Greening Development Finance in the Americas
Development banks operating in Latin America and the Caribbean (LAC) are falling far short of playing the key role they need to in spurring economic recovery and sustainable development. Given the significant market failures involved in shifting investment into sustainable infrastructure, and the fact that the region is in the midst of an economic downturn, development banks are essential to filling a $260 billion dollar annual infrastructure gap and a $110 billion dollar annual gap in financing for climate change. According to our estimates however, development banks provide just $8.7 billion per year in terms of green finance in general, and climate finance in particular is just $5.9 billion per year. Green financial flows from development banks need to be scaled up significantly, and alongside proper governance structures to ensure that green financial flows translate into sustainable development outcomes.
Development banks will be essential in achieving two of the most important Sustainable Development Goals (SDGs). Development banks can help smooth the burden of risk with long run investments, and can help correct for market failures. Development banks can also help mainstream sustainable practices, climate change considerations (i.e. low carbon development and climate resilience) as well as play a catalytic and convening role in fostering dialogue and exchange of experiences on these topics. Development banks also can help ‘crowd-in’ the private sector and other sources of international finance.
This study provides an initial assessment of the extent to which the existing development banking regime in LAC is poised to achieve these goals. More specifically, we ask two research questions. First, to what extent do IDBs operating in LAC support green finance in the region? Second, to what extent do IDBs deploy environmental and social safeguard systems in LAC? LAC has made strides in green financing and in safeguarding large projects in a manner that is environmentally sustainable and socially inclusive. However, development banks will need to rapidly increase their engagement in both of these areas in order help turn the region’s economies toward sustainable development.