On the Road to a South African Green Bank

CGC staff spent the last week in Johannesburg, partnering with the Development Bank of Southern Africa (DBSA) on the formation of their new Climate Finance Unit based on a “Green Bank” model. The DBSA is a regional development bank, financing infrastructure projects across multiple countries in partnership with private lenders and international DFIs. Identifying the opportunity and the need to increase its “green” development activity, the DBSA has decided to form a Climate Finance Unit (CFU) dedicated to financing climate-friendly infrastructure across energy, water and other key sectors.

Like other Green Banks before it, the CFU will focus on filling market gaps and offering capital in ways that can catalyze greater private investment. It will specifically support projects that are commercial but not quite “bankable” for the private lenders, and would benefit from the CFU’s credit enhancing capital. The DBSA is also taking an innovative approach to technical assistance, as the CFU will reside within its broader Project Preparation Unit. This will allow the DBSA to provide both development and capital support to projects.

The DBSA is now in the process of securing co-funders to support the new Climate Finance Facility, which will be the primary lending vehicle for the CFU. This debt facility will be seeded by the DBSA itself, but it is also seeking co-funding from DFIs and potentially the Green Climate Fund, as well. The Facility will make debt and credit enhancing forms of investments. And DBSA will source financial product concepts from a new Climate Policy Initiative “Lab,” which will be co-located within the DBSA’s facilities.

This is a significant development in climate finance, and not just for Southern Africa. Coming out of Paris Agreement, attention has shifted to the country level, where local implementers must figure out how they will pay for low-carbon infrastructure. CGC recently completed a large research and stakeholder outreach project, funded by the Hewlett Foundation, to explore the application of the Green Bank model in emerging and developing markets. This work indicated that Green Banks can become a key piece of the climate finance architecture, driving more foreign and domestic climate investment, while enabling local actors to determine climate investment needs.

The DBSA’s leadership and desire to implement this innovative model serves as an example for developing countries around the world. For national development banks curious to know how they can form defined Green Bank divisions within their existing institution, South Africa is showing in a practical way how this can be done. By engaging and hopefully pulling in investments from DFIs, they are also creating a precedent for new ways that foreign development capital can flow into local markets and be highly catalytic, driving increased levels of private investment in new market segments.

There is still much work to be done to launch South Africa’s new Green Bank, but they are on their way. And CGC is proud to be partnering with the DBSA on its work, delivering technical know-how and Green Bank best practices from around the world.