Opinion: On climate, multilateral institutions must work with national banks

Preventing a climate catastrophe requires a lot of resources: human, technological, political, and, above all, financial. All must be mobilized at both the national and international levels. Ensuring multilateral and national development banks are working together to finance climate adaptation and mitigation efforts is key to the agenda in upcoming global development finance meetings. For most low- and middle-income countries, many already suffering significant damage from repeated climate shocks, scaling up international financial support is imperative. But since at least the 2009 Copenhagen U.N. Climate Change Conference, advanced economies have failed to provide adequate financing to undertake the needed investments in both mitigation and, particularly, adaptation. The creation of a dedicated Loss and Damage Fund at COP27 in Sharm el-Sheikh was a breakthrough of sorts. But to date, the multilateral fund hosted at the World Bank has received less than $750 million, while the estimated cost of climate shocks in LMICs is likely to exceed $400 billion annually by 2030. The commitments at COP29 in Baku last year fell well short of requirements, raising the question of whether the international financial architecture is fit for purpose even before U.S. President Donald Trump lit a fire under U.S. cooperation. Since the Paris Agreement, efforts by multilateral development banks to close the financing gap have been framed around the “billions to trillions” agenda. In essence, that agenda has encouraged policymakers to adopt more innovative ways to pull in private finance. In particular, public-private partnerships, or PPPs, have been promoted by multilateral financial institutions to fund public goods and services, including for the green transition. These partnerships rest on the promise that well-structured contracts can, with a small amount of public money to make projects attractive to private finance, provide a more cost-effective delivery vehicle. With their fiscal space squeezed and beguiled by the expanding portfolios of new financial players, policymakers have been falling over themselves to sign partnership deals. At COP26 in Glasgow, a financial alliance under Michael Bloomberg and Mark Carney suggested that such deals could help unlock over $130 trillion to ensure the safety of the planet. As the new administration in Washington looks to diminish its international commitments, there have been renewed calls for private capital, both market and philanthropic, to double down on these partnerships with governments. But doubling down on a failed strategy is a road to frustration if not madness. There is little evidence to support the claims around PPPs when it comes to the scale and cost of finance. Commentators have referred to them “as reality-based as a Shrek movie” and a “magic pony.” World Bank Chief Economist Indermit Gill agreed that the billions to trillions had “proved to be a fantasy.” People and the planet need to hear a different message. Over the coming months, beginning with the Finance in Common Summit in Cape Town, South Africa, last month; continuing through the U.N.’s Financing for Development Conference in Seville, Spain, in July; and culminating in COP30 in Belèm, Colombia and the G20 Summit in Johannesburg in November, there will be ample opportunities to fashion that message. The Cape Town conference offered an opportune moment to bring fresh thinking to the discussion of development finance. The Finance in Common Summit is a global network of all public development banks, which aims to align financial flows on the 2030 Agenda and the Paris Agreement for Climate Change. Together these institutions have upwards of $23 trillion in assets and a wealth of experience to draw on. With this in mind, a new report from the Boston University Global Development Policy Center was launched at the summit. It sets out the case for closer partnerships across public finance institutions that are aligned with the host government’s development and climate change priorities and focused on transformational programs and projects that would not be realized in the absence of public support. Blending from the ground up to boost public investment is key to building such programs. But these will still require mobilizing private capital which is patient, as well as willing to share the risks and rewards of investments in a policy environment that is enabling but also regulated and accountable to citizens. MDBs have a wealth of experience in tapping into capital markets, managing the resulting risks, and supporting project management. National development banks have the potential to take the lead in making green finance work because of their position at the intersection between international climate and development finance, and local financial institutions and private investors. They also have the potential to align development financing with mitigation and adaptation actions. But while MDBs have had a long but often forgotten history of collaborating with NDBs and, as documented in the report, there is currently an incipient revival of such partnership, including through local currency lending, this could stall in the absence of a comprehensive framework for promoting MDB-NDB collaboration. The coming months offer a real opportunity to put such a framework in place.