The world is facing an unprecedented climate crisis, with disasters striking more frequently and with greater intensity. From devastating floods in Pakistan to severe droughts in the Horn of Africa, the impacts of climate change are deeply intertwined with global development challenges. Yet, multilateral development banks (MDBs), which should be at the forefront of financing climate solutions in developing countries, are not stepping up to meet this urgent need.
Despite the increasing severity of climate-related disasters, MDBs’ total lending remains around $100 billion per year. This figure pales in comparison to the estimated $2.4 trillion additional annual funding required for climate and development finance in the developing world. Moreover, net transfers from MDBs to these countries are close to zero, or even turning negative when debt repayments are considered.
While efforts to mobilize private capital for green projects are essential, many critical climate investments, such as building resilient infrastructure and strengthening health and education systems, do not offer the high returns that attract private investors. Recognizing this gap, Barbadian Prime Minister Mia Mottley’s Bridgetown Initiative advocates for a holistic approach to climate finance, emphasizing the pivotal role of MDBs in leading adaptation efforts.
The Independent High-Level Expert Group on Climate Finance estimates that an additional $200 billion in annual MDB spending is needed to protect lives and livelihoods from climate change. Fortunately, there are ways to achieve this increase without significant new capital from governments.
Firstly, MDBs can optimize their existing resources. By adopting recommendations from the G20’s Independent Review of MDB Capital Adequacy Frameworks, MDBs could increase their lending capacity by $75 billion annually. This involves enhancing how they leverage existing capital while maintaining credit quality, making better use of callable capital—a shareholder guarantee already on their books—and standardizing capital treatment across credit-rating agencies.
Secondly, extending guarantees to de-risk climate-related loans could boost annual lending by another $25 billion. These guarantees require minimal budgetary impact for shareholders, as the likelihood of an AAA-rated lender’s entire portfolio defaulting is low. Moreover, MDBs have a strong track record in recovering troubled loans. As the Education Commission highlights, every dollar of backing can cover $27 in loan portfolios.
At the recent G20 Summit in New Delhi, U.S. Secretary of the Treasury Janet Yellen proposed a similar approach, underscoring the growing recognition of the need to enhance MDBs’ role in climate finance. By adopting these measures, MDBs can significantly increase their support for developing countries without compromising their financial integrity.
The climate crisis demands a swift and substantial response. Multilateral development banks have the potential to be powerful engines driving climate adaptation and mitigation efforts in the developing world. By unlocking their existing capacities and adopting innovative financing approaches, MDBs can rise to the challenge, helping to safeguard our planet and promote sustainable development for all.
Reference(s):
Readying the multilateral development banks for the climate fight
cgtn.com
