Will new development banks help or hinder on climate change?

New development banks have the potential to both help and hinder efforts to tackle climate change. With development finance under scrutiny at the Addis Financing for Development conference, now is the time to ensure that they take climate change into account.

Adrian Fenton's picture
Guest blog by
6 July 2015

Adrian Fenton is a post-graduate researcher at the Sustainability Research Institute of the University of Leeds, and a visiting researcher at ICCCAD

Three girls wash their clothes in the Akaki river, near Addis Ababa. Climate change is affecting the quality of water in Ethiopia and much of the wastewater released by the industries and houses in Addis Ababa reaches the Awash River untreated, putting public health at risk (Photo: Beatrice Mosello/ODI, Creative Commons, via Flickr)

The coordination of development finance will be a key issue at the Third International Conference on Financing for Development, taking place in Ethiopia later this month.  

Previously dominated by institutions such as the World Bank, this landscape has seen dramatic changes with the creation of new financial institutions, many of which have been created by developing countries, such as China.  

These include the BRICS Development Bank and the Asian Infrastructure Investment Bank. With potential capital stocks of up to USD $200 billion (PDF) and $100 billion respectively, they will have a significant impact on the future development of the global economy and consequently the global climate.

Therefore it is imperative that they, and other development banks, sufficiently mainstream climate change considerations when making investment decisions.

Climate risks and opportunities

This issue is urgent as there is only a slim window to have a chance to stay below 2 degrees Celsius of warming, a target which is enshrined as the main objective of the UN Framework Convention on Climate Change (UNFCCC).  

A recent report from the Structured Expert Dialogue (PDF), set up to review this long-term target, found current efforts inadequate. Prompt and decisive action is needed to meet the target, including stronger efforts to promote sustainable development.

This makes it crucial that all development banks established to promote global economic development aid the transition towards a low-carbon future. Consistent policies will be instrumental in assisting this transition, according to the New Climate Economy report produced by the Global Commission on the Economy and the Climate.

One important area to consider is the environmental safeguards used by development banks when making investment decisions. These must be strong to ensure, for example, that these banks do not fund investment in coal without carbon capture technology, and that they do not ignore alternative viable renewable energy projects. Without appropriate safeguards there is a risk that the activities the new development banks finance may undermine action on climate change.

Finance under the UN climate convention

Climate finance refers to all finance pledged under the UNFCCC to help developing countries mitigate and adapt to climate change. It should be recognised that the Financing for Development Conference is also important for those interested in climate finance.  

There is currently a distinct lack of climate finance available. December 2014 saw the capitalisation of the Green Climate Fund, the largest fund specifically designed to tackle climate change. Yet it only has $10 billion (PDF) in capital for the next four years.  

This figure, combined with current levels of other climate finance, are generally accepted to be insufficient to tackle climate change according to most estimates.

Shortfalls increase need for climate compatible development finance 

It is clear that levels of climate finance need scaling up. This should not only involve the search for additional funds, but also involve aligning existing flows of development finance with climate change goals.

It could be argued that more impact is likely to be generated by mainstreaming climate change concerns into development banks because they control more capital. These sums are far greater than all of the finance committed under the UNFCCC to date.

A substantial part of climate finance still goes towards traditional development projects where the climate element is "bolted on". The UNFCCC text says climate finance should be 'additional' to development finance, but this is a complex issue. If development finance institutions were truly leading the way to low-carbon and climate-resilient economies, and funding met the required levels, then this additional 'climate' finance shouldn't be required.

It would seem more efficient to ensure investments by development banks mainstream climate change concerns into their work from the start, rather than having these concerns dealt with by other funding mechanisms later on. That this needs to occur indicates they are not thinking sufficiently about climate change.

Climate change will increase the costs of development and may make it difficult or impossible to meet the post-2015 Sustainable Development Goals.  

Ultimately, the lack of climate finance is increasing the need for development finance. At the same time, the limitations of development finance will increase the need for climate finance. What's needed is for these funds to finally align towards the same goals.

Adrian Fenton (adrianfenton@hotmail.co.uk) is a post-graduate researcher at the Sustainability Research Institute of the University of Leeds, and a visiting researcher at the International Centre for Climate Change and Development (ICCCAD).

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