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The Scope for More Multilateral Climate Finance

Multilateral development banks are uniquely positioned to help governments make the necessary investments to achieve a carbon-neutral future. But to take advantage of MDBs’ full potential, capital-adequacy requirements that limit how much risk they can assume must be loosened.

PARIS/WASHINGTON, DC/LONDON – With climate change already affecting the lives and livelihoods of millions of people around the world, the need for a coordinated global response has never been more urgent. But to mobilize the huge sums required to finance the investments we need to ensure a climate-resilient future, the world must establish institutions that can support large-scale green projects and programs in developing countries. Fortunately, we already have such institutions in place: multilateral development banks (MDBs).

When multilateral lending institutions emerged in the aftermath of World War II, some questioned their financial sustainability and capacity to mobilize private capital for public projects. But the MDB model has proven to be dynamic and able to leverage governments’ capital contributions many times over. Given their access to cheap funds, highly rated MDBs can also offer long-term loans at relatively low cost, making them well-positioned to provide the scale of support needed to address the complex challenges of climate change.

But the MDB model has yet to achieve its full potential. A recent independent report commissioned by the G20 finds that multilateral lenders are constrained by capital-adequacy requirements that place excessive limits on how much risk they can assume. As a result, capital is being underutilized at a time when the world needs it most. The report recommends a series of measures, including more accurate risk assessment, that would enable MDBs to use capital more efficiently and increase their lending capacity. Over time, according to the report, these reforms could increase MDBs’ lending capacity by hundreds of billions of dollars without hurting their AAA credit ratings.