According to the IPCC’s Sixth Assessment Report, finance, international cooperation and technology are critical enablers to accelerate climate action. There is sufficient global capital and liquidity to close global investment gaps, but there are barriers to redirecting capital to climate action both within and outside the global financial sector.
At the Sustainable Investment Forum, the UN Climate Change Executive Secretary spoke about the importance of climate finance and the urgency of investments to accelerate climate action. He stated that new initiatives from the financial sector must respond to the need to drive progress across three main areas:
- Managing risks to investing in climate action in developing countries. Where risk is real, there is a need to deploy at scale the risk reduction instruments – such as guarantees, insurance, and local currency hedging and financing – necessary to unlock capital. Where risk is perceived, there is a need to address the biases that hinder investment at scale and the expectation of high financial returns when engaging in climate change.
- Financing a just and equitable transition. There is a need to develop transparent transition plans that shift investment portfolios over time and that enable ramp-ups in climate investments to the same extent as we see phasing out harmful investments.
- Managing the debt crisis. There is a need to develop a shared understanding of climate-fiscal-debt links and ensure no country builds up excessive debt because of climate action.
Mobilizing additional climate resources with external funds
For more than ten years, IDB has forged strategic partnerships with external sources of finance in order to invest in low-carbon and climate-resilient development. In 2022, the IDB board approved more than $500 million of external funds from CIF, GCF and ACL. This figure may seem quite significant. However, the International Energy Agency establishes that $4 trillion annually will be the cost to reach net zero by 2050.
The IDB Group has over two dozen concrete examples of external climate finance scaling and replication effects in its wider portfolio. Some of the most valuable contributions to climate action are the transformation of value chains, the adoption of regulatory frameworks and incentives, and stronger governance over natural resources. IDB’s mobilization of external sources of finance is supporting countries in the region to advance toward meeting their international climate change commitments.
By working with public and private financial institutions and ministries of finance and planning, we promote dialogue and knowledge for policy and regulatory change. Also, we model investments and drive sector operations to implement climate governance systems and develop innovative financial schemes and instruments to promote investment in low-carbon and climate-resilient projects and programs. Operations with external funds give the IDB an additional tool to leverage resources from other sources, including national financial institutions, governments, and international funding sources. The main external partners of climate finance for IDB are:
- The Climate Investment Funds (CIF)
The joint work between the IDB and the CIF successfully demonstrates the impact achieved after 13 years of effort through its results. To date, a total of 173 operations have been carried out and close to $2.2 billion has been financed, attracting $6.1 billion in co-financing, distributed among internal and external IDB resources, in addition to resources from other counterparties. This collaboration is strengthened through governance and dialogues and has positively impacted the project’s beneficiaries. This partnership nurtures public and private investments to support countries realizing their climate change commitments in light of the Paris Agreement.
- The Green Climate Fund (GCF)
The success story of the IDB-GCF partnership consists of eight projects and programs worth $762 million in GCF financing plus $964 million in co-financing, benefiting 11 million people in Latin America and the Caribbean in areas such as buildings, cities, industries, and appliances. We are currently supporting 24 countries in the region, including the Amazon region. A regional program is now transforming the transportation sector. The E-mobility Program for Sustainable Cities in LAC targets sustainable urban development through measures that strengthen and improve urban public transport and the quality of life in secondary cities. The Program links e-mobility with sustainable urban transport system development and climate resilience in nine countries.
- The NDC Pipeline Accelerator Multi-Donor Trust Fund (ACL)
The Accelerator aims to help LAC countries prepare the necessary investments to meet their climate and sustainable development objectives. It is expected to place more attention on supporting the small and vulnerable countries in the region, adaptation, and emerging themes like nature-based solutions, circular economy and e-mobility. The fund supports areas of intervention in infrastructure, agriculture and land-use management and has already successfully leveraged more than $14 billion in public and private investments. It has supported 51 projects to help countries deliver on their NDCs and on the Paris Agreement goals. The fund recently received a recapitalization from the Nordic Development Fund, its anchor donor.
- The International Climate Initiative (IKI)
The International Climate Initiative (IKI) and the IDB implement a portfolio of projects with an approximate value of $40 million and this collaboration has more than seven years supporting climate action. Together they support areas in mitigation, adaptation, REDD+, and biodiversity.
The IDB works with other external funds, such as the Mitigation Action Facility and the Global Environment Facility (GEF), among others. These collaborations increase the impact of the transformational change needed to help clients and partners transition to low-carbon and climate-resilient economies.