This blog was co-authored with Angela Whitney, Manager Climate Aligned Industries, RMI
In a pivotal year for sustainable development and climate action, world leaders would do well to turn to the proven solutions of the green bank model. The climate crisis may be felt more slowly than the overwhelming immediacy of the COVID crisis, but it involves similar challenges and potentially graver consequences if we fail to address the crisis with the urgency it demands.
This past month, Lord Nicholas Stern opened the second Global Green Bank Design Summit noting we are at a crucial moment in history with the twin crises of COVID and climate. He asked, “How do we recover? How do we drive forward in a different way?” Countries are grappling with how to revitalize their economies to spur long-lasting COVID recoveries. Fortunately, a growing number recognize that national green investment banks can help them build back stronger while advancing climate action and social inclusion goals.
Coming out of the Group of Seven (G7) Summit and looking ahead to COP26, global leaders are setting general commitments to scale up investment. It is time now for them to support specific country solutions that are up to the task of channeling investments into the most critical climate and recovery projects.
As Lord Stern went on to say, “We have to [proceed with] strong investment of the right kind and innovation of the right kind. The right kind is sustainable and green that allows us to develop strongly over the future decades.” He described the “special role” of green banks in charting the way for whole system change, and concluded that, “we should see the green investment banks not only as in the vanguard, but the vanguard of a whole system change.”
As evidenced by the participation in June’s Design Summit, the interest in the green bank model is steadily growing around the world. Green finance practitioners and experts joined over 300 participants from 54 countries during the Summit organized by the Green Finance Institute (GFI), RMI, and the Natural Resources Defense Council (NRDC). During the four-day virtual summit, participants discussed the transformative role that green banks can play in scaling up green investments, accelerating climate finance flows, and addressing local market needs.
So just what can green banks provide?
Green Banks Can Scale Climate Solutions
Investments in clean energy and transportation, resilient urban infrastructure, and sustainable agriculture and land use will be critical for creating new jobs, improving air and water quality, and helping to reduce the inequalities that the pandemic laid bare. Yet we are nowhere near the pace and scale of green investments necessary to ensure a green recovery. The OECD and a number of other countries have allocated a total of US$336 billion in COVID recovery funds to environmentally aligned measures—only 17 percent of their total allocations. Meanwhile, regions like Latin America have only allocated 2.2 percent of stimulus funds to environmental projects.
The gap is striking, but it doesn’t have to exist. Green banks can provide much needed capacity. “[The] Green Bank model can be a pivotal actor within a national ecosystem,” said Amal-Lee Amin, Director of the CDC Group and another featured speaker at the Summit. She identified three main areas in which a green bank can be an asset to a resilient, climate-aligned economy: As a bridge between policymakers and investors to ensure that policy will attract private sector investment; as a means of deploying technical assistance and blended finance in a targeted way to overcome specific barriers; and as a financer of businesses that step up to manage climate risk.
Green Banks Can Accelerate the Flow and Impact of International Climate Finance
Collectively, the world needs to invest trillions of dollars over the next 15 years to meet climate targets. Much of this investment is needed in emerging and developing countries.
At the G7 Summit, the leaders of the world’s seven wealthiest democracies rightly placed climate change high on the agenda. As observers point out, however, the leaders’ renewed pledge to mobilize US$100 billion in international climate finance does not go nearly far enough. And details are scarce on what G7 countries will do in practice to accelerate North-South climate finance flows (or, increase access to it).
As we head into COP26 later this year, it is crucial for developed countries to meet and increase their climate pledges, while at the same time ensuring that those dollars have the greatest impact possible. Nigel Topping, the UN High Level Climate Action Champion for COP26, said at the Green Bank Summit,
“I think that the case for locally driven green investment banks, helping to quickly and efficiently channel international climate funds and mobilize private capital into local solutions that strengthen vulnerable communities and help reduce inequalities has been well made. Solutions like resilient climate infrastructure in cities, clean energy access, sustainable agriculture and the development of new green sectors that can create jobs for younger generations…. By fostering the financial innovation that will help accelerate the maturity of local green markets, green banks can support green recoveries that are aligned with the Paris Agreement and can even help raise further climate ambition.”
Green Banks Offer Tailor-Made, Local Solutions
No two green bank journeys are alike. Green banks are purpose-built institutions or facilities that respond to local financial, political, and institutional contexts and specific market challenges. Some countries may choose to establish a new standalone institution like Mongolia’s Green Finance Corporation. Others may establish green facilities as part of existing institutions like the Development Bank of Southern Africa’s Climate Finance Facility. In some countries, existing institutions may initiate processes to “green” their operations by establishing environmental and social risk management systems and creating new green products such as green loans and green or social bonds. This is the case with several national development banks in Latin America working with the Interamerican Development Bank.
Despite their differing approaches, green banks share the common purpose of using public funds to stimulate private investment in underinvested low-carbon sectors. As Bryan Garcia from the Connecticut Green Bank stated, “You should always think of this main objective: how are you going to use a limited amount of public resources to attract and mobilize multiples of private investment in your green economy? This the foundation to green banks.”
By demonstrating that climate solutions are indeed possible, replicable, and scalable, green banks can help governments aspire to even greater climate ambition.
Accelerating Climate Action through Green Bank Development
Because every green bank pathway is unique, countries may encounter numerous obstacles to establish, capitalize, and launch a green bank. The Green Bank Design Platform was established by GFI, RMI and NRDC to help countries navigate the process. It helps countries connect to experts that can help them develop capacities and build opportunities—such as the Summit—to create a community of practice that shares experiences and key learnings with peers. As one country practitioner explained, “[one is] not quite sure where to get support. But a Platform like this, now I know where to go for help. It’s comforting and gives me confidence to be a [green bank] champion.”
The Summit demonstrated that countries have an interest and willingness to establish green banks and facilities. The onus is now on the international climate finance community to work with these first mover countries as they embark on their green bank journeys.