Funding the Fight Against Climate Change

Jack Schwartz

At the 26th Annual CAF Conference, jointly organized by the Inter-American Dialogue, CAF-Development Bank of Latin America and the Caribbean, and the Organization of American States, top multilateral development bank leaders participated in a panel titled “Funding the Fight Against Climate Change.” The panel, moderated by Alicia Montalvo, manager of climate action and positive biodiversity at CAF-Development Bank of Latin America and the Caribbean, convened Daniela Stevens, director of the Energy Transition and Climate Program at the Inter-American Dialogue, Genevieve Connors, practice manager for environment, natural resources, and the blue economy in the LAC region at the World Bank, and Hilen Meirovich, climate change head at IDB Invest.

Experts discussed the call for reforming multilateral development banks (MDBs) to adjust their incentives and operating models to address the climate crisis and how green finance and other innovative methods can help drive the energy transition in Latin America and the Caribbean. Montalvo opened by introducing the panelists and emphasizing the importance of working together to make investing in climate solutions and biodiversity profitable.

The session began with each panelist explaining what they consider to be the key components of green finance and how each of their organizations plays a role in advancing the energy transition. Stevens set the stage by reminding the audience of Latin American countries’ fragile fiscal contexts following years of unprecedented spending spurred by the Covid-19 pandemic and falling tax revenues, amounting to an average deficit of 6-7 percent of the region’s gross domestic product (GDP) and driving a significant increase in debt. This dire baseline scenario is crucial to consider during conversations on climate change in LAC, Stevens said, and she outlined the role of organizations like the Inter-American Dialogue in convening multiple stakeholders to map a reform agenda that aligns domestic policy with the international context. Stevens distinguished between two types of financial flows: equity investment, which seeks to generate financial returns or loans that must be repaid, and climate aid, which is given as a grant with no expectation of return. The former cannot be the only mechanism used, Stevens stressed, not only because of the region’s existing debt burden, but also because access to loans is often restricted to the largest economies. The quality of investment is as important as the quantity that is invested, she added, and countries’ needs must be identified and defined to assess the extent to which support adequately responds to these. MDBs can play a key role in this regard, Stevens said, by helping to attract private capital by providing technical assistance, improving governments’ institutional capacity, helping in the creation and harmonization of green taxonomies across the region, and building the local currency bond market to broaden the set of domestic investors. Importantly, MDBs can help de-risk private capital investments by implementing risk-sharing mechanisms to reduce the cost of capital for projects through blinded finance to increase the inflows of private money to the region, which remains limited. Finally, Stevens said multilateral banks can form coalitions with private and public sectors to trigger systemic change and institutionalize a coordinated response, to take advantage of the momentum built around calls for reform, including through annual meetings on climate change.  

Connors started by highlighting the World Bank Group’s new climate change action plan for 2021 and 2025, which among other things focuses on targeting large, high-emissions sectors such as transportation, agriculture, cities, energy, and manufacturing. What is interesting about Latin America and the Caribbean, Connors said, is that it differs from the rest of the world in that LAC constitutes only 8 percent of global carbon emissions, of which half come from agriculture, forestry, and land use change, compared to a global average of about 19-20 percent. Another factor distinguishing LAC is that it encompasses the Caribbean, where small island states are extremely vulnerable to climate risk. The region is also rich in natural capital and biodiversity and is home to the Amazon, which not only houses as carbon approximately 5 percent of global greenhouse gas emissions annually but is also currently moving toward a massive tipping point: if 25 percent of the rainforest is deforested (up from 18 percent currently), this would bring on a hydrological and meteorological shock waves across the world. For all of these reasons, it is important for MDBs like the World Bank to develop action plans specific to each region’s characteristics and challenges. For Latin America, that means working with the agriculture and forestry sectors to reduce emissions, but also to ensure the retention of biodiversity and ecosystem services. Connors finished by outlining that the World Bank Group has committed to aligning all its financing with the goals of the Paris Agreement, in addition to committing that about 35 percent of its finance would be earmarked for climate change, split evenly between mitigation and adaptation strategies. 

The Inter-American Development Bank in 2019 set a goal of having 30 percent of its financing going toward climate investment, Meirovich said, and it has launched a new strategy aimed at unifying its agendas on biodiversity and climate under the umbrella of green finance. This change comes from a better understanding of the interconnections between natural capital and climate change, which have shown that climate finance may be disincentivizing investment in biodiversity or what the IDB calls “nature-positive investments.” At IDB Invest, this translates into three underlying strategies: 1) working with the financial sectors in the region to promote green and blue bonds in capital markets, coupled with technical assistance in adopting international climate financing frameworks, 2) working with the real economy, targeting high-emitting sectors such as agribusiness and manufacturing, and 3) adaptation, including establishing a definition for what adaptation encompasses. This third pillar is key because adaptation strategies are more localized, responding to a wide variety of issues ranging from natural disasters to droughts, which have differentiated impacts. This lends itself to a complicated financial environment, Meirovich said, adding that defining these taxonomies brings MDBs one step closer to securing more climate financing for LAC.  

Connors then spoke to the role of the World Bank given its new president Ajay Banga, who took charge in June. She foresees an increased focus on climate and said she hoped to see more collaboration with “sister institutions” such as the IDB and CAF and with the private sector. A key element of this is thinking more strategically about how these institutions can mobilize more resources collectively to edge closer to global climate financing needs, which are estimated to be about US$6 trillion annually. At present, climate financing is nowhere near this figure, even for mitigation, which is ostensibly easier to fund given its revenue streams. While adaptation is an area where it is harder to invest, Connors emphasized that it would be a top priority of the World Bank Going forward, saying there are opportunities to work more closely with foundations, with concessional money, the private sector, and institutional investors to de-risk such ventures. Finally, she said there would be a greater focus on global public goods, including on climate action, but also on pandemics and tropical forests.  

Montalvo then asked Stevens to elaborate on how the Inter-American Dialogue is incorporating climate change as a transversal issue in its role as a convener of dialogue. Stevens outlined how each of the Dialogue’s five programs – migration and remittances, Asia and Latin America, rule of law, education, and the energy transition – all have a climate angle. For this reason, it is important to prioritize multidisciplinary expert teams because these issues are not isolated from one another. Stevens said she saw the role of the Dialogue as platform not only to facilitate conversations among Latin American leaders and countries, but also to promote more North-South discussions, trust in multilateral institutions, as well as dialogue with other key stakeholders like academia and civil society to strengthen accountability and ensure countries’ and MDBs’ commitments are met. 

Montalvo turned to Meirovich to address the question of declining trust in multilateral institutions, which Meirovich rebuked. Instead, she said, MDBs play a key role in assuring private clients that the projects they are financing meet high environmental and social standards and are not subject to so-called greenwashing. This translates into larger financing packages based on technical evaluations facilitated by institutions like the IDB. The challenge for Latin America and the Caribbean is not a lack of investor appetite, but rather that there are no quality green assets to invest in. For this reason, Meirovich added, IDB Invest can act as a platform to attract private capital using a variety of financial instruments, including local currency markets and more equity investments, and to work with the public sector in order to develop high-quality green projects that can eventually be financed by the private sector. 

Connors and Meirovich also discussed the prospect for future collaboration among multilateral development banks, acknowledging that there is a lot more than MDBs can do to work together, and climate finance provides an opportunity in this regard. Among the collaborative practices MDBs engage in are delineating common definitions and comparing notes and lessons learned. The problem arises, Meirovich said, when it comes to the actual countries – a part of current discussions involves the potential creation of country platforms where different MDBs can bring their analysis to the table, taking advantage of the synergies between the work multilateral banks do instead of competing with each other. 

Montalvo then raised the subject of Indigenous communities, and the impact that both climate change and green projects have on them. Stevens replied that the vulnerable groups – including Indigenous peoples but also other underrepresented groups like women and youth – are priority areas for the Inter-American Dialogue. The organization launched a climate initiative in Central America and a second one is in the works for the Caribbean, through which the Dialogue brings together civil society representatives from traditionally underrepresented groups to participate in roundtables and advise them on how to better implement US climate strategies such as the Partnership for Addressing Climate Change in the Caribbean (PACC 2030). The Dialogue uses its platform as leverage to advance these conversations in policy circles and the media, and to create representation where 10 years ago, there was none.  

The session ended with a discussion on the notion of a just energy transition – one that does not exacerbate existing poverty and inequality but actually works to reduce them. In this regard, Connors emphasized the importance of re-skilling and re-training populations that rely on industries that are expected to sunset, like the coal industry. However, this is more prominent in other areas of the world where coal is more abundant as a source of power. For LAC, Connors added, it is more about protecting forests in a way that allows jobs and access to high-value markets in areas and communities that would no longer be allowed to deforest or to keep expanding on the agricultural front. The question of justice is more than supporting the poorest, Connors stressed, but also about those physically located in areas that are now being called to be protected. This involves ensuring that Indigenous peoples or other vulnerable communities living at the margins of forests that are dependent on agroforestry can make a living from the bioeconomy in a way that meaningfully raises their living standards. Meirovich added her perspective on the issue, saying the new economy offers an opportunity to address inequalities by pushing leaders to think creatively and by creating green jobs for underrepresented groups. Stevens closed by highlighting that, to advance a just transition, such efforts can be linked to Sustainable Development Goals (SDGs) more broadly. “The transition brings challenges but also incredible opportunities,” Stevens concluded.