A sustainable COVID-19 recovery: The case for green loan guarantees

Is this a topic of interest? Make sure to join our July 1st webinar on 'Financing the Green post-COVID19 Recovery' for more!

Policymakers and business leaders were quick to call for a green recovery from COVID-19 already back in April. But the burning question remains – how?

Loan guarantees have proven to be an effective and efficient driver for greener economies – from bridging financing gaps to jumpstarting cleantech markets and unlocking capital for struggling SMEs.

Ultimately, the way governments and businesses go about enabling a COVID19 recovery will 'make or break' climate action and long-term prosperity for all. Well-designed green loan guarantees can help ensure the former and should be included in any government tool kit of effective green recovery solutions.

COVID19: a threat and an opportunity for climate action

COVID19 threatens not only our health and welfare, but it is also a real threat to a green future. While we have seen CO2 emissions decline during the COVID19 crisis, this is only a short-term result of the lockdowns. The risk of carbon lock-in as part of government recovery plans is real and immediate. As recovery funds are pumped out, we must be more deliberate in our lifestyles to avoid emissions from jumping up again. We need to ensure that political priorities and capital support innovative, low-carbon technologies while ensuring a sustainable, just transition for all.

The planned post-COVID19 recovery programs offer a unique opportunity to bring our economies on a path limiting global warming to 1.5-2 degrees Celsius and build climate-resilience. After the youth climate movement in 2019, politicians and business leaders acknowledged the need for more climate action but have failed to mobilize the necessary resources to address the challenge.

Now the money is on the table. Never again will governments spend similar amounts to re-start their economies and create jobs. Failing to channel this into initiatives that also support climate action would be a tremendously missed opportunity. Many political decision-makers, business leaders, and citizens across the globe have called for a green recovery - and certainly some money will be spent on more climate-friendly infrastructure - but more needs to be done to make sure programs are using the funds effectively and efficiently.

Combining climate action and economic recovery: how to create real impact

According to a recent study by the Oxford Economic Review, by Nicholas Stern and Joseph Stiglitz, most experts see there being primarily 5 effective COVID19 stimulus activities that are also beneficial for curbing climate change: Clean research & development, green infrastructure investments, building retrofits, natural capital investment, investment in education and training, and natural capital investment.

However, this study left out one of the most promising instruments for a green recovery: loan guarantees for green Small and Medium Enterprises (SMEs).

In fact, the blueprint for a green loan guarantee instrument for start-ups and SMEs already exists and has proven to be very effective in Switzerland, for example, and could be successfully replicated in other countries. The experts quoted in Stern's and Stiglitz's study also agree that liquidity-support instruments, such as loan guarantees, for start-ups and SMEs, actually have the highest long-term multiplier effect on economic growth.

Why not make these instruments green to ensure both economic recovery and a safe living environment by countering climate change?

Best practice: Green loan guarantees can hedge against negative climate externalities and boost competitiveness

Since 2015, the Swiss Technology Fund provides loan guarantees to start-ups and growth-stage SMEs that develop and sell low-carbon technologies or services. Managed by Emerald Technology Ventures and South Pole, the fund has allocated loan guarantees to more than 80 clean tech companies that have received access to low-cost loans from commercial banks based on these guarantees.

The loans enable the companies to improve their low-carbon solutions, grow faster and contribute to CO2 emission reductions worldwide. The instrument is very efficient: due to the low default rate (only 3 of 67 supported companies defaulted by the end of 2018), every unit of public capital spent raises a multiple in private capital.

Why is this instrument so effective?

1. Loan guarantees have a very high leverage in capital, as commercial banks will increase lending, companies can grow and the public only spends money in case of default.
2. Supporting early-stage companies has high long-term benefits for the public, as early-stage investments are risky and the whole economy benefits due to knowledge spillover effects. Many experts see that supporting start-ups and early-stage SMEs has a high effect on economic growth.
3. Green loan guarantees are uniquely placed to address two market failures at the same time: first, they address the negative externalities of climate change, and secondly the positive externalities of knowledge spillovers, which are much more likely in early-stage than for late-stage technologies.

Green loan guarantees will be even more effective after COVID-19, as small companies struggle to access capital and request more loan guarantees, as shown by the the increasing demand for Technology Fund loan guarantees during the COVID-19 lockdown.

Taking action: how policymakers and companies can support a green recovery

So how to set up new loan guarantee schemes to quickly support a green recovery?For governments, the action plan is simple, though time-consuming

1. Expedite the decision on whether to set-up a loan guarantee scheme (example: in Sweden, the finance ministry has already decided to set up green loan guarantees to support the recovery).
2. Design the loan guarantee schemes, such as eligibility criteria, risk sharing provisions, and the pricing.
3. Identify the best institution to run the guarantee scheme - this may be a ministry, a public finance institution or an appropriate private sector entity.
4. Reach out to green SMES to apply and start issuing loan guarantees to accelerate the green recovery.
5. Scale up the successful green loan guarantee scheme (at best funded by new carbon levies, e.g. on air travel, as just approved by the Swiss parliament).

These are all steps that governments need to take. But to expedite a green recovery, the private sector needs to take responsibility and also act fast and decisively. Companies should invest in sustainable practices and technologies within and beyond direct operations, and demand that local decision-makers prioritise sustainability in recovery schemes and funds.

We need both private and public sector leaders to work together to build back better. Green loan guarantees are a proven way to keep up the momentum and ambition for a sustainable COVID19 recovery.

South Pole invites you to learn more about the How to finance the green post-COVID19 recovery in our Climate Chatter webinar on 1 July, 2020 – which other ideas fro green post-COVID 19 recovery could work, and how exactly green loan guarantees work. Register your interest here.

Our team will continue to contribute in a constructive way to the post-COVID19 recovery debate, making the case for ambitious and inclusive solutions, working together with private and public sector leaders across the globe. Our integrated offering along the Climate Action Journey helps tailor solutions for the public sectors and corporates to reduce emissions within their boundaries, but also finance global avoidance and removal activities – through either certified carbon credits or investments into impact funds, such as the Technology Fund. More importantly, we can help empower frontrunners to take results-based climate action, today.