In less than five months, the development finance community will come together in Paris at the “Finance in Common” Summit to discuss the role of public financial institutions (PFIs) in achieving sustainability and climate goals– and what COVID19 has changed. PFIs are increasingly committing to support both climate goals and a ‘just’ transition – and are now playing a central role in the post-covid responses that governments are already implementing. Ian Cochran and Alice Pauthier explain why even with COVID19, PFIs must continue their important work on aligning their activities with climate and sustainability goals – and how their progress may be key to ensuring that the response to the crisis is both just and green.
PFIs are key actors in situations of economic crises
Public financial institutions – whether national promotional or development banks – have the mandate to support the development of economies and societies. Often referred to as ‘counter-cyclical’ institutions, PFIs tend to play specific roles within the financial system to help overcome punctual and structural market barriers and failures and have a long-term perspective. While the scope of activities varies, PFIs often on one hand foster and, redirect investments through a wide range of financial instruments: loans, equity, grants and guarantees. On the other hand, PFIs assist governments to develop policy by facilitating stakeholder dialogue, supporting the development of national strategies and plans and providing technical assistance.
This makes PFIs key actors to roll out both short term interventions as needed in the current economic crisis, as well as support long-term policy goals as in the case of climate change. The challenge today is linking the short- and long-term priorities to ensure that they use the tools at their disposal to provide resources and foster investments in specific sectors as well as to provide assistance to governments in designing and implementing ‘just’ and ‘green’ post-COVID national responses.
PFIs are well placed to help lead a ‘climate-compatible’ post-COVID response
Since 2015, a growing number of PFIs are integrating climate change considerations across their strategies, programs and operations. In addition, a growing number of PFIs – particularly the multilateral development banks and the members of the International Development Finance Club (IDFC) – have committed to ‘aligning’ all of their activities with the objectives of the Paris Agreement. Thus, on top of doing the ‘minimum’ of taking into account climate-related considerations, these institutions have committed to ensuring that all of their activities either do no harm or actively contribute to the achievement of the long-term climate goals.
At the start of 2020, operationalizing Paris alignment approaches was slated as one of the challenges for development banks. Many of these institutions are now working together either with their peers or with the broader financial community to develop and compare notes on the climate criteria and metrics to guide strategic plans, assess counterparties and transactions, and proactively manage climate risks and support the transition of the broader economy. These very tools can, in turn, ensure that the support provided as part of post-COVID19 responses channeled through the PFIs will a minima take climate considerations into account.
In practice, the approaches currently being developed and tested by a few leading PFIs can serve as an essential part of ensuring that transactions designed to support the recovery are at a minimum avoiding the risk of ‘locking in’ stranded assets and avoiding investments in parts of the economy
that may appear to be working today, but are not part of a low-carbon, resilient tomorrow. While far from perfect today, they nevertheless can help prioritize transactions that have the most impact towards the rapid low-carbon and resilient evolution needed – event in the current context.
A green and just recovery will require that governments and PFIs stay true to their commitments
The Finance in Common Summit planned in early November in Paris aims to gather the entire PFIs community and could be an opportunity for all PFIs to take or confirm commitments to mainstream climate considerations in all of their operations and align with climate as well as broader sustainability objectives. Since the start of the year, the focus has increasingly shifted to understand how this role has changed given the COVID19-induced economic crisis.
While NGOs and civil society are pointing out that the support of PFIs for fossil fuels among others remain high, we strongly believe that the Summit is an important moment for governments and other shareholders of PFIs to double-down on these institutions’ focus on climate and sustainability. This could be a major step to ensure that the global post-COVID response is compatible with climate objectives – and do not increase the risk of the world plunging from one crisis to another.
To make sure that PFIs can keep climate high on their agenda requires action from shareholders, upper management, and operational teams – as well as pathways to sharing and exchanging on practice:
First, governments must ensure that the blueprints of the economic and social recovery plan they are asking PFIs to help implement are themselves ‘green’. For example, the European Union has taken an important step through its €750 billion recovery plan geared towards the green transitions with a central role being played by the European Investment Bank. Many other countries are following suit, but it is essential that national plans proactively signal that the response must ‘do no harm’ and should support longer term climate and sustainability goals.
Second, governments must individually and collectively clearly signal to PFIs that they must uphold – and in many cases strengthen – commitments to the achievement of climate and SDG goals. While this should be done from today, the Finance in Common Summit in November will be a key moment for countries to strengthen the mandates of PFIs of all types on both climate- and broader-sustainable development issues.
Third, PFIs in turn will need a clear signal from top management that ambition on climate and sustainability will remain high on the agenda. On one hand, PFIs should continue to set ambitious climate and sustainability objectives – and integrate these considerations across all of their activities – including the design and disbursement of the post-COVID response fund. On the other hand, when PFIs are working with governments to support the development or implementation of post-COVID plans they should proactively work to ensure that the responses are aligned with climate and sustainability objectives and that climate risks are considered.
Fourth, work must continue inside PFIs on the development, rolling out and scaling up of climate risk and Paris Alignment approaches with the objective of fostering a green and just recovery. The COVID crisis precipitates an acceleration of what was already a complicated and technically challenging process. This will occur both individually as PFIs make progress to design their own approach – and collectively as different groups such as the MDBs and the IDFC members advance in developing common taxonomies, methodologies and approaches. Ensuring that this is done in a transparent fashion will be key.
Fifth– and perhaps most importantly – collaboration and experience sharing is essential. Many – including governments – can learn from the thinking going on within PFIs that can help improve how the overall public budget is piloted. There is also an important need for PFIs to share their experience and engage with the commercial financial community as their joined-up efforts will be key to success. While perhaps seen as a luxury for better times, it is important that both public and private institutions continue to make the time and find the resources to engage in peer-to-peer discussions through platforms and forums such as the Climate Action in Financial Institutions Initiative or UNEP-FI, among others.
Today, the world is still descending into the trough of the COVID19 pandemic wave that has washed over us. As we make the slow ascent up the other side, we must do all that we can to ensure that an even larger climate crisis is not looming on the other side. While PFIs are not alone the solution, if they live up their commitments and increasingly expectations, they may be able to help to turn the tide to guarantee a low-carbon, resilient recovery for all.
In this video, Alice Pauthier from I4CE explains, in two minutes, the stakes of the Finance in Common Summit :