Promotion of green finance

Explanation

Green bonds

The IDB has been involved in pioneering activities to establish a regional green bond market in Latin America and the Caribbean. In 2015, during the Green Climate Fund’s first round of allocations, the IDB established a regional Energy Efficiency Green Bond Facility with a loan of $400 million. This Facility had the goal of creating a green bond market in the region to enhance private sector initiatives on climate change, addressing demand-side efficiency and mobilizing institutional funds at scale toward small- and medium-sized energy service companies.

The Bank has also directed energy into fostering green bond markets at the national level. In 2017, IDB supported Colombia with technical cooperation to issue the country’s first green bond of COL$200 billion, to fund projects that mitigate climate impacts as well as improve environmental performance of Colombian companies. In addition to the Green Bond Facility for private sector issuers, IDB is using technical assistance to support subnational entities and Sovereigns such as their support to Chile, which is the first sovereign green bond in the Americas.

In December 2019, the Bank announced its Green Bond Transparency Platform at COP25, a platform that potentially solves the problem of lacking information for investors by using blockchain technology to transparently collate various data points such as environmental impact and bond performance of various projects. The platform is currently in its beta phase, and is set to enter normal operation later in 2020. 

Greening the System

IDB’s tools to promote green financing and mobilize private sector investment include the IDB B-Bond structure. Similarly to an A/B bond structure where a bond is sold in part to investing partners, in the case of the B-Bond IDB Invest is the lender of record and administers the entire loan, still sharing the project risk with other investors. In this case, though, the B-lender is a special purpose vehicle or trust that funds itself by selling securities to institutional investors. This structure allows the Bank to finance projects with the help of investors who would not usually invest in projects with a longer timeline and higher risk attached.

Before the “merge-out” of the IDB private sector window, the financial markets division of IDB had a “Beyond Banking: banking on global sustainability” strategy which promotes sustainable social, environmental and corporate governance practices by financial intermediaries in LAC through six strategic pillars, one of which is ‘planet banking’.  As an outcome of the merge-out, IDB Invest established Blended Finance and Advisory Service teams to develop knowledge and close the gap of climate friendly infrastructure investments.

Prior to the last five years, the connection between climate risk and financial systems has not existed in Latin American and the Caribbean.  To bridge this gap, the IDB has launched a research program that culminates in two related reports: one to map current climate risks and financial systems in the region alongside four country deep-dives, and another to propose possible ways the Bank, regulators, insurers and central banks can foster resilience in financial systems. This program hopes to spur a dialogue between various actors that have a role in creating a sustainable financial system in the region. In December 2019, the IDB showed the importance of relationships with finance ministers with the announcement that NDC Invest and the Chilean Government were developing a Finance Strategy on Climate Change, due to be implemented later in 2020. The Bank states the importance of financial plans as member countries begin implementing projects to meet NDC goals, and that they “will continue to support the entire region with this crucial task”.

IDB has also provided thought leadership on the role of National Development Banks (NDBs) in green investment.  For example, the Latin American and Caribbean Green Financing (LGF) Platform is a platform supported by IDB that has been developed to respond to demand from NDBs for information and knowledge on green finance.  Other notable initiatives include the Financial Innovation Lab which has created investment vehicles and financial structures that maximize private sector leverage.

In addition, IDB and IDB Invest manage two further funds to promote climate financing:

• The Sustainable Energy and Climate Change Initiative Fund, which specialises in renewable energy, efficiency and biofuels;
• The Canadian Climate Fund for the private sector of the Americas , which provides concessional financings to projects that do not benefit from a sovereign guarantee, targeting the most vulnerable countries where possible.