Generally, “green finance” refers to those investments that provide environmental benefits in the broader context of environmentally sustainable and low-carbon development, such as investments in clean / renewable sources of energy, energy and material efficiency, reductions in air, water and soil pollution, waste management and recycling, and clean transport.
The terms green investments, green projects and green finance are used interchangeably. “Green investments” are also often variously referred to as “clean”, “sustainable”, “climate change”, “low-carbon”, “environmental” or “environmentally-related” investments.
The European Union strongly supports green investments. It has been at the forefront of efforts to build a financial system that supports environmentally and socially sustainable growth.
There can be several reasons why small businesses may choose to invest in green projects when the regulatory policies do not explicitly require them to do so.
Cutting costs: minimising the amount of resources (energy, water), material inputs and generated waste from the SME production processes directly lowers a company’s operational costs and can have a positive effect on its balance sheet.
Market edge: companies that offer green goods and services differentiate themselves from their competitors in the market and their products are often better appreciated by consumers: this can lead to an improved market share for the company.
Green supply chains: green products and services have a positive impact on firms’ competitiveness, they support SME participation in green supply chains and increase the opportunities for such firms to export to external markets such as the European Union (EU) market.
Environmental impact: by making their products, services, and business practices more energy- or resource efficient, small companies can contribute to reducing the negative environmental, health and climate-related impacts of the economy of their country.
Small and micro-enterprises tend to be cost-conscious and focused on short-term profitability rather than long-term investments or compliance with environmental regulation. However, experience shows that investing in green projects is a win-win situation which can bring both private and societal benefits. Green investments can help to cut your business costs and can reduce the footprint of your business on the environment. The important thing is to select the right technology for your business, develop a realistic business plan, and correctly identify and assess the short and long-term costs and benefits of making a green investment.
With EU support, more than 100 SMEs from Eastern partner countries (including 15 Georgian companies from the food, chemicals and construction materials sectors) implemented resource efficiency and cleaner production programmes. Proposed solutions may bring significant economic and environmental benefits: savings of €2,000-€20,000 per enterprise, reaching up to €100,000 in some cases were identified. Support to identify such savings continues under the on-going EU4Environment programme.
There are many success stories of Georgian SMEs getting green, with the support of the European Union.
A survey conducted by United Nations Industrial Development Organization (UNIDO) has shown that the lack of adequate environmental regulation is a major bottleneck to increased demand for green investments across SMEs. Representatives of the business community in Georgia have repeatedly confirmed the need for more stimulus as a way to push demand for more green investments, including in the SME sector.
Enterprise Georgia, Georgia’s Innovation and Technology Agency, Agricultural and Rural Development Agency (ARDA) provide some kind of support and information to SMEs, including for green projects. These support mechanisms were developed taking into account the European Union’s experience. Often, they enjoy EU support: for example the EU’s ENPARD programme has assisted the ARDA. Also, the Deep and Comprehensive Free Trade Area (DCFTA) Initiative East has provided financial and technical support to Georgian small and medium-sized enterprises (SMEs), including for green investments.
New opportunities may appear within the EU4Climate window of FINTECC (Finance and Technology Transfer Centre for Climate Change). FINTECC is a programme that helps companies in participating EBRD countries for operations to implement innovative climate technologies.
Under the EU4Business initiative commercial banks in Georgia and international finance institutions can make funds accessible to your business. They include Bank of Georgia, TBC Bank, and ProCredit Bank, which manage environmental credit lines extended by International Finance Institutions (IFIs) such as the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB) under the EU4Business initiative. Besides on-lending to SMEs, they can also offer some technical assistance to their clients. End borrowers can often benefit from consultancy services and training to develop feasible projects.
As part of the EU-funded Caucasus Energy Efficiency Facility and the South Caucasus Sustainable Energy Finance Facility, the EBRD has applied the Technology Selector. This is an on-line shopping style platform that lists “best-in-class” green technologies that improve energy efficiency for businesses and households. The tool provides information and assists borrowers in their choice of equipment. The tool is available to use in Georgia as well. A simplified version of the tool for SMEs has been developed. These technologies have been assessed and pre-approved as eligible for EBRD financial support. The list is regularly updated to include the latest technologies and vendors.
More specialised information is provided by Business associations and the resource efficiency initiatives supported by the EU in partnership with UNIDO. More information about the initiative is available at the EU-funded Resource Efficient and Cleaner Production project web page.
One way to identify green project opportunities is to evaluate a company’s business and production processes using the Resource Efficient and Cleaner Production (RECP) methodology. This methodology, for example, is provided by UNIDO in assisting manufacturing SMEs to identify opportunities and deficiencies in the use of resources and find alternative solutions for business. The in-plant RECP assessments identify the inefficiencies, evaluating possible improvement measures from a technical, economic, and environmental point of view and pinpoints project opportunities on the basis of proposed RECP measures. These assessments can be provided by an RECP centre, whose experts are trained in applying relevant methodologies and equipped with measurement tools. The EU-funded RECP project implemented as part of the EU4Environment Programme in Georgia is supporting the establishment of such a national center. More details are available at www.recp.ge.
UNIDO’s RECP methodology provides a basis for a consulting service: an expert visits the enterprise, conducts a brief preliminary assessment, defines priorities with the company management and provides recommendations on which approaches can help reduce the enterprise’s resource use. Advice is provided on different aspects, including substitutions of inputs, good housekeeping, process and/or product modifications, waste minimisation, recycling options and technology modification. This process helps to estimate the associated costs and savings of the project as well as potential sources of finance. If the willingness to take a loan is confirmed, the RECP centre financing specialist can help complete the application to a selected bank. At a later stage, the RECP expert can also assist on determining how to install and operate new equipment.
The EU believes that small and medium-sized enterprises (SMEs) are indeed a key ingredient of economic life. That is why the EU4Business initiative was started to support and foster SMEs in the Eastern Partnership. The EU works together with the following partners to help provide green finance for Georgian businesses.
Credit lines, extended by IFIs (e.g. EBRD, EIB, KfW, Development Bank of Austria) and disbursed through local commercial banks are the main source of long-term financing for green investments for SMEs in Georgia. The Georgian partner banks include Bank of Georgia, BasisBank, Credo Bank, TBC Bank, VTB Bank, and ProCredit Bank.
Apart from credit lines on-lent to end borrowers, the EIB Group also provides partial portfolio credit guarantees to TBC Bank and ProCredit Bank under the EU Finance for Innovators scheme (InnovFin) as part of the EU’s Horizon 2020 programme and the Deep and Comprehensive Free Trade Area programmes. The InnovFin SME Guarantee scheme aims to facilitate and accelerate access to loan finance for innovative SME businesses, and provides guarantees on debt financing between €25,000 and €7.5 million. While not targeting green SMEs per se, this guarantee can be used to reduce the risk on green investments made by SMEs.
Some microfinance organisations in Georgia, such as Credo Bank and MFO Crystal, provide loans to energy-efficiency activities and smaller-scale, often decentralised, renewable energy facilities.
The government of Georgia has also set up support mechanisms for SMEs that can be used for resource efficiency and cleaner production investments. “Produce in Georgia” is the main government programme managed by Enterprise Georgia, the body responsible for SME policy implementation in Georgia. The “Produce in Georgia” Programme provides co-financing of bank loan interest rates and partial collateral guarantees. Much of the programme has been invested in the field of agriculture and tourism / hotels. Enterprise Georgia has also put in place a programme dedicated to renewable energy sources and it provides micro-grants to small businesses.
Commercial banks are the main source of SME finance, but the sector is regarded by lenders as relatively high risk. Interest rates tend to be relatively high (15%+), loans are generally priced dynamically based on a borrower credit assessment and competition in the wider lending market. Collateral requirements could be also significant (130% of loan value and more). Interest rates offered in the microfinance sector can be considerably higher. Dollarisation of lending offers lowers rates, but also creates potential risks for individual borrowers as they get their revenue in lari but have to pay back the loan in dollars.
For example, the weighted average interest rate of TBC Bank portfolio on energy efficiency and renewable energy projects in 2018 was 9.2% with an average maturity of 90 months.
The environmental credit lines are accompanied by technical assistance components that borrowers can benefit from. Such credit lines also provide subsidies to borrowers as an incentive to motivate them to take out loans for green projects. Given that energy efficiency and renewable energy projects are more complex to design and require more data and information to adequately appraise them (e.g. calculating expected CO2 emission reductions), the preparation of loan applications for such projects could indeed be more time- and resource-consuming than the efforts needed for the preparation of standard bank loan applications (e.g. consumer loans for apartments or cars).
Yes, there are different mechanisms that the government has put in place to improve access to credit for SMEs and alleviate financing constraints for SMEs, such as grants, interest rate subsidies on bank credit, and guarantee support schemes.
Enterprise Georgia has at its disposal a number of financial and non-financial instruments to support investment opportunities in the SME sector. Under “Produce in Georgia”, if a company gets a loan from the bank, the government can finance part of the interest payment. The loan amount needs to be between US$150,000 and $2,000,000 for manufacturing projects and US$600,000 and $2,000,000 for agricultural projects. Interest rates are between 11 and 13%. While not limited to green investment, Enterprise Georgia provides a 10% co-financing of bank loan interest rates and 12% for the annual interest rate of leasing for 24 months. It also provides a partial collateral guarantee of up to 50% for the first 48 months, among other services. One stipulation is that 80% of the loan should purchase capital assets. Such support is provided only for loans in Georgian lari. The “Produce in Georgia” Programme also contains some other elements of support. For instance, “Consulting Support” offers opportunities for training in marketing, sales, business planning, export, entrepreneurial skills and quality management.
Innovative enterprises can benefit from the support of Georgia’s Innovation and Technology Agency (GITA). GITA manages the implementation of innovation grant programmes. Mini grants and micro grants help Georgian companies and SMEs commercialise business ideas and technologies. In the framework of a World Bank loan – Georgia National Innovation Ecosystem – GITA has launched a Startup Matching Grants Programme. This aims to support globally scalable start-ups, including in the field of green technology and agriculture, and improve their access to finance and access to global markets.
Both Enterprise Georgia and GITA have received support from the European Union.
Georgia has implemented a light taxation regime for small enterprises. Microenterprises with an annual income below GEL 30,000 (~ €9,052) are exempted from profit tax, while small businesses with an annual turnover not exceeding GEL 500,000 (~ €150,870) are subject to a tax rate of 1% of taxable income. The “small business” status is withdrawn if the enterprise reports a turnover exceeding GEL 500,000 over two calendar years. The value-added tax (VAT) threshold has been fixed at GEL 100,000 (~ €30,174), and a new system for the automatic return of VAT credits was launched in February 2019. All taxes are payable online.
There are no specific tax incentives related to green investments by SMEs. The government could consider such options as accelerated amortisation and reduced taxes for renewable energy and energy-efficiency equipment, and possibly a corporate tax credit for green investments. Tax-based incentives are among the most effective tools that governments worldwide make use of in order to motivate businesses to undertake green investments and improve their environmental performance.
Many of these policy measures have been identified and put in place supported by the European Union, for example under the ‘Greening Economies in the Eastern Neighbourhood’ (EaP GREEN) Programme and EU4Environment.
In light of the COVID-19 crisis, the Ministry of Economy and Sustainable Development has developed a package of measures to support the business sector, including SMEs, to overcome the crisis. Strengthening access to finance and addressing liquidity issues are a core part of the support package.
The "Produce in Georgia” Programme has been expanded and re-designed to provide improved conditions to businesses. These changes include: (i) expanding the scope of the programme to include strategic and import-substitution oriented sectors; (ii) an increase in co-financing and maturity offered through the programme; (ii) increase of the financing of operational expenses; (iv) decrease of minimum credit/leasing volume.
Under the “Micro and Small Business Grants Programme”, Enterprise Georgia will support small firms with a particular focus on green, innovative and eco-friendly businesses. The Programme grant amount will increase from GEL 20,000 up to GEL 30,000 and the co-financing required from beneficiaries will decrease from 20% to 10%. The programme budget will be increased four times in 2020 and will be raised to GEL 40 million.
The Credit Guarantee Scheme is a key recovery tool (re-)designed to allow SMEs to restructure their loans without having their interest rates increased, receive new loans, improve their liquidity and retain employees. The budget for this scheme will be increased to GEL 330 million, which will enable the government to guarantee a loan portfolio of around GEL 2.2 billion. The guarantee coverage cap for new loans will increase up to 90% and restructured loans will have a 30% cap. The guarantee fee will be decreased from 1% to 0.3% and the loan amount we be tailored to the needs of businesses.
Given the role of tourism in Georgia’s economy and the high concentration of SMEs in this sector, the government has put in place special measures to support tourism. Among others, these measures envisage full exemption of the tourism sector from property tax in 2020 and a deferral of income tax for nine months. In addition, the government will subsidise 80% of loan interest rates for hotels that have turnover of less than GEL 20 million for 6 months (which is the majority of the Georgian hotel industry). Restaurants will be also eligible under the Credit Guarantee Scheme, which will enable them to overcome liquidity shortages and finance their operational expenses. For tourism companies/operators, the government will also subsidise the interest rates on their bank credits for 6 months.
Farmers and agricultural businesses will also benefit from additional government aid and the government will support domestic production including bio-products.
While not directly supporting green investments, all these measures can also benefit green SMEs as well.
As part of its global response to the coronavirus outbreak, the European Commission is mobilising an emergency support package for Armenia, Azerbaijan, Belarus, Georgia, the Republic of Moldova, and Ukraine.