We live in a world plagued by crises, wars, diseases and economic hardships that have had a terrible effect on human well-being in recent years. Most alarming of all is the increasingly harmful impact of climate change, which puts the very existence of countless species, including ours, at risk.
We are running out of time to fix the problem. The Intergovernmental Panel on Climate Change recently warned that the planet’s temperature is likely to rise 1.5°C above pre-industrial levels in the next ten years, and that it will exceed that critical threshold if immediate and massive reductions in emissions are not implemented. We could be entering a cycle of doom where the consequences of climate change distract attention and divert resources from addressing its causes, further hampering progress as the effects worsen.
Billions of dollars are being invested to avoid this fate, but it will take trillions of dollars. Where will they come from? High levels of public debt limit many countries’ policy options, and there are not enough bankable projects to generate the private investment that is needed.
Multilateral development banks (MDBs) like the Asian Development Bank (AsDB), which I chair, can offer much-needed finance and expertise for climate progress. But we can’t take bold action without radical changes to our operations. I believe MDBs need to do more, and faster, with the substantial resources they command. It is not enough to put climate action at the top of the development agenda. The climate crisis demands a drastic change in our mentality as development professionals.
The risks are greatest in Asia and the Pacific. In addition to representing more than a half of the world’s greenhouse gas emissions, the region is warming faster than anywhere else and is extremely vulnerable to rising ocean levels, extreme weather events, and biodiversity loss. These trends will only escalate if MDBs do not implement changes in the way they operate.
To improve humanity’s chances of winning the battle against climate change, MDBs must change in three ways. To begin with, some basic principles of its operations must be reformulated, especially the traditional country-focused strategy. The costs of climate change and the benefits of investment in adaptation and mitigation transcend national borders, so we need a more regional and global perspective that leverages the unique power of convening and coordination in all political jurisdictions.
Initiatives like the Energy Transition Mechanism, a collaborative and scalable blending instrument to accelerate the closure of coal-fired power plants in our region, are a step in the right direction. Led by AsDB, it combines concessional resources from donors, philanthropic sources, among other things, with market-rate funds from development finance institutions and commercial investors.
But much more is needed. Greening trade policies and agreements can reduce the negative environmental effects of trade, including from the export of waste and plastics to developing countries. Similarly, more accurate pricing of manufacturing emissions in trade agreements can help prevent “brown” industries from relocating to poorer countries with less stringent environmental regulations. Greater coordination of cross-border carbon pricing mechanisms will also be needed to encourage greener manufacturing and energy production.
The second change that MDBs need to adopt is a significant increase in climate investment. G20 members have said that by implementing reforms to manage capital more effectively, MDBs could increase lending by hundreds of billions of dollars without jeopardizing their AAA credit rating.
I agree that we must do more with what we have. AsDB is reviewing its capital adequacy framework to explore how adjustments such as a redefinition of risk tolerance and balance sheet optimization can create more room for higher lending volumes. This is an important step, but more innovation is needed to generate additional resources while ensuring they incentivize bold climate action.
To this end, it is vital that MDBs expand their capacity to mobilize private investment for a broader range of climate programmes, including through blending mechanisms. They should lead a global expansion of innovative financing structures, fostering greater cross-border and public-private collaboration on climate action.
Another way to free up additional capital for climate-related investments is financial risk sharing, which could take the form of conditional guarantees from donor countries. Capital that MDBs would normally set aside for default risk could instead be used to generate additional resources.
MDBs should also make greater use of concessional finance, including subsidies, to improve the bankability of projects. This is especially important for middle-income countries, which produce significant emissions but generally cannot access soft credit for development projects.
Finally, our institutions must become more efficient and effective. Incorporating global and regional development priorities into our business model requires greater climate and sectoral expertise that can be mobilized across borders. Private sector and public sector experts, whose work rarely overlaps with that of most MDBs, need to collaborate to identify impediments to private investment in areas such as renewable energy, and to design policies that can unlock the investment.
AsDB’s new operating model, now imminent, will radically change our structure to reduce organizational silos and increase climate-related and private sector work. I see this as just the first step on a path of reform that all MDBs must undertake to respond effectively to rapidly evolving challenges like global warming.
The sheer dimension of climate change can make us feel powerless. But if we act boldly today, we can avoid the cycle of calamity. I believe that the MDBs can rise to the challenge, as they have in response to other global crises. Avoiding a catastrophe of this magnitude requires nothing less.
Masatsugu Asakawa is President of the Asian Development Bank.
