Public development banks: gateways to transformative SDG financing

By Maria Alejandra Riaño, Research Fellow, Governance Programme, Institut du Développement Durable et des Relations Internationales IDDRI

Public development banks around the world can play a vital role in minimising economic decline, supporting recovery and financing structural transformation. To fulfil this role, they need to fully capture the interconnected and transversal nature of the 2030 Agenda and align their practices, operations and investments accordingly. It is not just a matter of marginally adjusting strategies and processes – public development banks need to deeply reshape behaviours and investment practices.

Scaling up public development banks’ alignment with the 2030 Agenda

Public development banks have certain advantages that position them at the forefront of the vast network of actors responding to the socio-economic impacts of the COVID-19 crisis and seeking to chart a course towards a transformative recovery. Public development banks have become an essential and complementary voice for traditional co-operation and commercial investors due to their detailed knowledge of the specific context in each region or country, and unmatched flexibility in the design of concessional loan programmes.

However, are they using their vast portfolio of funding tools (loans, grants, guarantees, etc.) and network-building capacity to uplift the social wellbeing of communities, preserve the environment and promote economic growth? And if so, what approaches have public development banks used so far to align with and internalise the 2030 Agenda for sustainable development?

Mainstreaming the 2030 Agenda in the work of public development banks

Whether multilateral, bilateral, national or subnational, most public development banks are willing and interested in mainstreaming SDG priorities in their strategies and operations. Internally these efforts include mapping and tracking current priorities and lines of credit in an attempt to match year-end results with various SDGs; the use of social and environmental safeguards as preconditions to approve credits/loans; and using explicit SDG frameworks to help drive operational strategy and assess investment impacts.

Brazil’s Far South Regional Development Bank, for instance, has chosen to evaluate its entire portfolio in terms of alignment percentage with the SDGs. It is already testing the idea of offering preferential credit conditions — extended payment period, lower interest rate, or partial extension of the loan’s total maturity — to projects that demonstrate alignment to one or more SDGs. The Dutch Entrepreneurial Development Bank has aligned its strategy with the SDGs and importantly its value creation model is designed to generate impact beyond financing. It focuses its investments in areas like agribusiness, promoting the low-carbon transition, safeguarding energy security and supporting financial inclusion.

The bottom line is that public development banks need to work harder at defining clear strategies, policies and targets that align their activities and investments with SDG priorities. In many countries, especially national and subnational development banks are still either overlooked or given an intentionally low profile, making such transformative change challenging. Efforts should however strive to achieve a complete, comprehensive and systemic integration of the SDGs, permeating all  activities, instead of classifying existing projects under individual goals. Furthermore, SDG compatibility analysis must transcend a project-to project approach and consider the portfolio as a whole. Public development banks would thus be able to better link short-term needs—exacerbated by the current crisis—with long-term transformation. 

Upgrading development finance: providing transformational investment

Public development banks need to re-envision the way they finance development, shifting from the mind-set of funding providers to that of enablers and mobilisers. Relying on their ability to work side-by-side with other stakeholders and private financial actors—through strategic partnerships, blended finance or other financial mechanisms like guarantees or green/SDG bonds—public development banks can become drivers of a 2030 Agenda-aligned recovery. As an example, leveraging its position as an intermediate trade and development capital partner in the region, The Eastern and Southern African Trade and Development Bank (TDB) was able to crowd in private partners, including through risk-sharing and co-financing strategies, to boost its scale of support. On the other hand, the Agence Française de Développement (AFD) has just unveiled its new SDG Bond Framework, which adopts an “impact by design” approach that selects loans according to their actual contribution to the SDGs, through a robust identification process.

Becoming powerful forces of change and sustainable growth also means that public development banks need to place a stronger focus on understanding and actively engaging with clients and beneficiaries. National and subnational public development banks like BDMG (Brazil), COFIDE (Peru) or BancoNación (Argentina), to name a few, have understood that better knowledge of their counterparts—governments, local authorities, communities, private commercial banks that serve as intermediaries—and of the context, sets them apart as last-mile specialists able to create value to society and promote local development.

Still a lot of work ahead

Despite these efforts, a big portion of public development bank practices and investments are still far from being aligned with SDG targets and from contributing to their implementation. Public development banks cannot succeed without political backing and support from governments, shareholders and other international stakeholders (donors, NGOs, credit rating agencies, research institutes, academia and the scientific community). Their actions need to be upheld by a clear national SDG policy — for instance through an Integrated National Financing Framework —, and tailor-made regulations that reinforce their role as public financial institutions working to support sustained social, economic and environmental growth in a territory with its own challenges and particularities. Accessing capital markets implies following private standards and going through the scrutiny process of credit rating agencies, which in most cases reduces public development banks’ appetite to take risks and invest in poor/fragile settings. Establishing a “SDG credit score” could be a major step to encourage and support public development banks to drive sustainable development transformation.   

Lastly, using private financial intermediaries can be a double-edged sword: although they can widen the scope of action and beneficiaries, private banking does not have the same goals and is driven by other interests. Public development banks must go further and find the right mechanisms, driven by their own sustainable development priorities, to guide these intermediaries in making the best possible use of available funds.

As the Finance in Common Summit unfolds from 3 to 11 November, researchers and experts from academia, think tanks and international organisations will share views and insights on the potential specialised public financial institutions have to accelerate the achievement of the 2030 Agenda.