Promotion of green finance

Explanation

As the region’s largest multilateral financier, the IDB Group offers a variety of financial and non-financial support (e.g., technical assistance, convening arrangements) to sovereign and private sector clients, which enables the promotion of green finance. Within the IDB’s public arm, the Connectivity, Markets and Finance (CMF) division is mandated to develop the green finance market and to leverage private investments in Latin America & the Caribbean (LAC).

Examples of the innovative financial mechanisms deployed by the IDB include loans from the flexible financing facility which enable the adjustment of financial terms during the project approval process and throughout the lifetime of the project to address changing needs. Furthermore, as part of its currency risk management scheme, the allows borrowers to obtain financing either in their local currency or in alternative regional currencies at any time during the lifetime of a loan. This is particularly important to foster the investments at scale needed to enable the energy transition in LAC. At COP28, the Bank (along with Brazil’s Ministry of Finance) announced the creation of a financial solutions platform aimed at reducing foreign exchange risk for investments “aligned with socio-environmental principles and climate change mitigation and adaptation”. The platform’s initial coverage of up to USD 3.4 billion seeks to mobilise green investments within the scope of Brazil’s Green Transformation Plan.

The IDB is also developing guarantees for debt-for-nature conversion, for example in Barbados and Ecuador. Furthermore, the Bank has developed the IDB CLIMA pilot programme, which aims to reduce the capital costs associated with climate- and biodiversity-related investments by rewarding borrowers with grant finance for achieving nature and climate objectives. IDB CLIMA has initially committed to fund ten pilot programmes, with a total funding envelope of USD 1 billion. In November 2024, an investment loan for Colombia to accelerate its just energy transition was approved alongside a technical cooperation grant from IDB CLIMA, marking the first operation of the pilot programme.

Another instrument used by the Bank to promote green finance is thematic bonds. For example, in 2018 the IDB provided technical assistance to Mexico’s Trust Funds for Rural Development to issue its first internationally certified agricultural bond. More recently in 2021, the IDB provided financial support and technical assistance to Eletrobras, a Brazilian company in the electricity sector, to make its debut in the green bond market. Additionally, through its long-standing IDB Lab (formerly known as the Multilateral Investment Fund) the IDB Group incubates, pilots, and tests high-potential projects and early-stage ventures. Eligible projects in the climate sphere are typically in the renewable energy, sustainable transportation, and climate-smart agriculture sectors. Once these ventures are tested, IDB Invest, the private arm of the IDB Group, can take them on.

IDB Invest is a key piece in the puzzle of private finance mobilisation for the IDB Group’s promotion of green finance. IDB Invest provides financing to a variety of clients, ranging from small and medium-sized companies (SMEs) to larger enterprises, financial institutions, and investment funds. As part of this, it offers a variety of guarantees – up to 100% – with different structures, for example risk-sharing guarantees and loss-sharing arrangements. Furthermore, IDB Invest provides bridge loans, partial credit guarantees and mezzanine financing solutions, among other instruments, to enable investments in climate-friendly infrastructure in the region. Specifically in the case of green credit lines, IDB Invest had created 35 green credit lines in 15 LAC countries as of 2019, reducing an estimate of 41 million tons of CO₂ equivalent per year.

For IDB Invest, the “Investing in Reversing” strategy, launched in 2019, has been key to deploying this wide range of instruments. As part of the IDB Group’s Paris alignment pledge, all IDB Invest eligible operations should have been aligned with the Paris Agreement as of January 2023. Efforts to meet this pledge have been guided by the application of the IDB Group’s Paris Alignment Implementation Approach (PAIA) and accompanying sector guidance.

Greening the system

The IDB Group supports the development of green finance markets in the region through the following key approaches:

1. Development of the green bond markets.
2. Information sharing and knowledge transfer.
3. Standardisation of sustainable finance frameworks.
4. Pushing for increased transparency and accountability of green finance.

Regarding information sharing and knowledge transfer, the IDB recently (2023) started a technical advisory programme on Paris Agreement with the Association of Latin America Development Finance Institutions (ALIDE), aiming to provide support to National Development Banks in their Paris alignment process. Furthermore, in 2017 the IDB founded the Brazilian Financial Innovation Laboratory in collaboration with the Brazilian Securities and Exchanges Commission, the German Development Agency and the Brazilian Development Finance Institutions Association. This forum brings together approximately 190 institutions from the Brazilian financial and capital markets to exchange experience in the use of innovative financial instruments for sustainable development in the region.

In terms of other relevant knowledge sharing and exchange networks, the IDB is a founding member of the public–private Green Finance LAC Platform, which was launched in 2018. The IDB also facilitated the creation of the Regional Climate Change Platform of the Ministries of Economy and Finance of the LAC region. This platform aims to promote the exchange of lessons learned to improve fiscal policy responses to climate change and support the development of green taxonomies. The Bank acts as the platform’s technical secretary, helping to coordinate the dialogue among the different countries.

The IDB joined the Network of Central Banks and Supervisors for Greening the Financial System as an observer in 2019. As part of this role, the IDB uses its convening power to leverage its existing networks of financial institutions, regulatory entities, and public and private investors to promote the sustainable finance agenda in the LAC region, including standardisation where relevant. As a project level example, the IDB has funded the Chilean Financial Markets Commission to pilot climate scenario analysis and stress testing tools for financial supervision. The IDB is also working with member countries, insurance companies and other financial institutions to develop broader and deeper local risk markets in Latin America. This work is made up of two aspects: (1) improving regulatory and supervisory frameworks to ensure a conducive environment for private sector development; and (2) offering co-financing to prospective private sector partners looking to provide natural disaster risk transfer products.

Relatedly, the IDB Group has authored several publications contributing to the climate-relevant policy dialogue in LAC, such as notably on designing suitable fiscal policies for decarbonisation and resilience. 

Green bonds

The IDB’s award-winning Green Bond Transparency Platform is a standard-setting initiative. This platform, which was launched in 2021, promotes the standardisation of green bond reporting to improve certainty and reliability for green investment in the region. As of 2023, the platform covers 73% of LAC’s bond issuances, amounting to USD 26.8 billion. Due to its rapid uptake, it won the “Initiative of the Year – Green Bond 2022” award from Environmental Finance, a news and analysis outlet on sustainable finance.

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