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The role of multilateral development banks in green finance in China and globally

By Mathias Lund Larsen (People's Daily Online)    12:40, September 06, 2018

Photo: Xinhua

Aligning MDBs with Sustainable Development

The future of China and the rest of the world depends on its transition to a socially and environmentally sound economy. Realizing this transition will require political will, continued technological innovation, international cooperation, and a rapid scaling of business and economic innovation focused on realizing the Sustainable Development Goals, and meeting commitments under the Paris Agreement on climate. The Chinese and other governments have over recent years made ambitious commitments across these areas. In particular, mobilizing finance at scale is a pre-requisite to success, and yet today’s global financial and capital markets are not yet fit-for-purpose. Given their size, history, mandate, and overarching influence, multilateral development banks (MDBs) play a crucial role in the necessary transitioning of the global economy. Recently, MDBs have been encouraged by the United Nations to examine and enhance their role to increase their contribution within sustainable development. This issue has been addressed in a comprehensive report published by the International Institute of Green Finance of the Central University of Finance and Economics.

In climate financing alone, in 2016 all MDBs together provided over $27bn, of which 77% were labelled as mitigation and 23% as adaptation. In the 2013-2015 period MDB climate finance amounted to over one third of developed countries climate financing support to developing countries, working to fulfil the 2020 promise of $100bn under the United Nations agreement. Based on their commitments, MDBs will provide 40% of global developed to developing country climate flows by 2020. While the cumulative numbers are large, it is critical to view these as a proportion of total MDB financing, as well as consider the greenness of MDBs non-climate and non-green portfolio. It is further important to consider the overall greenness of MDBs portfolios. Comparing MDBs current portfolios with a 2-degree warming scenario, the World Resources Institute concludes that 17% of financing is aligned with a 2-degree pathway, 57% is conditional, 22% is controversial, and 3% are misaligned. This provides an indication that MDBs need to change business-as-usual to be aligned with green policy objectives.

The implications for China

China is both a member and recipient of MDB support and is influenced by MDBs’ activities both in China and abroad. As such, the dynamic trends that are changing the role of MDBs in green finance are also influencing China. For example, as MDBs are increasing their focus on green finance China is receiving more such investment. Furthermore, with the rapid growth of green bonds in China, its market is now amongst the world’s largest. MDBs are increasingly following this trend with the New Development Bank issuing several green bonds in China, with indications of interest of similar issuances by other MDBs. Additionally, given the commercial bank led financial system in China, greening lending portfolios is of critical importance, and MDBs are providing assistance in this process. For example, the International Finance Cooperation of the World Bank Group has been assisting numerous Chinese banks over the last decade, such as Industrial Bank, Agricultural Bank of China, and MaAnShan Bank.

The Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB) are cases of particular interest as China was the initiator of the prior and co-founder of the latter. China’s involvement in these institutions show that China is both supportive of MDBs as development financiers, as well as of including green ambitious in their mandates. For example, the Asian Infrastructure Investment Bank’s core values include ‘green’ alongside ‘clean’ and ‘lean’, while the New Development Bank currently has the largest proportion of green financing of any MDB at above 60%. The Belt and Road Initiative (BRI) requires vast amounts of green finance which both the AIIB and the NDB will contribute to. While loans under the BRI are targeted at local actors, Beijing remains a driver of the initiative and it is therefore encouraging to see numerous policy documents promoting the greening of the BRI. As MDBs are increasing their ambitious for green finance, such as by setting higher goals of climate finance by 2020, BRI countries will be a key recipient of MDB loans in the decades ahead.

Using MDB characteristics to overcome green finance challenges

In the global economy, capital naturally flows to where return is the highest. Simply put, the unmet need for green financing is therefore a sign of a lower return on investment from a combination of actual and/or perceived lower revenues and higher costs – as based on numerous factors inside such calculations. A number of challenges for scaling up green finance exists in terms of the institutional environment, project owners, investors, as well as in financial markets. MDBs possess a number of unique characteristics that make them the best candidate for addressing some of these challenges. Concretely, MDBs can use their policy-goal oriented nature that provides a long-term view, concessional terms, and counter-cyclical engagement, in combination with their technical expertise and ability to mobilize private capital.

Furthermore, MDBs are recommended to prioritize private capital mobilization and carry out greater cooperation where operations and mandate overlaps. As MDBs across the board are scaling up green financing, an effective and efficient approach to this effort is critical. Our analysis finds that MDBs can benefit from greater coordination of their approaches, methodologies, and practice, while maintaining their individual unique features required by their local environment. Through the above recommendations, MDBs can work towards realizing their potential and expectation to providing a critical piece in the puzzle for meeting the green financing need in China and abroad.

The author is the Director of International Cooperation & Research Fellow at the International Institute of Green Finance, Central University of Finance and Economics.

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