The UN’s COP26 climate conference in Glasgow has seen development banks from around the world come together to outline their contributions to a low-carbon future. Robust financial infrastructure is a critical pillar of a just and efficient transition to net zero. But the obstacles development banks still face have been cast into sharp relief by the conference.
Development banks are pioneers at the best of times, tasked with assuring a country’s socio-economic prosperity well into the future. Now, however, even more daring initiatives and ambitious targets are required as banks do their bit to tackle climate change, which has become not only the greatest threat of the era, but also an opportunity to create a fairer society and a better quality of life for everyone.
At the beginning of the COP26 conference, 10 multilateral development banks (MBDs) issued a joint statement pledging to scale up their activity in response to the climate crisis, particularly in low and middle-income countries.
Green finance is on the rise around the world, with multilateral development banks (MDBs) mobilising $66 billion for climate friendly investment in 2020, according to the Joint Report on MDBs' Climate Finance. All MDBs agreed to create frameworks to align their investment projects with the Paris Agreement objectives in 2017. In 2019, they provided 46% of all public climate finance.
As well as being a platform for ambitious new targets from governments, the COP26 conference saw another step up in the pledges made by development banks. The Asian Development Bank (ADB) announced the launch of a new carbon fund, the Climate Action Catalyst Fund (CACF). This is designed to help member countries meet their nationally determined contribution targets (NDCs) and aims to help make carbon credits a viable system across Asia by directing finance towards their exchange.
The ADB is the fourth largest development bank in the world. It will play a significant role in the green transition as it rallies support for a net zero future in the hugely influential – and polluting – Asia Pacific region, where “the battle against climate change will be won or lost”, according to ADB President Masatsugu Asakawa.
The European Bank for Reconstruction and Development (EBRD) also used the summit as a platform for more ambitious targets, promising to increase the proportion of total investments represented by green finance to more than 50% by 2025. It also launched a low-carbon pathway for the nitrogen fertilizer industry along with the International Fertilizer Association. This indicates to producers what kind of investments they need to make now in order to reach net zero in the future.
The Eurasia factor
One particularly important region is Eurasia. The Eurasian Development Bank’s (EDB) member-states account for about a seventh of the world’s landmass and represent mostly developing countries. Although the region historically lags behind Europe and America in environmental protection, it is trying to grow its carbon crunching potential through environmental stewardship. Decarbonisation is a major focus here, as the vast steppe stretching across Northern Asia and Eastern Europe has huge carbon sequestration capacity.
In a speech at COP26, Nikolai Podguzov, Chairman of the Management Board of EBD, said: “The international community pays a great deal of attention to our region’s ability to reduce its carbon footprint. All the Bank’s member states have acceded to the Paris Agreement and adopted national action plans until 2030 to combat climate change. If these national plans are implemented, the total emissions by the EAEU and Tajikistan in 2030, with carbon absorption and the projected significant increase in GDP factored in, will be 45% below 1990 levels.”
This year, the EDB adopted a new strategy prioritising environmental and resource efficiency. By 2026, the bank plans to increase the share of green projects in its portfolio from the current 15% to 25%. Having already financed renewable energy projects with a total installed capacity of around 500MW, it now plans to bring the total amount of renewable energy funding up to $1 billion. In Kazakhstan alone, the EDB is planning projects with a combined capacity of 300MW in wind and solar power. These are expected to help reduce the carbon footprint of the country’s energy sector to the tune of 1.4 million tonnes of CO2, according to the Mr Podguzov.
Transport corridors will be another crucial area of Eurasian infrastructure in the fight against climate change. The EDB is currently involved in the development of land transport routes using rail and road, designed to transport people and goods more efficiently in accordance with environmental standards, as well as bringing greater economic opportunity. They are expected to cut transport-related CO2 emissions on the China–EAEU–EU axis by around half.
Teamwork makes the green work
But there is still a lot of work to be done. In order to set the world on a truly sustainable footing, countries will have to learn to cooperate – something that they are particularly resistant to doing in a time of de-coupling and protectionism.
Finance has been one of the sticking points at this year’s COP26 summit, as poorer countries have argued that they have not received enough support from wealthier countries, as reported by bne IntelliNews. The truth is that there is enough capital from institutional investors to finance climate-friendly infrastructure worldwide, but the funding gap between developed and developing countries is huge.
Climate co-finance for low and middle-income countries from public and private sources reached $36 billion in 2020. This is a huge improvement on earlier figures, but it is not enough. Developing countries will be the most important players in the fight against climate change. According to analytics company GlobalData, 88% of the world’s megacities will be in developing countries by 2025, yet these are also the countries with the least financial capacity for implementing sustainable infrastructure. Development banks can help to mitigate this problem by raising capital from private companies and wealthy governments and channelling it towards green projects.
One of the areas where the funding gap is most acute is Central Asia. To implement their respective national action plans, the countries of the Eurasian Economic Union and Tajikistan need new decarbonisation investments of $550 billion by 2030, or $70 billion a year. To achieve decarbonisation goals, investment in environmental protection and natural resource management needs to be doubled.
To help attract more finance for green projects in its member countries, the EDB is working to raise finance from special funds. It is currently undergoing accreditation with the Green Climate Fund, which will give clients another source of loans for implementing green projects.
The EDB also hopes that its cooperation with the Vienna-based International Institute for Applied Systems Analysis (IIASA) will serve as a springboard for future collaboration between the EU and the EAEU. The EBRD and IIASA have plans to develop joint applied research into carbon regulation, and to share best practices in green finance and the implementation of ESG standards. This kind of cooperation could be a good model for low-carbon economic development based on shared standards across continents.
Africa, too, suffers from a lack of availability of green finance. This is particularly important in a region where high existing temperatures risk imperilling entire eco-systems with further warming. The African Development Bank (AfDB) is directing much of its climate financing towards resilience and climate adaptation, like protecting freshwater systems. A third of Africa’s population already faces water scarcity, according to a report by the AdDB.
The remains of the day
As the effects of climate change begin to imperil island nations and destroy habitats, a massive acceleration of climate funding is needed across all sectors of the economy if the world is to limit global temperature rises to 1.5 degrees Celsius. But hope can be derived from what has already been achieved.
The biggest step has already been taken: green financing is finally a profitable business. The total assets of ESG investors have tripled over the past eight years to reach around $40 trillion, and assets managed by the funds that focus on green bond investments have grown at a rate of 50% a year since 2019. Meanwhile, the Global Commission on Adaptation estimates that an investment of $1.8 trillion in five key areas of climate resilience in Africa over the next 10 years would generate more than $7 trillion in benefits. As more and more investors pile in, the value of green finance is set to balloon.
This is further helped by regulatory instruments designed to incentivise the mobilisation of green capital, such as carbon credits, green bonds (of which $1 trillion had been issued globally by 2020), and ESG ‘greeniums’. These are discounts made to climate-friendly bond issuers. Greeniums are highest for the energy and financial sectors, which receive up to 50 and 25 basis points in compensation, respectively.
Greenium by sector. Source: VEB.RF
Over 60 countries have also already introduced pricing mechanisms for greenhouse gas emissions, with a group of developed countries recently announcing the construction of a carbon border adjustment mechanism.
All this gives considerable cause for optimism: a combination of market forces and redoubled efforts by governments have laid the groundwork for a green economy. But we can’t be complacent. The doomsday clock, in the words of British Prime Minister Boris Johnson, is striking one minute to midnight. It’s now more important than ever that investors, companies, governments, and banks come together to make the final shift from ‘business as usual’ to ‘change as usual’.
This article first appeared in the New Economy Observer (NEO), a digital publication covering the intersection between finance and social responsibility, with a special focus on emerging markets. It offers news and analysis on major issues shaping the new global economy, including climate change and renewable energy, sustainable development, e-commerce and tech innovation, and the future of work.