Mexico: Decarbonizing Value Chains with clean energy and sustainability investments in SMEs

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In the context of the global trends towards green value chains, the near shoring opportunity, and the energy sector challenges in Mexico, the program will incentivize and facilitate investments in clean energy and sustainability by Mexican SMEs. Affordable financing will be accessible through financial institutions to support investments aligned with the Mexico Sustainable Taxonomy that enable SMEs to obtain a sustainable certification, linking, for the first time, financing to a sustainability certification, thus ensuring alignment with Mexico’s climate change and other sustainability objectives (as specified by the Taxonomy). The sustainability certification will serve as a form of labelling/differentiation to enable their identification for sourcing by large firms and multinationals seeking to ensure the sustainability and lower carbon footprint of their value chains. Moreover, compliance with sustainability criteria as specified in the Mexican Taxonomy, and aligned with the requirements of international markets, will position SMEs to expand their client portfolio, accessing value chains from large firms domestically and internationally, as well as become better positioned for responding to national public tenders. The greening and optimization of use of energy, as well as water and raw materials will enable lowering production costs and increase SMEs’ productivity, leading to an increase in competitiveness and a smaller carbon footprint. It will also contribute to lessening the pressures on Mexico’s strained energy infrastructure (especially electricity transmission). The project’s support to enhance sustainability will also include gender considerations, with special focus on women-inclusive firms. To ensure the success of the sustainable financing made available, building on NAFIN’s and other countries’ experience with clean energy financing to SMEs, the project will also consist of a set of comprehensive capacity building activities targeted at the SMEs, as well as the FIs.The PDO would be achieved through the following components: i) Clean Energy and Sustainability investments in SMEs; (ii) Risk mitigation facility, and (iii) Capacity Building, technical assistance, and project management. Component 1: Clean Energy and Sustainability investments in SMEs (US$ 185 million). This component will provide access to affordable financing to SMEs through a credit line administered by NAFIN. The decision on the modality of credit line – i.e., lending to beneficiary firms through private participating financial institutions (PFIs) or direct lending by NAFIN to beneficiary firms or combination thereof - will be made during project preparation based on further analysis of market demand and capacity of lenders to implement this innovative and technically complex loan product. The climate finance expected to be mobilized from the CTF will be critical and will be blended with IBRD financing and subsequently with banks’ own financing to offer SMEs affordable financing for their sustainability investments. The option of a guarantee from MIGA will also be explored with NAFIN to potentially mobilize additional financing from capital markets without the use of a sovereign guarantee and thereby enable further scaling of the financing for the Project. The Project financing will mostly be channeled towards investments which will help beneficiary SMEs lower the carbon footprint and increase sustainability. The specific eligibility criteria for SMEs investments will be agreed with NAFIN during project preparation. These may include investments to reduce thermal and/or electric energy consumption, which would lower energy costs otherwise borne by the SMEs. Examples include investments in more energy efficient equipment and machinery (e.g. electric motors, cooling equipment, as well as replacement of use of fossil fuels and grid-electricity with distributed RE sources, as well as smart energy systems). The relatively long-term maturity of sub-loans would enable beneficiary SMEs to repay their loans with the cost savings generated by the investment. The detailed eligibility criteria for PFIs and beneficiary enterprises, and the sub-loan terms and conditions (size, maturity, etc) will be agreed with NAFIN during project preparation and recorded in the Project Operations Manual.Component 2: Risk mitigation facility (US$ 15 million). This component will help financing a guarantee mechanism to cover risk of non-payments by SMEs and attract the participation of commercial banks, wary about risks associated with lending to SMEs. The climate finance to be mobilized from the CTF will provide a critical contribution to this component, and hence the successful roll out of the Project.Component 3: Capacity Building and technical assistance (US$ 13 million). This component will deploy capacity building and technical assistance.