With the conclusion of the Finance in Common Summit (FiCS) and the upcoming NYC Climate Week, the international community has come to see the powerful synergy that can be achieved when we combine the capillarity of public development banks and the convening power of multilateral development banks. This synergy is best encapsulated by the adage “the whole is greater than the sum of its parts:” Our efforts will clearly have more impact if we coordinate actions than if we carry out projects independently.
What are the key features of this new financial mobilization?
1. First, it underscores the need for scale to close financing gaps.
The world needs to mobilize $3.3-4.5 trillion annually to achieve the Sustainable Development Goals. At today’s levels of public and private financial flows, developing countries are falling $2.5 trillion short of this level every year. Development finance must expand on an unprecedented scale, and it must do so quickly.
2. For this expansion to occur, we need much stronger development incentives to be embedded in the financial instruments.
Incentives will help us not only to measure but also to reward impact effectively. Key examples of these more targeted instruments are sustainability-linked bonds and loans and debt-for-nature/climate swaps such as those issued by Ecuador, Barbados, Belize, and Seychelles. Other instruments, such as the IDB’s Principal Payment Option, offer a contingent clause in debt contracts that can provide financial relief in times of distress, thereby increasing resilience in the wake of natural disasters.
3. The new conception of mobilization stresses a multidisciplinary approach that connects the mobilization power of the financial system to sector-specific knowledge in critical areas for sustainable development.
Multilateral Development Banks and Public Development Banks need to make a much more holistic effort to integrate their collective financial and sector-specific knowledge. The financial sector needs to offer tailored, fit-for-purpose solutions that can be combined with enabling reforms in fields such as sustainable infrastructure, agriculture, housing, urban development, health, and education.
4. This new approach requires us to elevate standards through institutional strengthening and capacity building.
Currently, only 25% of financial flows are bound to low- and middle-income countries and only 6% are going to countries in Latin America. Part of the challenge of positioning Latin America better has to do with improving the regulatory framework and the institutional capacities of different countries.
After these three days of intensive coordination and consultation among public development banks and multilaterals at FiCS, two initiatives stand out as encapsulating this new trend in financial mobilization: the Green Coalition of Development Banks and the Green Bond Transparency Platform. They are both emblematic of the four main features described above: scale, high powered incentives, multidisciplinary approach, and the elevation of capacity building standards.
The Green Coalition of Development Banks was launched by the IDB and the Brazilian Development Bank (BNDES) during the Amazon Summit in Belem, Brazil, in August 2023. Conceived with the goal of coordinating synergistic and complementary sustainable development initiatives with unprecedented scale and impact for the Amazon Region, this Coalition brings under one umbrella 20 development finance institutions, including the IDB, Public Development Banks from Bolivia, Brazil, Colombia, Ecuador, Peru, and Suriname, as well as the Development Bank of Latin America and the Caribbean (CAF) and the World Bank.[ACDS1] The Latin American Association of Financial Institutions for Development (ALIDE) and the Brazilian Development Association (ABDE) are also contributing to the initiative.
During FiCS, we held the Coalition’s second working session and further advanced the preparation of its Action Plan, with the ambitious goal of launching it at COP28 in Dubai later this year. The Action Plan will map the footprint of coalition members in the region, identifying synergies and areas for collaboration. It will involve activities to develop common frameworks and high standards to measure, monitor, and report the impact of investment programs. It will also promote capacity building, the development of tailored financial solutions, and enhanced capital mobilization.
Bringing these banks together under one common purpose provides a unique opportunity for coordination and scale of financing for targeted objectives. This new collaboration model will ensure a focus on impact and high standards as a group, thereby embedding high-powered incentives in its proposition of initiatives, instruments, and projects, targeting critical areas for the sustainable development of the Amazon region.
Green Bond Transparency Platform: A Global Edition
Another example of collaboration that was featured at FiCS is the IDB’s Green Bond Transparency Platform, a regional public good to increase the accountability of LAC’s green bond market – and thereby help grow it. This platform allows investors to understand where their resources are being invested and what is the impact they can generate.
Since its launch in 2021, the platform has grown to cover 80 percent of the LAC market, with information on 235 bond issues worth a total of $42 billion.
During FiCS, the Platform began the process of going global as Germany’s KfW, the EIB and AFD expressed support for expanding its coverage of bonds in emerging markets outside the LAC region. It has reached the kind of scale that a global public good would envision.
In addition, the Platform creates incentives for countries to build regulatory frameworks for reporting and transparency of different bond issuances. With time, this will increase the credibility of reporting mechanisms, elevate standards through enhanced institutional strengthening, and change investor behavior accordingly. Our work in Chile and Colombia across the entire cycle of issuance, from design to implementation, has shown how this enhanced accountability translates to effective changes in practices on the ground.
Why is this time different than before?
While we are aware of the skepticism regarding past efforts to increase collaboration in development finance, participation in the FiCS has convinced us that this time will be different. There is simply no precedent for the magnitude of international consensus regarding the urgent need to address the imperatives of development in the context of the climate crisis.
Every day, governments face more pressing demands to adapt, contain and to some degree revert the effects climate change, biodiversity degradation, food insecurity and other geopolitical challenges that are threatening our collective wellbeing, especially among the most vulnerable.
An unprecedented call for action to reform and expand the role of the international financial system in response to these overlapping crises is now in place. The question now is not whether but rather how this should be done. If we deliver on these commitments, then the international financial system will truly have shown that the whole can indeed be greater than the sum of its parts. Let’s make next week in NYC count!