Climate crisis must drive change in development banks

We live in a world assailed by crises - with war, disease and economic hardship taking a terrible toll on human welfare in recent years.

Most alarming of all is the worsening impact of climate change, which threatens the very existence of countless species, including our own.

Time is running out to fix the problem. The Intergovernmental Panel on Climate Change recently warned that the planet’s temperature will likely rise 1.5°C above pre-industrial levels within the next decade, and will shoot past that critical threshold without immediate and massive emissions reductions.

We could be entering a doom loop, in which, the consequences of climate change distract attention and divert resources from tackling its causes, further impeding progress as the effects worsen.

Billions of dollars are being invested to avoid this fate, but trillions are needed. Where will it come from?

High public debt levels constrain many countries’ policy options, and there are not enough bankable projects to generate the necessary private investment.

Multilateral development banks (MDBs) like the Asian Development Bank (ADB), of which I am president, can deliver critically needed financing and expertise for climate progress.

However, we cannot take bold action without making sweeping changes to our operations. I believe that MDBs must do more, and faster, with the substantial resources that we manage.

Simply placing climate action at the top of the development agenda is not enough. The climate crisis demands a dramatic shift in our mindset as development professionals.

The stakes are highest in Asia and the Pacific. In addition to accounting for more than half of the world’s greenhouse-gas emissions, the region is warming faster than anywhere else and is acutely vulnerable to rising sea levels, extreme weather events and biodiversity loss.

These trends will only escalate if MDBs continue to pursue business-as-usual practices.

To improve the odds that humanity wins the battle against climate change, MDBs must change in three ways.

For starters, some basic principles of their operations, namely the traditional country-focused approach, must be recast.

‘Look beyond national borders’

The costs of climate change and benefits of adaptation and mitigation investments extend beyond national borders, so we need a more regional and global perspective that leverages MDBs’ unique convening and coordinating power across political jurisdictions.

Initiatives such as the Energy Transition Mechanism, a collaborative and scalable blended-finance instrument to accelerate the retirement of coal power plants across our region, are a step in the right direction.

Led by ADB, it combines concessional resources from donors, philanthropic sources and others with market-priced funds from development-finance institutions and commercial investors.

But much more is needed. Greening trade policies and agreements can reduce the negative environmental effects of trade, including the export of waste and plastics to developing countries.

Likewise, more accurate pricing of manufacturing emissions in trade agreements can help prevent “brown” industries from relocating to poorer countries with weaker environmental regulations.

Greater coordination on cross-border carbon-pricing mechanisms will also be necessary to encourage greener manufacturing and energy production.

The second change MDBs must embrace is to scale up climate investment significantly. The G20’s members have argued that, by implementing reforms to manage capital more effectively, MDBs could increase lending by hundreds of billions of dollars without jeopardising their triple-A credit rating.

I agree that we need to do more with what we have. The ADB is reviewing its capital-adequacy framework to explore how adjustments such as redefining risk tolerance and optimising balance sheets can create more headroom for increased lending.

This is an important step but more innovation is needed both to generate additional resources and to ensure that they incentivise bold climate action.

To this end, it is vital that MDBs expand their capacity to mobilise private investment for a broader range of climate programmes, including through blended-finance mechanisms.

They should lead a global expansion of innovative financing structures, spurring more cross-border and public-private collaboration on climate action.

Another way to free up additional capital for climate-related investments is to share financial risk, which could take the form of conditional guarantees from donor countries.

Capital that MDBs would otherwise set aside for default risk could instead, be leveraged to generate additional resources.

MDBs should also make greater use of concessional finance, including grants, to improve project bankability. This is especially important for middle-income countries, which produce significant emissions but typically cannot access soft loans for development projects.

Act now

Finally, our institutions must become more efficient and effective. Embedding global and regional development priorities at the core of our business model requires stronger climate and sectoral expertise that can be mobilised across borders.

Private and public-sector experts, whose work rarely overlaps at most MDBs, need to collaborate to identify impediments to private investment in areas like renewable energy and to design policies that could unlock downstream investment.

ADB’s forthcoming new operating model will radically change our structure to reduce organisational silos and increase climate-related and private-sector work.

I see this as only the first step on a path of reform that all MDBs must take to respond effectively to rapidly evolving challenges like global warming.

The sheer scale of climate change can make us feel helpless. But if we act boldly now, we can avoid the doom loop. I believe MDBs can rise to the challenge, as they have done in response to other global crises.

Averting a catastrophe of this magnitude demands nothing less.

- Project Syndicate

- Mkini

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MASATSUGU ASAKAWA is president of the Asian Development Bank.

The views expressed here are those of the author/contributor and do not necessarily represent the views of MMKtT.