Opinion: Getting climate infrastructure right — A stronger role for development banks
The 2015 Paris Agreement stipulates that global warming needs to be limited to well below 2 degrees Celsius to reduce the impact of climate change on human life. Yet, with the world’s population set to rise by more than 2 billion by 2030, the coming decade will see a leap in infrastructure investment — transportation, energy, water and sanitation — which could make or break the 2 degree goal. What is built and where could either lock us into a high emissions infrastructure, or forge a lower-carbon pathway toward the goals of the Paris Agreement.
Some recent commitments on climate change made by development banks include:
• The Asian Development Bank committed to double its climate finance to $6 billion annually by 2020.
• The African Development Bank pledged to triple climate finance by 2020.
• The European Bank for Reconstruction and Development committed to increase “green” financing to 40 percent of annual business investment by 2020.
• The Brazilian Development Bank rolled out new policy to scale up clean energy and scale down coal and hydropower.
• The European Investment Bank committed to financing climate action with 100 billion euros of investments over the next five years, increasing its lending for climate in developing countries to 35 percent of total lending by 2020.
The Organisation for Economic Co-operation and Development estimates that infrastructure investment could reach as much as $6.9 trillion per year worldwide over the next 15 years. To reduce poverty and meet the Sustainable Development Goals, two-thirds of that new investment needs to be made in low- and middle-income economies, those most vulnerable to climate disasters. How do we mobilize the necessary resources from both public and private sectors? And how do we make sure they go into sustainable, climate-resilient infrastructure?
The role of development banks in creating climate infrastructure
Development banks could make the difference. Unlike other financial actors, they can both finance cleaner infrastructure and help countries to implement policies and strengthen the institutions needed to enable climate action. They also bridge the gap between public and private sectors and help to crowd in private finance.
Given the prominent role development banks will play in the SDG era, we would be losing an opportunity if we did not push for them to serve as engines of transformation toward a low-carbon, climate-resilient pathway.
There are some encouraging signs: multilateral development banks have made ambitious commitments to act on climate change, with some of them committing to doubling or tripling their climate finance by 2020; bilateral development banks help to deliver the climate finance commitments made by their governments in the context of the U.N. Framework Convention on Climate Change, namely mobilizing $100 billion per year by 2020; and national development banks are increasingly initiating green financing, especially in Brazil, China, South Africa, Mexico and Turkey.
Further action needed to mitigate against climate change
But is this enough to deliver the imminent, urgent change needed to meet the 2 degree goal? In reality, infrastructure choices made by development banks, their shareholders and their clients will need to radically scale up support for low-carbon and climate-resilient infrastructure if we are to make the decisive transition needed. The OECD report, “Investing in Climate, Investing in Growth,” highlights that one-third of infrastructure financing committed by MDBs in the past three years targets climate change mitigation or adaptation; only 21 percent of major MDBs’ financing for transport and 16 percent for water target climate objectives between 2013 and 2015.
‘Investing in Climate, Investing in Growth’
The OECD report, “Investing in Climate, Investing in Growth,” provides an analysis of how low-emission and climate-resilient development can be achieved without compromising economic growth, competitiveness or well-being.
To find out more, you can access the report here.
Furthermore, strategic priorities need to evolve. While bilateral development finance institutions are mobilizing private investment for renewable energy in developing countries, the costs of these technologies is getting more competitive with fossil fuels — as seen in India and China in recent weeks — making it necessary for DFIs to target other areas, such as increasing energy efficiency and financing low-carbon transport.
As for national development banks, they need mandates that give them a clearer role in implementing national climate plans, as well as the capacity and staff resources to implement climate financing.
Governments, as shareholders and clients, can make these changes happen. Climate targets, strategies and action plans, supported by clearer, more consistent reporting about what these multilateral, bilateral, national development banks finance, will drive climate action and improve accountability. Access to concessional finance to “blend” with their own resources will help mitigate risks and attract private investors, especially for new technologies and solutions. Assessment and disclosure of portfolio-wide carbon footprints will help align infrastructure portfolios. Finally, better, closer, more collaborative financing between MDBs, bilateral and national development banks will help build the necessary capacity in national institutions, while increasing the impact of collective efforts. The OECD stands ready to support development banks on this journey.
Over 10 weeks Devex and our partners will take an in-depth look at the innovative financing mechanisms driving forward the 2030 sustainable development agenda. We’ll explore how the funding gap can be filled, ask how cross-sector collaboration can lead to improved global health care, and look at what it takes to build successful partnerships for change. Join us as we examine the innovative financing powering the Global Goals by tagging #Going4Goals and @devex.
