It’s 2023 and we would have thought that we would be anywhere near the Avatar mindset by now. The movie is not real life, we know, but it’s an environmental message. We are not here to discuss James Cameron’s script but to raise awareness of the importance of protecting nature and addressing climate change.
At IDB, we play a pivotal role in catalyzing public and private investment in climate and biodiversity action. For more than ten years, the IDB Group has forged strategic partnerships with external international funds, which have allowed it to access additional finance for climate change and biodiversity interventions.
As the IDB publication states: “Such collaborations transformed the IDB’s operations: from helping mainstream the topic of climate change in country dialogues to providing innovative financial products further to catalyze investment in low carbon and resilient initiatives. In turn, the IDB has become a key technical and financial partner for channeling this finance. Because of this, the Bank is expected to play an essential role in future rounds of international climate investment.”
What is Behind the IKI and IDB Collaboration?
The International Climate Initiative (IKI) is implemented by the Federal Ministry for Economic Affairs and Climate Action (BMWK) of the German government in close cooperation with the Federal Ministry for the Environment, Nature Conservation, Nuclear Safety and Consumer Protection (BMUV) and the Federal Foreign Office (AA). Through the IKI, the ministries jointly support approaches in developing and emerging countries to implement and ambitiously develop the Nationally Determined Contributions (NDCs) anchored in the Paris Agreement. This includes measures to adapt to the impacts of climate change and to conserve and rebuild natural carbon sinks, considering environmental, economic, and social concerns. The IKI also supports its partner countries in achieving the Convention on Biological Diversity (CBD) goals.
IKI finances projects run by organizations, like the IDB, that implement measures together with developing, emerging, and transitional countries within the four IKI funding areas:
- Mitigating greenhouse gas emissions
- Adapting to the impacts of climate change
- Conserving natural carbon sinks with a focus on reducing emissions from deforestation and forest degradation (REDD+)
- Conserving biological diversity
Currently, IKI and IDB implement a portfolio of projects with an approximate value of US$ 40 million. Let’s look at them.
The Case of Fiscal Policy for Climate Change in Latin America and the Caribbean (LAC)
All public and private financial flows must be in line with the international objectives set out in the Paris Agreement. For this to happen, it will require considering fiscal policy and green budgeting approaches. In collaboration with BMWK, the IDB is leading efforts to provide methodologies, knowledge products and finance to ensure ministries of finance have the tools they need to adapt to the physical impacts of a changing climate, achieve carbon neutrality, and rip the benefits of the technology transition. In 2021, a US$ 20 million fund was launched, the Fostering Fiscal Policy for Climate Change in Latin America and the Caribbean Fund. Recently the fund endowment was increased to US$ 30 million with a new IKI of US$ 10 million. With these resources, BMWK and IDB are providing technical assistance to 20 ministries of finance in the region to design and implement comprehensive climate change action plans and to up to 7 regional technical assistance projects on issues such as stranded assets, institutional capacity building, long-term decarbonization and adaptation fiscal strategies, and sustainable public investment planning. The Fund also supports the operation of the Regional Climate Change Platform of Ministries of Economy and Finance of Latin America and the Caribbean, launched in August 2022. The Platform supports the exchange of knowledge to shape fiscal policies in response to climate change in LAC. The need for this Platform was identified and requested by the Board of Governors of IDB during the Bank’s 2021 annual meeting in Barranquilla, Colombia, reflecting the interest of ministers of finance of the region in playing a more active role in efforts to address the challenges posed by climate change and support the implementation of the Paris Agreement.
These ministries are increasing their awareness of climate change and the importance of fiscal policy and their role is critical to ensure transformation, improve decision-making, and effective governance. Check out five key areas where these ministries can support the implementation of the Paris Agreement and support LAC countries to turn their pledges into concrete action.
Water Funds: A Sustainable Climate Adaptation and Resilient Model for Stressed Urban Watersheds
Water resources in LAC are highly seasonal and unequally distributed. Since 2000, IDB supports the Latin American Water Funds Partnership (LAWFP), with key partners such as FEMSA Foundation, The Nature Conservancy (TNC), the Global Environment Facility (GEF), and IKI. The Partnership supports Water Funds by providing scientific knowledge to achieve and sustain water security through nature-based solutions and the systematization, management, and dissemination of knowledge, capacity-building, and technical monitoring. It also supports the promotion of an inclusive dialogue among relevant stakeholders in the region to boost collective action. So far, more than US$ 25 million were invested by the partners in the region, and 26 Water Funds were created, involving more than 100,000 beneficiary families and 300,000 hectares that were restored and/or conserved. Nowadays, the second investment phase is facing its end and a new cycle is being evaluated by the partners, with a focus on scaling up the interventions and driving the evolution of the partnership to a Water Security Platform, recognized in the region as a leading innovative hub for Water Security, Watershed Climate Resilience and Science-based decisions.
Nowadays, thanks to IKI funds, IDB is implementing a Technical Cooperation (TC) with the objective of contributing to NDC adaptation goals by creating and strengthening Water Funds as governance and financial mechanisms that mobilize public and private funding for the development of Ecosystem-Based Adaptation (EBA) strategies at the watershed level in six countries in LAC, in particular: Brazil, Colombia, Ecuador, Dominican Republic, Peru, and Guatemala. IKI results include direct support to more than 80,000 people through capacity building and technical assistance in the implementation of nature-based solutions and the implementation of more than 22,000 hectares of EBA strategies.
LAC Green Finance Facility
The facility aims to mobilize private investment in mitigation actions and low-carbon and sustainable business models through National Development Banks (NDBs). The main output of the program is the development, for each of the NDBs, of ready-to-use tailored financial strategies consisting of a combination of financial instruments (i.e., guarantees, longer-term credit lines, contingent credit lines, insurance, etc.) and non-financial instruments (i.e., technical support project development, capacity building of firms and potential clients, capacity building and promotion with local financial institutions, development of standard contractual mechanisms for risk sharing, mechanisms for validation, monitoring, and verification by third parties, etc.).
Since September 2016, the initiative has supported 17 NDBs, 8 government institutions, 2 financial innovation laboratories (LABs), 2 green finance public-private dialogues leveraging public and private investments through 11 green credit lines, 2 approved Green Climate Fund projects, 4 green or sustainable bonds and the design and implementation of the Green Bond Transparency Platform with social and environmental additionality. In six years, the Facility has mobilized and catalyzed over US$ 2 billion in sustainable investments in six countries: Brazil, Chile, Colombia, Mexico, Paraguay, and Uruguay.
The IDB/IKI LAC Green Finance Facility paved the way to address financial and non-financial barriers to climate investments in several sectors (RE/EE, and bioeconomy). Increasingly NDB beneficiaries are considering the alignment of their financing strategy to the Paris Agreement.
Generating a transformational change will require IDB and partners to work at multiple levels, from government, large corporations, and medium and small enterprises to beneficiaries. The IDB avatar mindset will have to focus on assisting countries to apply innovative approaches to harness IKI’s contributions and other funds while facilitating effective transitions towards carbon-free and climate-resilient economies.