By Auda Escobar, Specialist at the Financial Stability Department and Marisela Rivas, Specialist in Economic and Financial Research from the Central Reserve Bank of El Salvador.
Inclusive green finance (IGF) is proving increasingly pivotal to the future stability of global markets. This has encouraged financial institutions in El Salvador to take a more prominent lead in climate change mitigation by boosting support for IGF policies in everything from strategy-making to banking, and investment. Here’s a more in-depth look at some of the green initiatives gaining ground in the country’s financial sector…
With the growing need for a greener financial sector, the Salvadoran financial system has put in place two protocols to guarantee the availability of environmentally friendly financial services in El Salvador: the first is the State Green Protocol, which is a voluntary cooperation agreement between public banks and the central government, while the second – the Financial System Protocol – is made up exclusively of private banks.
The purpose of these protocols is to converge the efforts of financial institutions in promoting and strengthening socially and environmentally sustainable economic development in the country. This is achieved through the implementation of an annual work plan carefully designed to meet protocol objectives, and the hosting of periodic financial institution meetings and performance reports aimed at monitoring and evaluating the protocols’ challenges, successes, and prospects.
The guidance and reassurance offered by these two green strategies have led to an increasing number of companies adopting inclusive green finance initiatives, including the establishment of environmental governance programs and the ratification of formal national and international agreements consolidating their corporate environmental responsibility strategies. As a result, IGF has gained significant ground in El Salvador, with a 2022 survey by the Central Reserve Bank of El Salvador revealing that 11 out of 21 supervised financial institutions – that’s 52 percent – offer green financial products and services (see Graph 1), amounting to a 23.8 percent increase from 2017.
Graph 1. Supervised financial institutions that offer green financial
products and services in El Salvador.
Green banking initiatives
The country’s banking system is also gearing up to go green by expanding its selection of environmentally friendly products and services on offer. These include everything from campaigns to raise funds for environmental conservation to credit cards made from recyclable materials. Here’s a closer look at just some of the sector’s IGF initiatives:
– Banks offer green project loans exclusively to companies with sustainable production lines, efficient energy management protocols, and gas emission reduction programs – thereby providing an incentive for entrepreneurs and business owners to take the environmental impact of their products and services more seriously.
– The banking sector promotes programs that fund small and medium enterprises (SMEs) – particularly environmentally friendly businesses, led by women and youth – with the proceeds from sustainable bonds.
– Banks set up “green savings accounts” aimed at encouraging customers to dedicate a small percentage of their savings to nature conservation projects like the rescuing of endangered sea turtles or the sponsorship for incubation pens on El Salvador’s beaches.
– Green credit cards are produced out of environmentally friendly materials such as non-edible corn and recycled plastic.
– Banks offer credit, or financing opportunities, to green projects aimed at advancing sustainable agriculture, energy efficiency, renewable energy, drip irrigation, and clean transportation. Some examples of private banks’ credit initiatives include credit for biodiversity-friendly MSMEs, energy efficiency and renewable energy; sustainable credits for rural development; credit for energy efficiency and renewable energy; and credit for micro and women entrepreneurs of Ciudad Mujer (or Women City).
Sustainable bonds were a pivotal factor in the growth of the country’s small and medium enterprises (SMEs) in 2021 and 2022. The Sustainable Bonds Guide, created by the International Capital Markets Association (ICMA), defines sustainable bonds as bonds of which the proceeds are directed exclusively to finance or refinance a combination of green and social projects that are aligned with the main components of the Green Bond Principles (GBP) and Social Bond Principles (SBP).
The issuance of Green Bonds, Social Bonds, and Sustainable Bonds is carefully regulated by El Salvador’s stock market legislation obliging bond issuers and investors to fully comply with the following provisions:
In April 2022, the Superintendency of the Financial System of El Salvador (SSF) authorized the use of the country’s first sustainable bond. Issued by the private sector, the bond was equivalent to approximately US$11.4 million and was purposed for financing and refinancing loans for SMEs and businesses led by women and young people. In addition, the proceeds would be used to finance a portfolio of green projects in renewable energy, clean transportation, sustainable agriculture, energy efficiency, and drip irrigation. The provision of loans to the SME sector helped boost El Salvador’s economy – in return positively impacting its society and the environment.
IGF initiatives to boost gender equity
Salvadoran financial institutions increasingly value the role of gender equity in financial inclusion and recognize women’s ability to encourage entrepreneurship, sectoral competition, and economic growth – especially within the country’s SME sector where, according to a 2018 survey, more than 61.5 percent of businesses are owned by women. IGF projects can capitalize on this crucial role women play in the economy by boosting their businesses while also providing them with an incentive to establish and maintain environmentally responsible business practices.
A 2022 survey by the Central Reserve Bank of El Salvador showed that supervised financial institutions are already dedicating part of their loan portfolio exclusively to women-led businesses, providing them with easier access to credit and potentially better growth opportunities. By fostering partnerships with entities that support women entrepreneurs, financial institutions in El Salvador have been able to provide women-led businesses, not just with green loans, but also with technical advice on how to achieve their environmental sustainability targets. Besides attracting foreign investment, initiatives such as these can go a long way in promoting sustainability while also contributing to closing the financial inclusion gender gap.
By taking advantage of projects such as the Regional Business Financing Program for Women and the Green MSME Initiative, El Salvador hopes to further promote the idea that recognizing and supporting women business leaders through IGF is key to a thriving and environmentally sustainable SME sector.
Towards a greener more inclusive future
The financial sector’s recent embrace of green products and services is bound to benefit the most vulnerable sectors of El Salvador’s society in the long run by making them more resilient to the risks of climate change while helping to mitigate its impact. Moreover, it will bring the country closer to reaching its climate objectives as it strives to do its part in achieving the 2023 Sustainable Development Goals, particularly gender equality (SDG 5), employment and economic growth (SDG 8), inequality reduction (SDG 10), climate action (SDG 13) and cross-sectoral partnerships for a better future (SDG 17).
AFI’s Inclusive Green Finance workstream is part of the International Climate Initiative (IKI), supported by the German Federal Ministry for Economic Affairs and Climate Action (BMWK), based on a decision by the German Bundestag.