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Public event

Rethinking development banking in the Decade of Delivery

This session will consider some of the avenues currently being explored to foster the transformational impact of development banks and development finance institutions (DFIs), including how shareholder governments can best support them in their efforts to support the needed transformation of developing countries.

Partners: OECD, IDFC

Provisional agenda:

Part 1 – Roundtable discussion with shareholders
Moderator: Benoît Leguet, Managing Director, I4CE

  • Özlem Taskin, Policy Analyst, OECD
  • Nancy Lee, Senior Policy Fellow, Center for Global Development and Member of the G20 Expert Panel tasked with the Independent Review of Multilateral Development Banks’ Capital Adequacy Frameworks
  • Ahmed Al Qabany, Senior Climate Change Specialist, World Bank Group
  • Norbert Gorissen, Deputy Special Envoy for International Climate Action, Federal Foreign Office, Germany

Discussion with audience

Part 2 – Roundtable discussion with financial institutions

Moderator: Claire Eschalier, Head of the Secretariat, Mainstreaming Climate in Financial Institutions
Scene-setting presentations:

  • Dr. Anja Carolin Gebel, Policy Advisor, Germanwatch – Aligning Policy-Based Finance with the Paris Agreement
  • Alice Pauthier, Project Manager, I4CE – Supporting the alignment of financial intermediaries

Panel discussion:

  • Dana Kupova, Associate Director, Head of Green Economy Transition, Financial Institutions Business Group, European Bank for Reconstruction and Development (EBRD),
  • Alexis Bonnel, Strategy division, French development Agency (AFD),
  • Elvin Afandi, Division Head, Economic Policy& Research, ICD,
  • Vito Dellerba, Caisse de dépôt et placement du Québec (CDPQ)

Concluding remarks: Rachel Owens, Director of the Climate Finance Programme, European Climate Foundation

Recording:

Summary of discussions

Part 1 – Roundtable discussion with shareholders
Moderator: Benoît Leguet, Managing Director, I4CE

Panel discussion:

  • Norbert Gorissen, Deputy Special Envoy for International Climate Action, Federal Foreign Office, Germany

The system is not fit for purpose to address the various crises we are facing. Each of these crises required additional funding to manage the crises or address and resolve it.

Climate seems to be one of the most overarching crises. As developed countries, we committed to mobilize 100 billion for developing countries and failed to do so.

Four areas of work were identified:

  • Adaptation finance
  • Access to finance
  • Mobilizing more successfully private finance
  • Multilateral Development Banks (MDBs): we recognize more and more the need for a reform of their business models:
    • Shareholders should play a stronger role and request better analytics of the cost of climate change, consider the capital adequacy review, but also look at possible capital increase dedicated for climate, creating incentives to borrow specifically for mitigation and adaptation and creating more concessionality.

The government of Barbados started to initiate debate in the Bridgetown agenda, which included the MDBs but also the IMF and what could be done with the special drawing rights. It becomes clear that we should launch a debate on the reform of the whole Bretton Woods system. This debate cannot appear here, but there is already some requests for the World Bank to come up with some ideas by the Spring Meetings next year.

  • Ahmed Al Qabany, Senior Climate Change Specialist, World Bank Group

Paris Alignment has been one of the key priorities of the Bank. Having proper analytics on the pathways will be key for the implementation of the Paris alignment approach. The World Bank group has developed Country Climate and Development Reports (CCDRs). These tools aim to become key tools for the dialogue with client countries and partners.

Supporting countries will require a lot of concessional finance.

  • Özlem Taskin, Policy Analyst, OECD – The role of development banks and their shareholders in the transition

Development Banks are key institutions for the transition in developing countries. Today we are not there yet and we need to rethink development banking for climate.

Development banks are highly influenced by shareholder governments.

The OECD report Investing in the climate transition highlighted that scaling up development banks ambition rely on three main elements:

  • Development banks need stronger mandates.
  • Support development banks to move from a traditional role of financing infrastructures towards mobilizing commercial finance. This requires rethinking their business model.
  • Development banks need more concessional capital targeted where they have the most climate impact.
  • Nancy Lee, Senior Policy Fellow, Center for Global Development and Member of the G20 Expert Panel tasked with the Independent Review of Multilateral Development Banks’ Capital Adequacy Frameworks

Capital adequacy decisions are critical for climate finance. Development banks capital is under-utilised and could be used mode adequately to produce more lending capacity. Implementation of the G20 Independent Review of MDBs’ Capital Adequacy Frameworks (CAF) report recommendations at scale could drive hundreds of billions of dollars of increased lending capacity.

The report recommendations of the report are grouped into three parts:

  • Assigning value to callable capital: callable capital is a form of guarantee that government shareholders offer to cover the extremely unlikely risk of an MDB default. Credit rating agencies recognize that this guarantee has value and provides uplift for their ratings. The report recommends that MDBs do it as well.
  • Deploying financial innovations that create more usable capital
  • Engaging credit rating agencies to promote more accurate risk assessments for MDB credits

The recommendations are mutually reinforcing. It would be much better if MDBs were moving on this agenda together. These recommendations would not just be for MDB lending capacity but also for crowding in private capital at scale. This is not a substitute for MDB capital increase but a complement.

  • Norbert Gorissen, Deputy Special Envoy for International Climate Action, Federal Foreign Office, Germany

MDBs need a vey clear mandate and should own climate as a central part of their operations. A number of MDBs are now calling themselves “climate banks”. Moving forward, climate indeed need to be one of the core objectives of development banks.

A number of internal obstacles should be considered and addressed. These include management incentives: incentives based on the impact of operations on climate change could have a big impact.

  • Nancy Lee, Senior Policy Fellow, Center for Global Development and Member of the G20 Expert Panel tasked with the Independent Review of Multilateral Development Banks’ Capital Adequacy Frameworks – Multilateral Development Banks’ Capital Adequacy Frameworks reform for impact

It is important not only to look at the World Bank but also the entire system.

Two set of reforms should be considered:

  • Additional finance: the size of finance needs to increase by four.
    1. Revision of MDBs capital Adequacy Framework
    2. Donor capital increases are required
    3. Consolidation of donor grant finance for climate
    4. Find a way to use the SDR allocation to reallocate it to allow additional lending from the MDBs
  • How the MDBs operate:
    1. Incentivize countries to allocate more of their finance for climate activities
    2. Shift to more catalytic instruments to mobilize more private finance
    3. There is a need for more collaboration between MDBs. A structure is needed to bring the MDBs together and share exposure to the risk.
    4. Need to target climate outcomes, and not only climate inputs

It is important to bring the two together.

  • Özlem Taskin, Policy Analyst, OECD – The role of development banks and their shareholders in the transition

The OECD identified emerging good practices implemented by development banks such as DBSA, to shift the focus of MDBs towards the mobilization of climate finance:

  • Reduce expectations for return on equity
  • Reduce disbursement targets and introduce a mobilization target
  • Upstream processes for mobilization

 

  • Ahmed Al Qabany, Senior Climate Change Specialist, World Bank Group

Recommendations are welcomed and will contribute to give the World Bank Group more space.

The World Bank has already taken some steps with:

  • CCDRs
  • The climate support facility of the World Bank which contributed to support countries, and the World Bank receives more and more requests from countries
  • SCALE: a multi-donor fund, which seeks to catalyse transformative climate action by deploying results-based climate finance

Part 2 – Roundtable discussion with financial institutions

Moderator: Claire Eschalier, Head of the Secretariat, Mainstreaming Climate in Financial Institutions
Scene-setting presentations:

  • Dr. Anja Carolin Gebel, Policy Advisor, Germanwatch – Aligning Policy-Based Finance with the Paris Agreement
  • Alice Pauthier, Project Manager, I4CE – Supporting the alignment of financial intermediaries

Panel discussion:

  • Vito Dellerba, Caisse de dépôt et placement du Québec (CDPQ)

Traditional investors are 900 times bigger than the MDBs combined. There is a need to find solutions to mobilize investors that are fit for purpose.

However, there are several barriers to private sector capital deployment:

  • limited local institutional capacity
  • lack of information and market accessibility issues
  • limited technical capacity
  • difficulty measuring transactions’ E&S impact
  • lack of sizable transactions
  • unattractive risk-return profile

Holistically integrating blended finance across the life of a project has the potential to mobilize private capital at scale. Dana Kupova, Associate Director, Head of Green Economy Transition, Financial Institutions Business Group, European Bank for Reconstruction and Development (EBRD),

  • Alexis Bonnel, Strategy division, French development Agency (AFD),

It is surprising that the financial system is not fit for purpose. For many years, the stakeholders have made progress in integrating E&S considerations in their operations. This is a revolution. But we are not there yet and it is not sufficient.

Can the sum of incremental actions lead to systemic change?

When the Finance in Common Summit was launched, the secretariat conducted a survey. Participants highlighted 5 ways to improve impact and lead to transformational change:

  • Mandate and role of shareholders in mainstreaming climate considerations in development banks
  • Regulatory context
  • Common language to define what is climate finance, aligned finance, etc.
  • Business models of development banks : moving from SDG taker, to SDG makers: looking not only at the project level, but also the counterparty level and the pathway level.
  • Improving collaboration within the financial community

Looking at the system level raises new questions

  • Should we speak about additional finance or about reorientation of the finance?
  • What role for financial services in the economy?
  • Elvin Afandi, Division Head, Economic Policy& Research, ICD,

The importance of in-house support of shareholder government countries.

Limited capacity of governments to implement NDCs and NAPs

Limited tools available to undertake the needed investments.

Development banks can provide the analysis and support government.

It is important that development banks collaborate in this endeavour.

  • Dana Kupova, Associate Director, Head of Green Economy Transition, Financial Institutions Business Group, European Bank for Reconstruction and Development (EBRD),

Paris Alignment is an important approach towards systemic and transformational impact. EBRD is currently developing its Paris alignment approach for intermediated finance and decided to focus on the institutional transformation of counterparties rather than only the final operations.

EBRD is looking at how they can help their own clients transform their business models, looking at both their strategies, governance, and how they monitor and disclose how they are progressing.

  • Vito Dellerba, Caisse de dépôt et placement du Québec (CDPQ)

Several barriers need to be addressed:

  • Financial risk is the first barrier for the private sector.
  • Technical barriers are high for adaptation finance
  • There is a trust factor that is important
  • Alexis Bonnel, Strategy division, French development Agency (AFD),

There is not enough safe spaces where the different financial stakeholders can discuss systemic issues

The Finance in Common Summit is promoting two ideas:

  • Develop collaborative platforms in countries with JET Partnerships
  • Discussions between initiatives at the global level in a summit like the Addis Ababa Summit held in 2015

There is a need to rethink the role finance and what is expected from finance.

Finally, there is a need to rethink accountability frameworks that are too project-based and too quantitative.

  • Elvin Afandi, Division Head, Economic Policy& Research, ICD,

There are systemic barriers and climate-specific barriers.

Having the regulatory frameworks will be key moving forward.

  • Dana Kupova, Associate Director, Head of Green Economy Transition, Financial Institutions Business Group, European Bank for Reconstruction and Development (EBRD),

One key challenge for transforming financial institutions is the need to build the capacity of the entire staff.

Current initiatives are focusing on best practice. But for many institutions at the early stages of the journey, they first need to identify what is the next step.

Concluding remarks: Rachel Owens, Director of the Climate Finance Programme, European Climate Foundation

Walking the talk will require to take into consideration the current market conditions.

Collaboration not only between public financial institutions but also with the private sector will be key. It is however important to recognize that some IFI are powerful, and it is important that the World Bank demonstrate leadership.

One key question that should be kept on sight is: what real world outcomes do we want?