EconomyNational development banks, key to climate finance in LA

National development banks, key to climate finance in LA

(Expansion) – The increase in financing is one of the greatest challenges for the implementation of projects that allow moving towards a low-carbon economy. In order for countries to comply with the climate actions that they committed to in the Paris Agreement, known as , it is necessary to mobilize resources towards sustainable projects.

This is where development banks play a fundamental role. How have they contributed and what potential do they have? What challenges do they face?

The national development banks are public entities oriented towards financing priority sectors for economic development, either by granting direct credit, acting as financial intermediaries, or creating guarantee programs.

They are focused on sectors where the private sector does not get involved because the risk levels are high, or because large amounts of capital are required to carry out the projects. Historically they have been key institutions in investment, infrastructure and economic development in Latin America.

Development banks position themselves as agents that have the potential to provide and channel resources for climate finance and support the implementation of plans in line with the NDCs. In recent years, these institutions have adopted environmental sustainability as one of their main objectives, exposing the potential they have in green financing through different axes.

First, they help directly finance investment projects. Such is the case of the in Brazil, which financed 70% (270 million dollars) of the construction of seven wind energy parks in the country, destined to provide clean energy to thousands of homes. This has been a significant project in the country, taking into account that it is one of the largest emitters of greenhouse gases in Latin America due to its intensive use of fossil fuels.

Development banks also act as financial intermediaries with the private sector in each country, such as BancoEstado in Chile, which is dedicated to granting loans to individuals and companies that wish to develop clean energy, circular economy or electromobility projects. In 2020 they announced a mortgage loan grant at a historically low rate (1.79%) to acquire homes with energy efficiency certification.

Likewise, the development of financial markets and the raising of resources through them play an important role. Such is the case of Nacional Financiera, which in 2016 issued the , denominated in national currency, whose resources have been used to finance renewable energy projects.

After this issuance, which was highly demanded, this and other development banking institutions, as well as the private sector, have continued to issue to finance infrastructure, water, energy and clean transportation projects.

In addition, they are a channel to receive financing from international sources, mainly from development agencies and multilateral banks, such as the IDB, the World Bank and the AFD. They have the advantage of knowing the economic context and the market conditions of the country where they are located, in order to appropriately channel resources towards the most important sectors.

On the other hand, it is important to identify the challenges that development banks face in their role as promoters of sustainable development. The first is the distribution of the financing they grant between adaptation and mitigation projects.

He indicates that 98% of financing flows in Latin America are destined for mitigation projects (reduction of carbon emissions). Financing adaptation projects (which reduce vulnerability to climatic catastrophes) is essential in the region, since it is very vulnerable to this type of phenomenon.

It is necessary to develop technical capacities to understand how climate change has affected countries and how to deal with it through infrastructure, water security and natural resource management projects.

Another challenge is access to resources. An investigation by the exposes that access to long-term financing and low interest rates is difficult for national development banks, since the projects they finance directly require large amounts of capital and have long recovery periods.

It becomes important to increase its exposure to international debt markets, innovation in financial instruments and increased financing by multilateral organizations.

It is essential to recognize the role that development banks play in climate financing and the potential they have to increase it, to provide them with greater strength and resources. In a world where the consequences of climate change are increasingly tangible, it becomes urgent to catalyze financing for projects that allow us to move towards a low-carbon world.

Editor’s Note: Mariana Navarro is an Associate Researcher at ESG Latam. Follow her on . The opinions published in this column belong exclusively to the author.

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