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Three ways national development banks can unlock climate-smart growth

Written by Samantha Attridge

ATMs in Yangon, Myanmar. Photo: Asian Development Bank, 2015. CC BY-NC-ND 2.0

There is no doubt the world is facing a climate emergency. We must all act now to shift to climate-smart growth by redirecting our current investment and financing flows towards the Paris Agreement. National development banks (NDBs) have huge untapped potential to support this transformation. But our new report finds that despite their collective firepower – which far exceeds that of the multilateral and bilateral development banking system – NDBs have yet to step out of the shadows and into the international and domestic limelight. It is now time for NDBs to claim their rightful place at the policy table.

To lock in climate-smart growth, we must invest in climate-smart infrastructure. This is not an easy task for any country, not least for many developing countries whose capital markets are not that well-developed and whose public finances are stretched. Climate-smart investment often requires large upfront investment with long-term financing and payback periods, which is not widely available. And when available, it is extremely costly.

Other challenges include profit risks associated with potentially risky new climate-smart technologies, as well as uncertainty surrounding the security of revenue generation stemming from possible changes to government policy. For these reasons, private finance has not – and does not – naturally flow to climate-smart investment.

Unleashing the potential of NDBs

NDBs are uniquely placed to overcome these challenges. Thanks to their financing models, they can provide longer-term, more affordable financing than what is available in the market. And with their unrivalled knowledge of local markets and long-standing relationships with both private and public local sectors, NDBs also possess important non-financial advantages over the multilateral and bilateral banking system. Deeply rooted into the local context, NDBs are therefore well placed to effectively and efficiently channel and catalyse climate-smart finance and investment.

To do so, however, three inter-linked and mutually reinforcing pre-conditions need to be in place.

1. Good governance is key

Good governance underpins the willingness of governments to invest in them, and the willingness of private investors, multilateral development banks (MDBs), development finance institutions (DFIs), and international climate funds to partner with them. It also affects their ability to develop and access capital markets. Well-governed and well-run NDBs with a clear and stable ‘green mandate’ are more likely to be integrated into policy frameworks and have a seat at the policy table as they are better able to deliver government objectives. This leads to a virtuous circle of ‘good’ governance.

2. NDBs must be well-resourced

NDBs need enough resources for them to operate at the scale required to meaningfully support the transition to climate-smart growth. Apart from a few large NDBs such as the China Development Bank, the Brazilian Development Bank (BNDES), and the German KfW, most are constrained in their ability to finance and mobilise private investment at scale.

Access to developed local capital markets can help NDBs to grow and overcome scale challenges, particularly given the real and perceived fiscal constraints in many developing countries. Where markets are less developed, NDBs can work closely with the government, regulators, and the international community to develop them. This is an area which is often overlooked, but is crucial to optimise NDB resource and mobilise private domestic savings into climate-smart investment.

3. International support for NDBs is needed

There is growing recognition of the importance of NDBs by the international community. Some international public actors are working closely with NDBs and are fully engaged, while others have yet to take the leap. We found many positive results of this collaboration, such as NDB governance reform and, in some cases, NDB protection from political interference.

Access to concessional climate finance and associated capacity building has also been extremely valuable to NDBs. It has enabled them to take on some of the risks I mention above which inhibit private investment. This helps NDBs to build pipelines of climate-smart investment opportunities and overcome one of the main bottlenecks to catalysing private investment in this area. The problem is that NDBs – who are uniquely placed to leverage it to maximum effect – are often bypassed in accessing these concessional climate funds.

NDBs need to step out of the shadows. Although there is increasing recognition of their untapped potential in the shift towards climate-smart growth, there remains much to be done if it is to be unleashed. I have briefly highlighted three areas for attention. These suggest a very clear action agenda for national governments and the international community, which will be the focus of my next blog.