Latin America and Caribbean countries are facing a pandemic with myriad social and economic consequences. At the same time, we also have climate change enhanced fires raging in Brazil’s Pantanal and hurricanes pounding the Caribbean. This complex situation shows that governments, the private sector, civil society, and multilateral development banks (MDBs) need to work together to support a sustainable recovery.
The consequences of COVID-19 in the region are tragic. It is the worst hit region, alongside Asia, with over 310,000 deaths. We estimate that we may lose up to 17 million formal and 23 million informal jobs this year and 2.7 million companies will go out of business.
Our path out of the pandemic should make sure we create a new normal and shift from business as usual to sustainable economic development. Development banks have a vital role to play to support this shift by ensuring we do projects the right way, select the right projects, and help fix governance, financial, and institutional systems.
First, we need to do projects the right way. The traditional focus on climate change has been to measure and check emissions and make sure resilience to climate risks is baked in. While this approach matters, we need to go further.
That’s why the IDB has just released a new Environmental and Social Policy Framework. This policy moves beyond measuring and reducing emissions to trying to avoid them. It also incorporates an exclusion list that limits the IDB’s financing of fossil fuels to reflect country commitments to the Paris Agreement. The new policy also requires assessing climate change and disaster risks and will apply a method for risk management that makes sure projects are resilient.
Second, MDBs can also help make sure we manage the climate crisis by doing the right projects. We decide which projects to support in response to demand from our clients. The most recent update to the IDB Group Institutional Strategy emphasizes the cross-cutting challenge of climate change and environmental sustainability. Our Corporate Results Framework (CRF) also reflects commitments to climate finance and sustainable land use. It refers to the need for the borrower to check and manage climate risk in projects.
MDBs can support countries in ensuring long-term planning for decarbonization and adaptation. Planning includes ensuring stakeholder engagement and working with Ministries of Finance, Ministries of Planning, and Sector Ministries in prioritizing and executing projects.
Twenty-one regional countries, including Chile, Costa Rica, and Jamaica, have announced their intention to achieve net-zero emissions by 2050 and enhance the ambition of their Nationally Determined Contributions (NDCs). MDBs can support countries with climate action by financing projects from these more ambitious NDCs.
Projects range from climate resilient and low-carbon infrastructure, through enhancing social resilience, and improving health systems, to promoting education for a just transition. With that in mind, last August, the IDB approved a US$200 million loan to The Bahamas to support small businesses, manage natural resources, and promote the Blue Economy.
Third, MDBs have a key role in helping to fix institutional contexts. A fundamental challenge to climate action is that organizations beyond those responsible for climate plans must own and execute those plans. Our work in the region shows how long-term strategies can support a just transition to net-zero emissions. This can help countries avoid becoming locked into expensive carbon-intensive pathways. With renewable energy now cheaper than fossil fuels in many countries, US$ 90 billion worth of assets are at risk of becoming stranded in the region’s power sector.
Additional fundamental challenges include the regulatory and governance barriers that increase costs and decrease effectiveness of climate solutions. Improving regulations can remove price barriers and help drive transformational change. Changing taxes and subsidies can increase fiscal revenue to help support governments through recovery. IDB supported improvements to fiscal policy and regulations can help create institutional arrangements for sustainable finance.
This means delivering finance that supports Environmental, Social and Governance (ESG) investments and ensures that projects consider and manage climate risks. This is important in fiscally constrained governments who urgently need private finance investment to recover. A key lesson learned from the last fiscal crisis is that we must change financial and institutional systems to make sure that recovery is sustainable in the long-term.
The IDB and other MDBs can support low-carbon and climate resilient development that is consistent with the Paris Agreement as a response to COVID-19. This includes ensuring MDB investments are low-carbon and climate resilient and support country plans for decarbonization and adaption.
MDBs must play their role in ensuring a long-term impact by helping countries introduce sustainability into institutions. A final role of development banks is supplying the knowledge to carry out changes for a more sustainable world and promote myriad co-benefits including reducing inequality and pollution.
There is strong public support for a sustainable recovery. Scores of countries and cities across the region and Europe are very interested in this agenda. A sustainable recovery can be the bridge between getting countries onto a path towards sustainable and inclusive development while advancing global climate and biodiversity commitments. Latin America, the Caribbean and Europe can be the engineers to construct that bridge.
Photo: Graham Watkins
Follow us on Twitter: @BIDCambioClima