting, Kosovo has the most polluted energy mix in Europe and faces shortages in energy supply and substantial increases in energy demand. The logical response would be for Kosovo to accelerate the transition toward more resilient and greener sources of energy, in order to reach a net-zero future and foster sustainable economic growth. Unfortunately, it is remarkably evident that the energy transition is just starting to take shape in Kosovo. The exact path has yet to be set, but one thing is clear: it will require capital, financing, incentives, know-how, and more. The financial sector will play a central role in supporting this transition by allocating capital to more sustainable projects. There is no better time to tell ProCredit Bank’s story as the leader and the most experienced bank in Kosovo in pushing forward the sustainability and green finance agenda.
While ProCredit Bank’s identity revolves around responsible and sustainable banking, its green finance approach has had to incorporate Kosovo’s reality as a latecomer to the green transition and decarbonisation arena, while also carrying the burden of an energy mix dependent on fossil fuels. This presents significant untapped potential and at the same time is one of the most critical infrastructure challenges the country is facing.
It would be easy to say ProCredit Bank is committed to climate change and to sustainable and green finance; however, by now we all know that such statements by themselves are not enough. Many institutions still have a long way to go from creating catchy slogans and superficial promotions about sustainable banking to actually taking real action and achieving impact. What are the challenges? For ProCredit, engaging in sustainable finance and pursuing responsible banking has been neither easy nor straightforward, and it has been a journey that involved making choices and setting the right priorities. Specifically, this often-meant forgoing profit by rejecting clients who were running non-eco-friendly activities, such as those involving single-use plastics, or deciding to not finance projects in protected areas. Such decisions were taken even though other actors in the banking sector continued to ignore green standards and instead maximized their own profits with inflated short-term margins that, in the medium and long term, have high environmental costs.
It is with great pride that we can now showcase how ProCredit Bank’s actions match its words, how we commit to delivering real impact and how we have become an important player that remains a step ahead on the road to Kosovo’s green transition.
ProCredit Bank Kosovo is not new to green and sustainable finance. Starting in 2006, we have now been engaged in green finance for almost 18 years. As the largest SME bank in Kosovo, we leveraged our strengths and became a front runner in driving the country towards a sustainable growth path and a greener, net-zero economy. Today, ProCredit Bank remains committed to embracing the ESG criteria, decarbonisation plans, and sustainable economic development, while also accelerating green finance measures in response to growing climate change and environmental degradation.
Nevertheless, energy transition and sustainable growth are complex topics that cannot be tackled alone. They require strategic partnerships and the commitment of all stakeholders, starting with the government. We are all looking forward to having the country’s energy strategy in place as a guiding, forward-looking plan to support the energy transition of the country, accompanied by simple and transparent processes to ease project implementation. Investors and clients should not be discouraged by bureaucratic obstacles or process inefficiencies; the feed-in tariff system should be replaced with an auction bidding, competitive, market-based selection system; subsidized fossil fuel-based energy prices should be abolished, etc. Subsequently, the banking supervisors and regulators must record relevant data, introduce transparency in disclosure and reporting, and adopt common language for communication and definitions, etc.
What is ProCredit Bank’s approach to green finance and what makes us different?
ProCredit’s efforts are guided by our principles for a greener and more sustainable environment. The starting point for us, in contrast to other financial institutions, was to anchor a holistic, environmentally-sound framework in our institution. It begins with how we aim to minimise our own negative impact on the environment in our day-to-day operations, and how we pro-actively promote the sustainable business as an integral part of our institutional identity and business strategy. To accomplish these objectives, we developed and implemented a comprehensive environmental management system (EMS) that is based on three pillars:
- Pillar 1: Internal environmental management, consisting of processes and procedures that help us to systematically reduce our direct environmental footprint.
- Pillar 2: Management of environmental and social risk in lending. This pillar aims to help us mitigate the environmental and social risks of our clients and of the financed investments.
- Pillar 3: Green lending. This represents our objective to have a positive environmental impact in Kosovo by promoting green investments. The focus of this paper is to elaborate on Pillar 3.
For us, sustainable finance is not just about green loans; it includes the broader environmental and social impact of lending. Understanding our clients and their needs, and supporting them in their energy transition and in the decarbonisation of their businesses is of paramount importance for us. We devote substantial staff resources to client awareness measures and educational campaigns in order to ensure a good comprehension of the complex interactions involved in sustainable and green investments. We help clients explore the benefits of the energy transition and understand the relevant technologies and the investments they can undertake, while also building energy resilience to achieve optimal cost structures in the long term.
In financial terms, our green lending activity is growing and it constituted nearly 17% of our total loan portfolio as of March 2022; we aim to surpass 20% by the end of 2022. Green loans fall into three main categories:
- Energy efficiency loans for both SME and household clients. These represent the bulk of our green loans (80% as of March 2022), encouraging energy efficiency investments, boosting electricity savings, optimising energy use, and reducing electricity bills.
- Renewable energy loans. The largest potential for renewable energy in Kosovo is in solar and in wind-generated energy. Undoubtedly, this represents the future of the energy mix for Kosovo, so the discussion should only be about how fast the country can exploit this potential. ProCredit’s main experience so far has been in financing solar energy projects. Kosovo enjoys relatively high solar irradiation, between 1200 and 1500 kWh/m2, which translates into considerable electricity production generated by solar panels. ProCredit Bank has a strong focus on harnessing this potential and has provided financial support for investments in solar panel installations on two levels:
- a) Smaller-scale financing
For SMEs, we focus on supporting investments in small-scale, decentralised photovoltaic panels covering the rooftops of the business premises and used for self-consumption. We nearly doubled the number and volume of financed projects for rooftop PVs in 2021, and we intend to grow further in 2022. We see these projects as an important step toward improving the energy mix, promoting more sustainable client businesses, and a greener future overall.
- a) Larger-scale project finance lending
This is the least developed form of investment and financing in the country, for a number of reasons. While the lack of a clear legal framework and other administrative barriers make investments rather difficult, the banking sector at large also lacks expertise in assessing renewable energy investments through a project finance methodology. In contrast, ProCredit has invested in in-house capacity to develop and assess renewable energy project finance business. Within our approach, decisions are based on the sustainability of the future cash flows generated by the project itself, rather than on the historical cash flows, as would be required by traditional SME financial assessment methodology. However, an approach built around future cash flows is not without risks, in particular in an undeveloped market, so it is important to strike a balance between non-recourse and full-recourse projects when supporting a fast adaptation of technology and a speedy energy transition. When engaging in non-recourse project financing, credit guarantees or solid collateral coverage is required in order to meet the bank’s underwriting standards. This underscores the immense importance of the KCGF guarantee windows, which serve as an important enabler in the financial system.
- Other environmental management investments, such as those in recycling alternatives, waste management and sustainable agriculture, etc.
It is important to emphasise that, as part of the ProCredit group’s efforts to assess climate risk and to limit our impact on climate change, we have committed to measuring and disclosing the greenhouse gas emissions associated with our loan portfolio and investments, in accordance with the Partnership for Carbon Accounting Financials standards. For more information, please refer to the ProCredit group’s Impact Report 2021. Our sustainability efforts, when translated into environmental impact, have led to CO2 reductions from our green loan portfolio amounting to 638,545 t CO2 eq. For us, it is not enough to simply report the number of green loans issued; rather, it is more meaningful to measure and disclose the CO2 emissions reductions and the real impact this has on the environment.
What has our journey towards sustainable finance and green lending been like, and what makes us successful?
Our success is based on years of solid commitment and investments in training to develop our capacities and ensure that our established principles and our approach have been internalised within the institution. Our sustainability and green finance objectives are not short-term initiatives. They started with the vision and determination of the shareholders and managers to adopt green principles and take action without delay. Establishing an environmental and social risk management framework required solid expertise about the technical and legal aspects of the project; it required investments in financial modeling/project finance skills, and it required appropriate credit risk management techniques to be developed.
Regular staff trainings in the bank, via the ProCredit academies, and through regular exchange and experience-sharing with other ProCredit banks has been a key factor in achieving lasting success.
Our 2021 Group Impact Report showcases our continued leadership in sustainable finance and responsible banking, presents our progress in reducing carbon emissions and accelerating green lending, and further describes our transparent metrics and disclosures.
While environmental deterioration and climate change pose a continuous challenge for us, it is imperative that our generation act with urgency. ProCredit Bank is committed to this path and, together with the support of other relevant stakeholders, we can unlock the potential in the market and support the flow of capital to greener clients and investments in Kosovo. We aim to remain at the forefront of global and local sustainability efforts, as this is part of who we are: a responsible, ethical, sustainable bank for whom principles, the environment, and society truly matter.