F MORE AGGRESSIVE CLIMATE AND GREEN FINANCE TARGETS
The IDB Group has established a Climate Finance floor of 30% of our total lending volume, as well as a mandatory 40% and 65% share of projects with climate components for IDB Invest and IDB, respectively. These targets are part of the 2020–2023 Corporate Results Framework. There has been sustained progress in mainstreaming climate, implementing many of the incentives mentioned above. This is reflected in the record-high share of projects supporting climate change. By 2021, IDB and IDB Invest have already achieved climate components in 69% and 58% of projects, respectively.
In 2019, the IDB Group delivered almost $4.9 billion in Climate Finance, amounting 29% of total lending volume; in 2020 and 2021, the IDB —like other MDBs— has focused on providing urgent support to countries to deal with the COVID-19 emergency. This led to a sudden shift in the sector composition of new operations toward social and fiscal sectors and an emphasis on policy-based lending. This, in turn, has substantially limited opportunities for Climate Finance, which in 2020 dropped to $3.48 billion and 20% of total lending. Similarly, in 2021, we ended the third quarter with $1.64 billion of Climate Finance
representing 19% of our total lending volume, and conservative estimations for climate finance until the end of the year are close to 25% of climate finance, depending on how the public and private sector pipelines develop. We expect our
climate finance to rebound as countries begin their recovery.
To build an inclusive, low-carbon, and resilient economy, the region must increase investment in sustainable infrastructure, sustainable cities, and rural development. These types of investments are where opportunities for Climate Finance typically concentrate for the IDB Group. But the “narrow" definition of climate can be counter-productive in the context of sustainable
recovery. Although at the beginning of the pandemic countries experienced some temporary benefits such as improved air quality and a reduction of GHG emissions, the future may present more environmental challenges if these aspects are left unattended –as shown by the aftermath of the 2008 financial crisis recovery
As the economic recovery takes root, the IDB Group must not only focus its attention on nation-wide impacts; but also, local environmental conditions must be a priority. Countries and private clients in the region recovery need to include not only climate financing but also reducing biodiversity loss, sound management of chemicals, and other environmental threats. As the region recovers from COVID-19, it will also need financing for its local ecosystems, supporting plans for a healthy sustainable recovery
In this context, it is clear to us that the appetite for economic stimulus coincides with the IDB Group’s intention to increase the share of resources channeled to green finance: including climate change investments but also going beyond by investing in an environmentally sustainable economy. In line with Vision 2025, enhanced corporate targets for green finance will be an
an integral component of the IDB Group’s approach to post-pandemic social and economic recovery in LAC.
The adoption of the proposed incentives would allow us to bring to our Board a proposal to increase our climate finance from a 30% floor to 40% floor of green finance on average for the next 4 years subject to country demand (35% of CF). Additionally, if private capital mobilization is blended into the same target, this target could increase to 40% of climate finance and 45% of green finance on average for the next 4 years.
Since we seek to lead by example in the attainment of these targets, we are committed to addressing some of the key challenges that in the past have obstructed the application of a more integrated and systemic way of accounting for all our efforts to finance sustainable investments and mobilize private capital:
1. Address methodological discrepancies that place limitations on the accounting of climate finance to reflect its transformational potential, such as the inclusion of short-term transactions, which not all MDBs report, and that has resulted in imprecise comparisons across MDBs. We will also explore ways to include private capital mobilization in this accounting – an item that current methods of MDBs do not include since in many instances this finance can be more catalytic than capital from our own account –while also aligning internal incentives, as explained above.
2. Account for additional types of activities that are allowing us to facilitate the conditions for Paris- aligned pathways. Currently, climate finance systematically omits several types of investments that have proven critical amidst the COVID-19 crisis, and that help promote healthy, safe, and sustainable environments: Investments that promote sustainable water management, that improve air quality and reduce other types of pollution, and that enhance ecosystem services, among others.
A very good example of this is our recently created Amazon Coordination Unit, leading the Amazon Initiative, that will integrally coordinate support for sustainable and inclusive development in this critical ecosystem for our region. This is the type of investment needed to foster pathways consistency with the Paris Agreement, and that also attends to the political-economic reality of our clients’ need to provide immediate relief and quality of life improvements to the most vulnerable. In this sense, expanding the accounting of climate finance towards a concept more aligned with “green finance” can further enable us to promote the enabling conditions for the equitable, climate-resilient, and low carbon pathways our region so urgently needs.
For these reasons, we are developing a new and innovative methodology that combines green and private capital mobilization with climate finance. Doing so will allow the IDB to better define climate projects and calculate our targets in a more transparent way.
