Opinion: A blueprint for the next decade of development finance

Time is running out. With seven years left to meet the Sustainable Development Goals, low- and middle-income countries are scrambling to find the $2.5 trillion needed annually to invest in health, infrastructure, connectivity and decarbonization.

This alarming shortfall has prompted calls to accelerate reforms to the international financial architecture to unlock new resources.

The recent Summit for a New Global Financing Pact in Paris laid a road map for maximizing financing at these institutions. Now, the Finance in Common, or FiCS, movement is working to mobilize more high-quality public and private investment and align operations to achieve greater impact.

The FiCS movement, born in 2020, has grown into a global coalition of 530 institutions with unmatched capacity to leverage public and private financing to address market failures and foster sustainable development. These banks provide equity, long-term financing, guarantees, and risk mitigation instruments in sectors and regions where private financing is insufficient — a valuable service at a time when governments are fiscally constrained. The record level of green finance from PDBs is a good illustration, with for instance International Development Finance Club’s climate financing totaling $224 billion, a 20% increase over the previous year.

Governments worldwide are seeking financing to meet development goals. Institutions like ours must help by providing more climate financing and increasingly innovative financial instruments.

As government officials and other partners gather for the 4th edition of the Finance in Common Summit, which will be hosted in Cartagena, Latin America, for the first time, we think three areas are especially promising for advancing this agenda.

Increase ambitions

First, FiCS members should increase their ambitions and unlock novel sources of financing — especially for climate.

Recent years have seen a flowering of innovative financial instruments, such as sustainability-linked bonds, debt swaps, or instruments contingent on disasters such as catastrophe bonds, postponement of payments, or contingent credit lines, which allow countries to obtain funds almost immediately after a disaster strikes.

Last year, Uruguay issued its first sustainability-linked bonds. The coupon for the $1.5 billion issuance is linked to compliance with Uruguay’s climate goals under the Paris Agreement, thereby aligning investor interests with national environmental priorities.

The Inter-American Development Bank currently provides over $3.5 million in ex-ante financial coverage for 16 Latin American and Caribbean countries, enabling them to access funds within days of an earthquake or hurricane. These instruments are increasing climate resilience in countries as varied as Paraguay, Guatemala, Jamaica, and the Dominican Republic. Other instruments, including some loans from IDB or the World Bank, offer relief from debt obligations in the event of a disaster.

Debt swaps are becoming increasingly used. Earlier this year, IDB partnered with Ecuador and the U.S. Development Finance Corporation to structure a historic debt-for-nature conversion to protect the Galápagos Islands. This generated about $450 million for conservation purposes over the next 18 years, showing how development banks can redistribute risk to maximize capital mobilization and achieve extraordinary results.

The Global Shield Solutions Platform will improve financial protection against climate-related disaster risks for people living in vulnerable countries. The initiative is gathering Germany, Canada, Denmark, the U.S, France, and Ireland for a combined total of €210 million. The French Development Agency, AFD,  is managing the French contribution and is collaborating with KfW and other financial institutions to provide technical and financial support to partner countries starting. The initiative fosters greater financial protection and faster and more reliable disaster preparedness and response.

Improve the technical capacity of NDBs

Second, multilateral development banks, or MDBs, should expand efforts to improve the technical capacity of national development banks, or NDBs, whose on-the-ground presence in countries can help us scale-up impact across and within regions.

MDBs have a proven track record of transferring technical and strategic know-how to NDBs. In Latin America, IDB has partnered with the Association of Latin American Banks to help NDBs build institutional capacity in areas such as capital markets development and to issue social, gender, and green bonds. This role as a “market setter” has been instrumental in mainstreaming climate and social-related debt instruments and moving the sustainable agenda toward capital markets.

MDBs can enhance their support for NDBs by leveraging the synergies available notably through IDFC. This platform of 26 national and regional public banks, thanks to its climate facility, provides a unique opportunity for PDBs to collaborate and contribute to the global community's sustainable goals.

The Common Principles for Climate Finance Tracking, established by MDBs and IDFC for monitoring mitigation and adaptation activities, can serve as exemplary models. These principles not only promote harmonized approaches but also encourage replication, making it easier for other NDBs to participate and contribute to common efforts.

AFD is a key partner for NDBs and MDBs in Latin America, supporting their transition and development through long-term credit lines coupled with technical assistance. Over time, AFD has also built strategic dialogues with these institutions, particularly on their alignment to the Paris Agreement and the 2030 Agenda. These partnerships are crucial to ensure the financing of sustainable investments in such important sectors as agriculture, energy, water, green cities, or affordable housing.

Coordinate efforts for sustainable impact

Third, we must work as a system to ensure our efforts to provide financing are not scattered and that we don’t overburden our recipient countries or others.

To prevent this, PDBs should define common standards and metrics aligned with global best practices so we can attract private investment at a much greater scale, while supporting transparency and accountability through rigorous monitoring and evaluation.

Harmonizing and replicating approaches and instruments across countries and regions is key to scaling up effective interventions.

Before purchasing green bonds, for example, investors typically demand evidence that these instruments meet objective, verifiable standards for delivering social and environmental benefits. To that end, IDB and IDB Invest in 2021 launched the Green Bond Transparency Platform, which promotes the harmonization and standardization of green bond reporting to increase investor confidence and facilitate green investments in the region. The platform is based on data securely uploaded by issuers and external reviewers that uses blockchain technology to report on the bond’s investment and development impact performance. At FiCS this year, AFD will join forces with the European Investment Bank and Germany’s development bank, KfW, to take the IDB’s platform global.

Common standards will be important to protecting the Amazon, an irreplaceable ecosystem shared by eight countries. Earlier this year, IDB launched Amazonia Forever, a holistic umbrella program for inclusive, sustainable development that will function as an aggregator and coordinator of various initiatives, funds, and projects. In this context, a green coalition recently launched by IDB, the Brazilian Development Bank, and development banks from across the Amazon region provides a platform that will map investment and projects, offering insight into how we can replicate and develop novel financing initiatives.

Building an improved understanding of nature and nature-related risk is key to support a shift in global financial flows away from nature-negative outcomes and toward nature-positive outcomes. The Taskforce on Nature-related Financial Disclosures was created to develop and deliver a risk management and disclosure framework for organizations to report and act on evolving nature-related risks. It aims to support national development banks to go beyond the integration of climate-related risks. The Development Finance Hub, animated by AFD, consists of 40 individual taskforce members representing financial institutions, corporates, and market service providers with over $20 trillion in assets. The taskforce has contributed to the preparation of the TNFD guidelines.

Finance in common proves solutions exist. If we work together, as a system, there is every reason to believe we can meet the SDGs and secure a better future for both the planet and its people.

Join us at Finance In Common Summit and be part of the conversation.