The global finance rethink behind the green transition

At last week’s World Bank-International Monetary Fund annual meetings, a recurring theme was clear: The international financial system is hindering low- and middle-income countries from pursuing the green economy. Avinash Persaud, a key architect of the Bridgetown Initiative and special adviser on climate change to the president of the Inter-American Development Bank, argues that the problem is rooted in our tendency to divide climate and development into separate areas. “You can’t really divide development into these different silos of climate or nature or jobs,” he said during a session at the Devex Impact House. “When you’re trying to do development, you have to be conscious about climate shocks.” For many vulnerable nations, these shocks are existential, but the solutions are not paying attention to the need for resilience moving forward. Persaud spoke about Dominica, where Hurricane Maria destroyed more than double the island’s annual income in a single day in 2017. “Imagine you had a development strategy that was completely unrelated to being more resilient to those shocks. It would just not be relevant,” he said. The same goes for solutions. Renewable energy, often seen as the solution to the climate crisis, is advancing rapidly. Global investment in clean energy is expected to exceed $3 trillion, with $2 trillion flowing into renewables. Yet the transition is not straightforward for many developing nations, which lack the institutional and physical structures to take advantage of the boom. International investors often require rated securities and stable foreign exchange, creating barriers for countries with unrated local projects. Persaud outlined a new initiative to address this issue by the Inter-American Development Bank called ReInvest+, which channels institutional capital into local projects while mitigating currency and credit risks. The program will find seasoned loans, convert them into securities that investors can buy, and work with local banks to identify new investment opportunities. The Bridgetown Initiative, led by Barbados Prime Minister Mia Mottley, has also pioneered mechanisms to combine development and climate, such as shock-absorbent debt instruments and pause clauses, now adopted by almost all development banks. Despite these innovations, Persaud warned that more fundamental changes are needed. “There’s all this talk about billions to trillions in private capital mobilization. We have been talking about it for 10 years. Do we have a real plan?” he said. “You can only solve a problem if you understand the problem. … We need to think about the obstacles to flowing capital, which is where the international financial institutions can do something.”