A climate resilient future requires public finances. But strong, long-term strategies to finance climate action have so far received little attention. Public development banks are an often overlooked avenue for meeting this need.

Much of the climate finance conversation centers on multilateral development banks. Their role is crucial, but it is the world’s 450 local, regional, national and subnational development banks that can drive ambitious climate policies on the ground and provide the bulk of global finance. Together, they represent $ 2 trillion in investment each year, or about 10% of annual public and private investment worldwide. In addition, most of these funds originate and are allocated at the national level.

Rooted in the economies and societies in which they operate, these public development banks form a link between national and local governments and the private sector. They are well positioned to provide transformational support for sustainable practices and infrastructure by linking short-term needs to longer-term goals. Indeed, they represent the visible hand which can mobilize and direct financing towards common objectives which are for the moment out of reach of the market.

The potential for concerted finance for climate action was highlighted last November when all of the world’s public development banks, including a large cohort of national institutions, came together at the inaugural Finance in Common Summit. There, they agreed to change their strategies, investment models and operations to support the United Nations 2030 Sustainable Development Goals. It was an unprecedented commitment to a common goal.

Public development banks and their stakeholders have the opportunity to take this agenda forward when they come together at the second Finance in Common summit organized by Cassa Depositi e Prestiti and scheduled for this month in Rome as part of the G20 program. . Seizing the opportunity will take several steps.

First, participants need to ensure that their mandates prioritize climate action and the SDGs at all levels. Many banks are reluctant to integrate climate action into their agendas for fear of overstepping mandates that focus on development or economic growth. As the most recent report of the Intergovernmental Panel on Climate Change pointed out, however, sustainability depends on adapting to the effects of climate change and moving to a low-carbon, equitable economy.

Second, development banks must mobilize and enable sustainable development investments from other public and private actors. Public development banks have largely focused on direct project finance, but they can play a more transformative role if they are incentivized to help redirect investments from other sources towards sustainable development. The majority of members of the International Development Finance Club (a global network of 26 international, regional and national development banks) are regular issuers of green, social and SDG bonds. And this trend is growing. For example, the West African Development Bank recently issued its very first sustainability bond.

Third, collaboration must make strategic use of the strengths of different types of development finance organizations. Although development banks can deploy concessional resources through appropriate financial instruments to attract private sector investment, these resources are scarce and exist mainly at the international and multilateral levels. But national development banks understand the realities on the ground. By working together, they can leverage these different strengths to steer investments towards sustainable investment paths and opportunities.

This type of collaboration has proven to be effective. Some African public sector banks, such as the Trade and Development Bank, have spurred innovation by attracting trade finance from national and international banks with the help of guarantee and insurance programs provided by multilateral banks of development. And a growing number of national development banks have been accredited by the Green Climate Fund for direct access to international climate finance, accelerating local investment flows.

Finally, the second Finance in Common summit should agree on the definitions of what constitutes sustainable finance. Public development banks, their governments and the rest of the financial community need to establish common investment criteria. From there, institutions must do the same to ensure that sustainable finance is not simply greenwashing by institutions whose major investments continue to plunder the planet.

This coordinated approach could significantly improve the effectiveness of investments in sustainable development. Together, national public development banks, with multilateral and private partners, can deliver clear and timely change in the places that need it most, and help make sustainability the “new normal” in finance.

Fortunately, we now have a unique opportunity to unlock the resources needed to support an inclusive and sustainable post-COVID economy. The recent and historic issue of the International Monetary Fund of approximately $ 650 billion in Special Drawing Rights (SDRs, the Fund’s unit of account) offers some leeway that should not be wasted. Some of this should be channeled through public development banks, such as the African Development Bank (which is already a “prescribed” SDR holder), in order to free up resources that could be used to promote a post recovery. -COVID focused on climate action. This strategy could have a significant leverage effect, especially if it is combined with the reforms proposed above.

Civil society, public development banks, and the private sector must act now to harness the potential of all public development banks and leverage the unprecedented investments countries are making (or making) to boost their economies. If they do, and collaboration is strengthened under the banner of sustainable finance at the upcoming Finance in Common summit, then these public development banks can provide transformational finance to solve the world’s most pressing crises.

Co-authors:. Frannie Leautier is CEO of SouthBridge Investment. Rémy Rioux is CEO of the French Development Agency.

Copyright: Project Syndicate
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Manish bapna

Executive Vice President and General Manager of the World Resources Institute