Greening Development Finance in the Americas

Development banks have a unique role to play in Latin America and the Caribbean (LAC) and in emerging market and developing countries across the globe. Development banks seek to correct key market and government failures and crowd-in private sector economic activity into areas such as infrastructure and cleaner energy technologies, as well as into policy formation and anti-poverty programs. As LAC seeks to move past the latest economic downturn, development banks can act in a counter-cyclical manner in order to spark economic recovery and trigger structural transformation throughout the region’s economies. 

The role of development banks will be essential to filling a $260 billion annual infrastructure gap and a $110 billion annual gap in financing for climate change. They will also be key to achieving the most important Sustainable Development Goals (SDGs) and crowding-in private sector investment. In terms of climate change, LAC is only responsible for approximately 12.5% of global greenhouse gas emissions but is disproportionately impacted by climate change through droughts, flooding and cyclones.

A journal article by Kevin P. Gallagher and Fei Yuan examines the extent to which development banks are providing international financing to LAC governments for environmentally sustainable development projects. The report also looks at the extent to which environmental safeguards are incorporated into the project operations of these development banks. To do so, the authors create a database of development bank finance in LAC from 2003 to 2014 and examine the environmental profile of such lending. Second, they conduct a comparative analysis of the environmental safeguards provisions of these banks operating in LAC.

Key Findings:

• Total development bank finance in LAC has stood at approximately 1.2 percent of GDP per annum since 2003. The emergence of Chinese and Brazilian development banks has helped fill a gap left by the World Bank.
• 33% of all development bank finance in LAC is not green. This significant amount of development bank finance flows into extractive industries, the generation of fossil fuels and conventional infrastructure projects.
• Green finance is 20% of total development bank financing in LAC. Three leaders in green financial flows are the Inter-American Development Bank, the World Bank and CAF-Development Bank of America.
• There is a lack of coherence in the monitoring and governance of development bank finance from a social and environmental perspective. Many large projects, whether classified as green or not, may not be well safeguarded and could bring significant risks to local communities, the environment and the balance sheets of development banks and private firms.

The authors recommend that development banks strengthen their capacity to invest in green finance and strengthen the governance of development finance in LAC. This report finds that significant effort will be needed to scale up green finance and to adequately safeguard both green and conventional development projects.