Development banks and finance institutions must step up if we are to make the sustainable recovery needed after the COVID-19 pandemic, write Rachel Kyte and Laurence Tubiana.
Rachel Kyte is Dean of The Fletcher School and Board member of Climate Policy Initiative (CPI). Laurence Tubiana is CEO of the European Climate Foundation (ECF).
This week marked the first-ever global summit of development banks, a group comprised of 450 financial institutions that together manage a massive $11.2 trillion toward economic activities for the public good.
While we applaud the organizers of the Summit for convening this important group during this critical time, we also call on these banks, and other important actors in development finance, to step up.
Now, more than ever, development finance has a role to play in addressing both short and long-term needs, setting market signals, and taking risks the private sector can’t bear – all roles crucial for setting the trajectory toward a more sustainable future.
COVID-19 has created an unprecedented health and social crisis with a dramatic impact on the economy and people globally, causing the largest recession since World War II and high unemployment in certain regions and countries.
Relief measures have been swift and massive. The Harvard Business School indicates that governments and central banks announced over $10 trillion in fifty countries between March and May 2020, alone.
The IMF has provided $100bn in emergency finance and debt relief (to 29 countries so far) and the G20 agreed a debt service suspension initiative covering 73 low and middle income countries. Development banks – particularly the big players – have also announced some relief with the World Bank Group pledging $160bn in recovery financing.
But measured against the breadth and depth of the economic setbacks spurred by COVID-19, it is too little. On their own these measures do little to shift the trajectory of growth and development to one that builds the resilience we needed for the crises that were upon us before the pandemic hit and which will be with us long after we have learned to live with the virus – climate change and skyrocketing levels of inequality. The business-as-usual finance, despite an anything-but-business-as-usual scenario, will likely lock-in economic activities that are the opposite of what’s needed for the future.
Those trying to respond to the crisis are not only pressured by politics-as-usual, but also struggling to maintain the bandwidth to focus on immediate relief from the pandemic, and re-emergence of their economies and an eventual rebalancing of priorities.
Yet, if the crisis has done anything, it has demonstrated the need to re-think how we are operating as a society – it has exposed the risks, the inequalities, and the downsides of short-termism.
However, an economic recovery that is socially just and environmentally sustainable, addressing both people’s needs for decent work and health and the planet’s need for protection, is not only attainable but also brings better outcomes in the short and long runs.
Development financiers, like those meeting this week, in their unique role as long-term financiers with a public good interest, can employ a number of new solutions that break this mould. They can link loans to both projects and intermediaries to sustainable outcomes; channel financing to crucial job-creating sectors such as energy efficiency or climate resilient water infrastructure; and eliminate all financing of fossil fuel projects that are unlikely to be financially viable in the future.
To get this done, development banks need to collaborate more effectively – and ambitiously – with each other, with governments, and with the private sector. If they cannot their owners should consider reconfiguring their capital and capabilities so that they can be more agile and ambitious. They also need other actors in the development finance ecosystem to play their part – including for policymakers and governments to help direct mandates; central banks and supervisors to link credit availability to sustainability and require financial firms’ to have targets related to broader economic risks like climate change; and for private sector actors to continue momentum toward linking environmental and social metrics to shareholder engagement and assessment of their own portfolios.
To turn these words into action, we have convened an Advisory Council of leading experts from governments, central banks, development finance institutions, civil society organizations, academia, and the private financial sector to develop a set of Principles for Financing the Sustainable Recovery. These principles can act as guardrails for economic recovery to ensure we do not squander this once in a generation opportunity to tackle the central challenge of our time. They are designed to be shared across the financial system to help ensure that moving forward, recovery finance is delivered consistently with the Sustainable Development Goals and Paris Agreement. We hope that the UK and Italian governments in particular will take these principles on board. They are uniquely positioned to lead as they hold the co-presidency of COP26 and the chairs of the G7 and G20 respectively.
The next wave of relief and recovery will be crucial for the world’s future. We urge leaders to use it to take on an immediate and bolder shift to a sustainable financing system.