The Way Forward: More ambitious targets, full Paris Alignment, and partnerships to catalyze private capital mobilization
Aligning our financial flows to the Paris Agreement and increasing our contributions to green investment in LAC is an ambitious and promising road for the IDB Group. There is a growing momentum for climate action and interest among our partners and members to do this, including public and private banks.
The IDB Group had 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.
In 2019, the IDB Group delivered almost $4.9 billion in Climate Finance, amounting 29% of total lending volume. In 2020, COVID-19 redirected lending towards urgent fiscal sand social measures, limiting opportunities for climate finance. Nonetheless, the IDB Group’s active role in promoting a green and sustainable economic recovery has paid off, and in 2021 we are observing an uptick in our clients’ interest for projects related to policies for a green and resilient economy, and new investments in low-carbon technologies.
Thus far in 2021, IDB and IDB Invest have already achieved climate components in 69% and 58% of projects, respectively. Conservative estimations for Climate Finance until the end of the year are close to 25% of long-term lending. We expect these levels to rebound as countries begin their recovery, until it doubles 2020 levels by 2025, amounting to a total $24 billion in the next four years.
To build an inclusive, low-carbon, and resilient economy, the region must increase investment in sustainable infrastructure, sustainable cities, and rural development. But the “narrow” definition of Climate Finance can be counter-productive in a context of sustainable 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 actions to reduce biodiversity loss, ensure 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.5
In this context, it is clear to us that the appetite for economic stimulus coincides with 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 integral component of IDB Group’s approach to social and economic recovery in LAC.
Institutional investors are rising to become particularly powerful potential allies to bridge investment gaps in LAC by means of green finance, given their increasing interest in net-zero initiatives and Paris aligned vehicles. The development impact of such a trajectory would be massive, as their participation would be a forceful signal for capital markets to invest in our region, allowing us to go from billions to trillions in private capital mobilization.
Accordingly, the IDB Group has the goal to harness these fast-paced capital dynamics and ensure they result in accelerated opportunities for green growth in the region. We are confident our commitment to ensuring Paris Alignment and bolstering green finance investment opportunities, paired with our ability to de-risk innovative solutions through blended finance, as well as mobilize private capital towards the Region, will be a winning formula that will make the hopes for a green recovery a solid reality.
5Green finance investments are those that include pollution abatement, recycling and re-use, surface water, soil, and groundwater, healthy ecosystems, sustainable transport that reduces impacts connected to the movement of goods and people, environmental goods, and provision of environmental services, access to water quality efficient water supply, treatment, and sanitation. Green finance is the broadening of the environmental dimensions of investments, from projects in sustainable energy and resource (water and materials) efficiency, to all other types of projects that result in physical environmental benefits.
