How to get climate finance to flow through National Development Banks

25 February 2020
Insight
A teller at a Thai Bank. Photo: ILO, 2005, CC BY-NC-ND 2.0

At the OECD Private Finance for Sustainable Development Conference last month, participants were able to hear first-hand how national development banks (NDBs) are driving change in their countries and mobilising private investment in climate-smart infrastructure.

Alongside reinforcing the findings of our latest research which was launched at the event, an important question was raised about the lack of money from international climate funds flowing through these institutions.

“Where is the concessional money?” asked Chief Executive Officer of the French Development Agency and Chair of the International Development Finance Club, Rémy Rioux.

Where is the concessional money?

Although international climate funds such as the Global Environment Fund (GEF), the Climate Investment Funds (CIFs) and the Green Climate Fund (GCF) are a small part of the total climate finance pie, they are still hugely valuable. Usually providing concessional finance, they have played an important role in helping NDBs to develop their climate-smart investment portfolios, especially in terms of building pipelines of investment-worthy opportunities and bolstering the capacity of NDBs.

In my last blog I argued that ‘good’ NDBs should be a natural partner of these climate funds, as they are uniquely placed to make catalytic use of this concessional money.

The problem is that although much of this money is targeted at developing countries, very little of it finds its way directly to or through NDBs. By design, not one NDB has direct access to the CIFs. Only one NDB, the Development Bank of South Africa, has direct access to the GEF. The GCF, however, is notably different. Eleven NDBs have direct access to it, reflecting the GCF’s emphasis on country ownership and direct access by national authorities.

This differentiating feature is great, but the statistics tell a different story. As our research revealed, only 9.2% of $5.2 billion GCF commitments to date have been made directly to nationally owned entities. This compares to a whopping 92% which have been made to the multilateral development banks (MDBs), regional development banks (RDBs), development finance institutions (DFIs) and United Nations’ agencies. 

More worryingly, only $700 million out of the $5.2 billion total commitments have been disbursed since inception – 60% of that through two multilateral organisations: the European Bank for Reconstruction and Development (EBRD) (with limited global reach) and United Nations Development Programme (UNDP).

This concentration and slow disbursement should be a cause for concern considering the climate emergency we face.

Three solutions

International institutions and climate funds need to step up efforts to engage with NDBs and vice versa. Here are three solutions to start with:

1. Increased integration

These institutions should engage with NDBs based on their respective comparative advantages. For example, smaller NDBs can utilise their non-financial strengths to identify, develop and originate investment opportunities helped by direct access to concessional climate finance. MDBs, RDBs and DFIs in turn can bring their financial might to help catalyse private investment.

A promising example is the proposed VERT-Infra initiative, which integrates NDBs directly into the multilateral funding structure drawing on their respective comparative advantages. Another great example is the DBSA Climate Finance Facility, a blended finance facility which has been part funded by the GCF.

Action is required at the country level too. Governments need to integrate ‘good’ NDBs into national climate change policy and planning frameworks. This will help position NDBs and connect them to international climate funds. NDBs can also be more proactive, for example, by developing climate-smart policies and investment strategies and reaching out to their National Designated Authority to secure nomination for GCF accreditation.

NDBs should also be integrated into country plans to implement the UNFCCC Paris Agreement. There is an opportunity for some countries to do this later this year as part of the COP26 process, but they would need to act quickly. Failing that, countries should target the 2025 submission round.

2. Capacity-building

The international community should not shy away from NDBs. Support not only helps these institutions to become strong local partners, but it can help shield NDBs from political interference and incentivise governance reform. We found many good examples of this kind of support yielding positive results, such as: 

  • the development of project finance capacity and pipeline development as was the case with the Inter-American Development Bank (IADB), International Finance Cooperation (IFC) and Nacional Financiera (NAFIN) and the development of the wind market in Mexico;
  • IADB’s support to Banobras in Mexico to develop social and environmental risk assessment;
  • the GCF’s Readiness Programme which helps institutions ‘get fit’ for accreditation.

3. Ease accreditation requirements

Although the GCF accreditation process has generally helped NDBs to improve their financial, environmental, social and governance (ESG) management, the overwhelming consensus is that the process is unwieldly. Many simply do not have the capacity to meet the requirements.

One accredited NDB, for example, told us during our research that the process took three years. Another shared that they had sent over 10,000 pages of documents, and many in Latin America raised the issue that all the documents had to be submitted in English. Some even questioned whether it was worth the ‘pain’ given the potential size of GCF commitment relative to their loan book.

The GCF’s recent replenishment means it is currently the largest global climate fund, and so this issue needs to be addressed. These issues are known, and reform is underway. Keeping NDBs in mind, the GCF could:

  • undertake a review of accreditation barriers in consultation with regional NDB associations;
  • explore how to prioritise NDB accreditation whilst balancing GCF financial management and ESG needs;
  • and develop new forms of access under the recently approved GCF project-specific approach.

We need much bolder action to tackle and adapt to climate change. This includes a shift in mindset from the international community who need to take a leap of faith and engage with NDBs.

Authors

Samantha Attridge
Senior Research Fellow
Samantha is a Senior Research Fellow, with a particular interest in innovative finance, [...]