Public development banks can drive sustainable finance

A climate-resilient future requires public finance. But strong, long-term strategies for financing climate action have, so far, received little attention. One oftenoverlooked route to meeting this need is public development banks.

Much of the conversation about financing climate action focuses 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 supply the bulk of global financing. Together, they account for $2 trillion in investment every year – about 10% of annual public and private investment around the world. Moreover, most of these funds are sourced and allocated domestically.

Rooted in the economies and societies in which they operate, these public development banks form a nexus connecting national and local governments and the private sector. They are well-placed to provide transformational support for sustainable practices and infrastructure by linking short-term needs with longer-term objectives. In effect, they represent the visible hand that can mobilize and direct finance toward common goals that are beyond the reach of the market for now.

The potential for concerted financing of climate action came into focus last November when all of the world’s public development banks, including a large cohort of national institutions, gathered at the first Finance in Common Summit. There, they agreed to shift their strategies, investment patterns, and operations to support the United Nations 2030 Sustainable Development Goals. It was an unprecedented commitment to a shared objective.

Public development banks and their stakeholders have a chance to advance that agenda when they meet at the second Finance in Common Summit hosted by

Cassa Depositi e Prestiti and scheduled for this month in Rome as part of the G20 program. Seizing the opportunity will require several steps.

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

Second, development banks must mobilize and enable sustainable development investment from other public and private players. Public development banks have largely focused on the direct financing of projects, but they can play a more transformative role if they have incentives to help reorient investment from other sources toward sustainable development. The majority of the 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 first-ever sustainability bond.

Third, collaboration should make strategic use of the strengths of different types of development-finance organizations. Although development banks can deploy concessional resources through tailored financial instruments to attract privatesector investment, these resources are scarce and exist mostly at the international and multilateral level. But national development banks understand on-the-ground realities. Working together, they can leverage these different strengths to direct investment toward sustainable pathways and investment opportunities.

Innovation

This kind of collaboration has been shown to work well. Some African public-sector banks, such as the Trade and Development Bank, have driven innovation by attracting commercial financing from both domestic and international banks with the help of guarantee and insurance schemes provided by multilateral development banks. And an increasing number of national development banks have been accredited by the Green Climate Fund for direct access to international climate finance, accelerating local investment flows.

Lastly, the second Finance in Common summit should agree on definitions of what constitutes sustainable finance. Public development banks, their governments, and the rest of the financial community need to establish common criteria for investment. From there, institutions must do the same to ensure that sustainable finance isn’t merely greenwashing by institutions whose main investments continue to plunder the planet.

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

Fortunately, we now have a unique opportunity to unlock the resources needed to support an inclusive, sustainable postCOVID economy. The International Monetary Fund’s recent, historic issuance of roughly $650 billion in special drawing rights (SDRs, the Fund’s unit of account) provides some breathing room that should not be wasted. Part of this should be channeled through public development banks, such as the African Development Bank (which is already a “prescribed” holder of SDRs), to free up resources that could be used to promote a post-COVID recovery focused on climate action. This strategy could have a significant leverage effect, particularly if combined with the reforms proposed above.

Civil society, public development banks, and the private sector should act now to mobilize the potential of all public development banks and take advantage of the unprecedented investments that countries are (or will be) making to stimulate their economies. If they do, and collaboration is reinforced under the banner of sustainable finance at the upcoming Finance in Common summit, then these public development banks can provide transformational financing to solve the world’s most pressing crises.