G20 & beyond: Multilateral banks take centre stage

As Multilateral Development Banks lead the charge to achieve sustainable development goals, here are four clear paths they should follow

Now that India has scored a perfect 10 in G20 diplomacy and achieved a consensus Delhi Declaration, the obvious question is: What next?

Arguably, the pandemic and the Ukraine crisis have brought the world together to unite against climate change, one of the commonly perceived threats rapidly engulfing the world. Out of the 12 commitments in the Declaration, eight refer to sustainable growth, climate change and inclusivity.

A key role is assigned to multilateral development banks (MDBs) in providing climate finance from their own resources and mobilising finance from other financial institutions that have the capital, not necessarily the appraisal capacity. Asian Development Bank (ADB), for example, aims to achieve a co-financing ratio of 1:2.5 by working with other lenders in Asia and the Pacific.

The reform pathway for MDBs adopted in the Declaration has been under discussion for some time, jointly pursued by developing and developed countries. The G7 countries led by the US have been pushing MDBs to leverage their balance sheets better and mobilise almost $200 billion for lending, particularly for climate finance. This is clearly in response to the repeated criticism by developing countries that Annex 1 countries (as per the Kyoto protocol) have failed to provide $100 billion in additional finance for climate action. The non-fulfilment of this commitment has created a trust deficit between those historically responsible for emissions and those currently contributing to the carbon load.

MDBs have since taken centre stage by declaring that all their new sovereign and non-sovereign lending would be Paris-aligned by 2023 and 2025, respectively, and by enhancing their ambition for providing climate finance. For instance, ADB increased its climate finance goal from $80 billion to $100 billion between 2019 and 2030.

There is also the unfinished agenda of implementing the Sustainable Development Goals (SDG), which cover multidimensional aspects of the socio-economic development of developing countries and which were hitherto at the core of the MDBs’ country strategies. At the midpoint to 2030, only 12 per cent of the SDG targets are on track. The Declaration speaks of pursuing reforms for better, bigger and more effective MDBs to address “global challenges to maximise developmental impact”.

There are four clear paths for MDBs to pursue following the Declaration.

1. Leverage their balance sheets and create more financing headroom. The Roadmap for Implementing the Recommendations of the G20 Independent Review of MDBs Capital Adequacy Frameworks (CAFs) is already endorsed. As MDBs examine its implementation, they must safeguard their “long-term financial sustainability, robust credit ratings, and preferred creditor status”. While adapting definitions of risk appetite, MDBs need to undertake a dialogue with credit rating agencies in order to preserve their credit ratings to enable capital raising at low cost. As MDBs work on their Evolution Roadmap, the resolution is expected to provide “further impetus on CAF implementation”. This could reach a final stage at the World Bank Annual Meeting in Marrakesh, by which time Volume 2 of the report of the Independent Expert Group on Strengthening MDBs would be available.

2. Mobilise private sector finance, including philanthropic capital. The refocusing on SDGs is important and, together with the climate shift, would call for increased spending. Poverty reduction programmes, education, health, and climate, now called a “public good”, need increased public spending for which governments don’t have enough resources. Therefore, MDBs are called upon to leverage private capital through innovative financing models and new partnerships. Stronger MDBs may be more effective in mobilising financing from “all sources for a quantum jump from billions to trillions of dollars for development,” and private enterprise would play a critical role in “accelerating growth and driving sustainable economic transformations”. MDBs will have to create meaningful platforms to attract private capital, and develop effective systems for its efficient deployment.

3. Create innovative financing mechanisms. Blended financial instruments, risk-sharing facilities, hybrid capital, callable capital, guarantees, and green bonds need to be employed by MDBs to support Nationally Determined Contributions (NDCs), carbon neutrality and net-zero goals. An innovation by ADB is the Energy Transition Mechanism, which seeks to accelerate early retirement of coal-fired plants and replace them with renewable energy to meet the energy needs of developing economies. Pilots are underway in Indonesia, the Philippines and Vietnam, while discussions are ongoing with Kazakhstan and India. Similarly, the World Bank is pursuing Just Transition Initiative in order to accelerate decarbonisation in a rational way. While banishing financing of coal-based thermal plants, MDBs have made a conditional exception of natural gas as a transition fuel, if accompanied by a credible pathway of decarbonisation.

4. Assist the developing member countries in implementing their NDCs. G20 has given a call for setting up “a New Collective Quantified Goal (NCQG) of climate finance in 2024, from a floor of $100 billion a year” in view of the need for $5.8-5.9 trillion in the pre-2030 period required for developing countries, in particular for their needs to implement their NDCs, and $4 trillion per year for clean energy technologies by 2030 to reach net zero emissions by 2050. Besides providing capital, MDBs should play a prominent role in supporting developing countries in formulating effective strategies and policies, capacity building, project formulation, devising pipelines of investible projects, monitoring, and credible impact assessment.

As global leaders continue to grapple with the need to enhance climate ambitions, it would be interesting to see how MDBs prepare for the larger role that they are expected to play in mobilising the resources needed to translate the high-sounding resolutions.

The writer, a former election commissioner and finance secretary, served as vice-president of the Asian Development Bank