Bridging the green investment gap in Latin America: what role for national development finance institutions?

By Maria Netto, Lead Capital Markets and Financial Institutions Specialist, Inter-American Development Bank, and Naeeda Crishna Morgado, Policy Analyst – Green Growth and Investment, OECD              

Green-investmentThe developing world urgently needs more and better infrastructure. Affordable and accessible water supply systems, electricity grids, power plants and transport networks are critical to reducing poverty and ensuring economic growth. The way new infrastructure is built over the next 10 years will determine if we meet the Sustainable Development Goal (SDGs) and the Paris Agreement objectives. Considering the long lifespan of most infrastructure projects, the decisions developing countries make about how they build infrastructure are critical: we can either lock-in carbon intensive and polluting forms of infrastructure, or ‘leap frog’ towards more sustainable pathways.

Many countries in Latin America are making this shift: thirty-two of them have committed to cut their emissions and improve the climate resilience of their economies, in infrastructure and other sectors, through Nationally Determined Contributions (NDCs). The cost is estimated at a staggering USD 80 billion per year over the next decade, roughly three times what these countries currently spend on climate-related activities. What is more, this is in addition to a wide investment gap for delivering development projects and infrastructure overall – the World Bank estimates that  countries in Latin America spend the least on infrastructure among developing regions in the world.

Who will bridge the sustainable infrastructure financing gap in Latin America and the Caribbean? National development banks (NDBs) and development finance institutions (DFIs) – state-owned financial institutions with an explicit socio-economic or environmental policy mandate – could make the difference. They have long played important roles in the region, financing local projects and mobilising private finance in their countries, but more recently, they also have started to provide climate specific financing, supporting the implementation of national climate action plans and policies.

New study on NDBs in Latin America sheds light on their role

The Green Climate Fund, the newest of the major multilateral climate funds, recognises the role of NDBs and domestic DFIs in financing climate and development activities, placing equal emphasis on international and national actors. But are they fit for that purpose? And what would it take to make them capable of rising to the challenge? In a first-of-its-kind study of NDBs in Brazil, Mexico and Chile, the Inter-American Development Bank (IDB) and Climate Policy Initiative (CPI) are shedding some light on those issues.

Firstly, IDB and CPI’s report shows that NDBs are already active players in climate finance: 12 NDBs and other domestic DFIs in these three countries committed about USD 11 billion to the sector in 2015. Different mandates and scopes of operations allow these banks to finance climate action in various ways. In Mexico, for example, SHF – the federal mortgage society – is supporting the development and construction of energy- and water-efficient houses, while NAFIN has played an important role in stimulating the countries wind energy sector. FIRA, one of the main financing arms of the Mexican government, is promoting more efficient energy and water use in the country’s food processing industry. In Brazil, the Development Bank of Minas Gerais (BDMG) is investing in sustainable transport, and the Brazilian Development Bank (BNDES) is financing much needed renewable energy and other sustainable infrastructure.

Secondly, however, the study illustrates that NDBs and other domestically focussed DFIs in Chile, Brazil and Mexico could and should do more: they need to target a broader range of sectors identified as priorities by NDCs, focussing on the greatest sources of emissions and major factors affecting climate vulnerability. For example, much of the climate finance in Mexico focuses on financing renewable energy, although urban infrastructure poses an equal challenge for reducing emissions and improving resilience. Similarly, in Brazil, much of the finance went towards infrastructure sectors, while only 11% went towards addressing climate issues in the agriculture and forestry sectors which are a major source of the country’s emissions.

Thirdly, NDBs and other domestic DFIs could enhance their capacity to mobilise additional resources from the private sector to bridge the investment gap for the NDCs in Chile, Mexico and Brazil. The study reveals that, while 85% of their climate finance targets private sector actors, they mostly use loans and credit lines, highlighting the need to scale up guarantees and other financial instruments that could help reduce risks and attract new investment.

Policymakers need to create conditions for NDBs to do more

The IDB and CPI’s study demonstrates that NDBs can play a critical role in bridging the green investment gap in Latin America, but they need help from shareholders, governments and international climate finance providers to take on a stronger, catalytic role:

  • Better, mainstreamed monitoring and reporting of climate finance can help NDBs identify climate-relevant projects in less familiar sectors and measure progress.
  • International and domestic DFIs need to work together and promote a better understanding of how risk mitigation tools and other blended finance approaches can help attract more private investment.
  • Targeted technical assistance demonstrating green business models in sectors where these are not yet established can help spur innovation and new transactions.
  • Capacity building can enable NDBs and domestic DFIs to access international climate finance better, and use it to support their countries’ NDCs.

Last week, the 23rd Conference of Parties of the United Nations Framework Convention on Climate Change (COP23) called for ‘Further, Faster Ambition Together’. Greater collaboration between international development banks and finance institutions and domestic financing institutions will be critical to help the latter play a more ambitious part in bridging the green investment gap in Latin America.