By Naeeda Crishna Morgado (independent expert) and Özlem Taskin (OECD Development Co-operation Directorate)
Developing countries are at the forefront of the ongoing battle to address climate change. Roughly 60% of the new infrastructure built before 2030 will be in the developing world, and it is these investment decisions that will determine our collective ability to address the climate emergency. Developing countries must invest in climate-compatible infrastructure, rather than locking in emissions and creating stranded assets. And they must do so while building resilience to increasingly severe and frequent extreme weather events, reducing poverty and inequality, addressing global epidemics and responding to humanitarian crises.
Enter national development banks. As publicly owned financial institutions with a development mandate, these banks have received increasing attention in the international discourse due to the countercyclical role they play in financial systems, helping to soften effects of credit crunches and deleveraging private banks in times of financial crises, and their role in financing infrastructure. National development banks also have a massive collective financial footprint; the national and bilateral banks that make up the membership of the International Development Finance Club (IDFC) represent USD 3.8 trillion in total assets – roughly 2.5 times the size of the total assets of multilateral development banks. Rémy Rioux, Chief Executive Officer of the French development agency Agence Française de Développement and Chairperson of the IDFC, recently pointed out that by “acting globally but thinking locally” national development banks are key players in fighting the climate emergency and delivering sustainable development.
With these financial resources and their trusted role as infrastructure financiers, national development banks are poised to play an essential role in bridging the investment gap for climate-compatible infrastructure. A new OECD Environment Policy Paper looks at the role of two major national development banks – Brazil’s National Bank for Economic and Social Development (Banco Nacional de Desenvolvimento Econômico e Social [BNDES]) and the Development Bank of Southern Africa (DBSA) – and draws implications for other national development banks. Both banks have leveraged their standing as infrastructure financers to play an increasingly important role in addressing the climate emergency. BNDES has been one of the Brazilian government’s main instrument to develop the national wind industry, including creating associated jobs. Similarly, DBSA played an important role in promoting renewable energy, including through investing in projects awarded under South Africa’s Renewable Energy Independent Power Producer Procurement Programme.1
What helps these banks to promote infrastructure investment that serve a climate-compatible future and therefore sustainable development? The case of BNDES and DBSA highlights three key success factors:
1) Missions and mandates
Clear mandates, strategies and targets are critical to support ambitious climate action. DBSA’s Climate Change Policy Framework adopts an ambitious climate finance target of a minimum of 35% of annual lending by 2022. In recent years, environmental sustainability developed into a clear centerpiece of BNDES’ mission and strategy, and in 2016, the bank announced it would cease financing coal power. As the climate emergency demands progressively ambitious climate action, it is important to safeguard and build upon such progress, irrespective of changes in leadership.
2) A mindset to ‘mobilise’ additional resources
Spurred by awareness of the limitations in public finance and the need for more infrastructure investment, both BNDES and DBSA are at stages of transition from their traditional role as providers of long-term infrastructure finance to enablers and mobilisers of other sources of finance for infrastructure promotion. The new DBSA Climate Finance Facility, which recently attracted global attention when the Green Climate Fund agreed to invest $56 million in the facility, provides a good example. The facility will provide credit enhancements (such as long-term subordinated debt tranches and tenor extensions) for climate projects2 that are commercially viable but cannot yet attract market-rate capital from local commercial banks and project sponsors at scale without such credit enhancements. In doing so, the facility will help fill market gaps, crowd in commercial investment, and support the reorientation of financial flows towards climate-compatible development pathways.
3) Political backing and support
Critical to the success of national development banks in fighting the global climate emergency is support and recognition of their potency and role by governments and shareholders. National development banks like BNDES and DBSA are backed by mandates from their governments and their activities are influenced by policies and plans at national and subnational levels as well as their positioning in national institutional frameworks. Moreover, support from the international community – donors, multilateral and bilateral development banks, NGOs and think tanks – can be an enabling factor for national development banks to increase national ambition on climate action and successfully delivery on this ambition.
With stronger, mission-driven mandates, an expanded role in promoting infrastructure through mobilising commercial capital for this purpose, as well as backing by governments and the international community, national development banks can be essential conduits to deliver both the Paris Agreement and the 2030 Agenda for Sustainable Development.
OECD conducts analyses on development banks and their role in furthering sustainable development as part of its work on green investment and development finance. “Scaling up climate-compatible infrastructure: Insights from national development banks in Brazil and South Africa” was prepared as part of Financing Climate Futures: Rethinking Infrastructure, a joint initiative of the OECD, UN Environment and the World Bank Group, to help countries deliver on the objective of making financial flows consistent with a pathway towards low emissions and climate-resilient development. Building on this paper, a follow-on analysis will look at the role of Chinese national development and policy banks in scaling up climate compatible infrastructure.
On Friday, 22 November at 16:00 CET / 10:00 EST, the OECD will present findings from the paper: “Scaling up climate-compatible infrastructure – Insights from national development banks in Brazil and South Africa”. Register to join the discussion and engage with our experts.
The OECD Green Talks Live webinar series brings experts together on pressing environmental issues for a global audience. These free webinars are open to the general public and participants are welcome to pose questions during the Q&A segment. Video recordings of our Green Talks are made available online afterwards.
OECD (2019), “Scaling up climate-compatible infrastructure: Insights from national development banks in Brazil and South Africa”, OECD Environment Policy Paper No. 18, OECD Publishing, Paris.
Financing Climate Futures: Rethinking Infrastructure
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I didn’t know about the IDFC. That’s absolutely thrilling to me!
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