Driving Climate Finance in Emerging Markets: An update on the JIM Engagement Program
In 2022 the JIM Foundation began a project to engage commercial banks from the DFI/MDB/Impact Investor client base who are about to start their carbon accounting and transition planning journey. After a successful pilot, we intend to scale the program to support up to 100 Financial Institutions. In this blog post we will provide an update on the Engagement Program.
Welcoming more financial institutions
After the pilot, and with the support of DEG, FinDev Canada, FMO, OeEB, and Proparco, the JIM Foundation is now welcoming more commercial banks in emerging markets to the program. We are currently supporting 10 banks and are looking to expand our program in key countries.
The JIM Engagement Program is a crucial intervention to make climate finance deliver in emerging economies. We will start with deep knowledge and training for financial institutions (FIs) who in turn will help the JIM Foundation onboard 500 FIs by setting examples and sharing best practices.
Learnings from the Program: Insights from Engaging Financial Institutions in Ecuador
Our recent local event in Ecuador proved to be a valuable platform for engaging with 10 prominent financial institutions in the country. The session was held in Spanish and hosted by Asobanca, the Ecuadorian banking association, at the Banco Pichincha Headquarters. Through fruitful conversations with these institutions, including sustainability and risk teams from Banco Pichincha, Produbanco, ProCredit, Banco Internacional, Banco Bolivariano, Banco de Machala, Citi , Banco Solidario, Banco Guayaquil, and BGR, as well as officials from the Ministry of Environment, Water and Ecological Transtition we have gained powerful insights into the realities of carbon accounting and its impact on their organizations.
“Asobanca’s member banks are committed in the fight against climate change, the preservation of the environment and the strengthening of sustainable financing in Ecuador. Furthermore, the interest of Ecuadorian banks in learning from world class tools such as the JIM, reflects their interest in making efforts to visualize the impacts of their portfolio, and also in developing this process in a transparent, standardized, and easy to understand way” expressed Roberto Romero, Asobanca’s Public Affairs and Communication Director
One notable outcome of our discussions was the increased awareness among these financial institutions regarding the role of the sector in achieving net-zero goals, thanks to their commitments to frameworks like PCAF, TCFD and NZBA of UNEP FI. However, we also discovered that several obstacles continue to hinder banks from effectively decarbonizing their portfolios.
To assist these institutions in identifying the sectors with the highest emissions, we propose leveraging the JIM. By connecting them with experts in the field, we can initiate the process of decarbonization in these identified sectors. It is essential to focus not only on scope 1 and 2 emissions but also on scope 3 emissions, as they present significant opportunities for decarbonization. Moreover, this approach can attract global investors interested in sustainable investments. To accurately measure progress, we believe providing more granular carbon accounting tools specific to the identified sectors is crucial.
However, identifying the sectors is just the beginning; implementing the necessary changes within the organizations presents a real challenge. For example, during discussions with the Agri deal teams of an Ecuadorian bank, it became apparent that cattle-related emissions significantly impacted their portfolio. Despite this knowledge, their short-term plans involved expanding this portfolio. Additionally, they acknowledged that while technologies like alternative feed could reduce emissions, convincing borrowers to adopt them without associated commercial benefits would be difficult. Carbon tax discussions did not gain traction, as it is not yet a mainstream topic.
In such situations, collaboration with relevant government entities becomes pivotal. The Ministry of Environment, Water and Ecological Transition (Ministerio del Ambiente, Agua y Transición Ecológica) has developed a suite of tools, including the Carbono Cero program, aimed at addressing carbon accounting issues. This program enables organizations to verify the improvements on environmental performance (such as emissions reduction), leading to tax incentives and improved market positioning. However, like many similar programs worldwide, the assessment and verification process pose a significant bottleneck to accessing these benefits. This is particularly true for Ecuador, where majority of borrowers are SMEs, and having such processes in place is very costly.
Lastly there were discussions around climate risk tools, or the assessment of assets and whether they are prepared for the upcoming landscape changes such as drought, floods, etc. We found that Ecuador is already preparing with the “National Plan for Adaptation to Climate Change” announced by the Ministry of Environment, Water and Ecological Transition. Other countries in Latin America have not yet prepared these kind of policies, meaning Ecuador finds itself ahead of some peers on this regard. This topic is currently of great relevance as the latest reports are coming in on warming oceans, and the devastating impact that El Niño is expected to have Ecuadorian coast in a few months’ time.
Engaging with these institutions banks has already given us valuable feedback on short-term upgrades we will make in JIM 3.0 (release date Q3-2023), which include upgrades such as updated statistics as well as improved user friendliness (and a full Spanish version of the JIM). Read more about the upgrades here. Longer-term functionality requiring R&D are to be built into JIM 4.0 (2024). Some of the areas identified for expansion for upcoming releases are:
Scenario analysis (Transition Risks)
Helping JIM members designing their net zero ambitions on setting targets and enabling them to create decarbonization plans. We have identified scenario analysis as a key functionality needed for members to assess potential transition risks and develop more resilient decarbonization strategies.
This feature could take into account factors such as market conditions and regulatory frameworks, ensuring that members can develop effective decarbonization plans that are aligned with their overall business objectives.
Physical Activity Tool for specific investments data
Our goal is to create a comprehensive physical activity tool added to the suite of tools that the JIM could make available which enhances engagement with financial institution investees and facilitates determining actual progress in decarbonization pathways, and help quantify the impact of green or sustainable lines
By integrating the ability for members to input physical data such as fuel consumption, electricity consumption, land-use change, the tool will provide more comprehensive and accurate emissions estimates of investments. This new functionality will enable members to create more confident estimates based on actual physical data, allowing financial institutions to better assess the potential risks and financing opportunities of their investments. Ultimately, this will result in more informed decision-making and more effective allocation of resources, helping financial institutions to achieve their sustainability goals.
Benchmarking with industry peers
In order to further enhance the capabilities of the JIM, we have identified opportunities on development of a benchmarking module. This module will enable financial institutions to benchmark their impact performance against their peers. By providing this valuable benchmarking data, we hope to provide a reference point to the industry. This would be paired with a data collection portal to further streamline benchmarking.
Climate & Biodiversity Risk (Physical Risk)
While accounting for transition risk, the JIM should also account for physical risk. We are keen to integrate frameworks related to climate risk and biodiversity risk into the JIM, such as TNFD and PBAF. These frameworks are specifically designed to address critical sustainability issues, and by incorporating them into the JIM, we can provide financial institutions with the resources they need to effectively assess their impact over these areas.
We remain committed to fostering collaboration with Local Governments and Financial Institutions to capitalize on their expertise and resources. Significant progress has already been achieved, presenting an excellent opportunity to exchange knowledge and best practices and transform them into tangible tools that can be implemented on a broader scale. To accomplish this, we intend to build upon the insights gained from our sessions during local events. By continuously learning from these engagements, we can further enhance our collective efforts in addressing climate change and achieving sustainable outcomes. Stay tuned for more events coming up this year!
About the Joint Impact Model Foundation
Established in May 2022, the JIM Foundation is a non-profit organization which manages the JIM and creates credible oversight for its development.
Its mission is to provide the means to quantify impact aligned with industry standards, contributing to impact harmonization for the financial sector in emerging economies. Its aim is to create an inclusive, aligned, and actionable financial sector that is geared towards impactful investments in sustainable economic development while decarbonizing portfolios.