Bank unveils green loans plan to unlock trillions for climate finance. IADB’s proposals involve lenders using public money to buy up renewable energy loans in poor countries

 

A street in San Pedro Sula, Honduras, devastated by a hurricane. IADB says the green loans proposal could be an ‘engine’ for growth. Photograph: Delmer Martínez/AP

 

Fiona Harvey Environment editor

 

 

An innovative plan to use public money to back renewable energy loans in the developing world could liberate cash from the private sector for urgently needed climate finance.

Avinash Persaud, a special adviser on climate change to the president of the Inter-American Development Bank (IADB), who developed the proposals, believes the plan could drive tens of billions of new investment in the fledgling green economy in poorer countries within a few years, and could provide the bulk of the $1.3tn in annual climate finance promised to the developing world by 2035.

“This could be an engine for green growth, and produce the trillions needed for climate finance in the future,” he told the Guardian. “It could be a transformation.”

 

His ideas will be set out in detail at a UN meeting in Germany this week, kicking off negotiations for the Cop30 climate summit that will take place in Brazil this November against a worrying global background for the discussions.

Having missed a deadline in February, the world’s largest economies still need to submit plans for their greenhouse gas emissionsbefore the Brazil summit, but so far only a few have done do so.

But research seen by the Guardian, carried out by the campaign group Oil Change International, shows that many developed countries are still planning to expand their extraction of oil and gas, despite promising at Cop28 in 2023 to “transition away from fossil fuels”.

The analysis found that the US, Canada, Norway and Australia were responsible for 70% of projected new oil and gas expansion in 2025-35.

Romain Ioualalen, the global policy lead at Oil Change International, said: “It is sickening that countries with the highest incomes and outsized historical responsibility for causing the climate crisis are planning massive oil and gas expansion with no regard for the lives and livelihoods at stake.”

At the two-week meeting in Bonn, which ends on 26 June, the vital issue of finance for developing countries – which they need in order to cut their emissions and cope with the impacts of extreme weather – will also come to the fore.

The proposals by Persaud and others to buy up loans to renewable energy projects in the developing world could allow billions of dollars of private sector cash to flood the sector, in a big boost to global climate finance.

The plan, which is being pioneered by the IADB, would involve getting taxpayer-funded development banks to buy existing loans to green projects in poor countries, which would free up investment from private sector lenders.

Such loans are relatively low risk because they are already performing – but because they are in developing countries, with credit ratings lower than those of rich states – mainstream private sector investors such as pension funds are often forbidden from touching them because of their strict rules on credit worthiness.

But if those loans are backed instead by development banks, which can provide guarantees against default, and which themselves have impeccable credit ratings, the “repackaged” loan finance can meet private sector criteria.

 

The Barbados PM, Mia Mottley, who launched a blistering attack on rich countries at Cop27 climate talks. Photograph: Independent Photo Agency Srl/Alamy

 

“The lightbulb moment was realising there was $50bn in performing green loans in Latin America,” said Persaud, a former adviser to Barbados’s prime minister, Mia Mottley, who has championed climate finance. “Why not buy that to enable new projects to be created?”

Key to the concept is that when the loans are bought up by the development banks, which pay a small premium to the current private sector creditors that own the loans, the originators of the renewable energy projects must agree to use the finance they gain access to in new projects.

This creates a “virtuous circle”, by which when the loans are bought up, developers – who already have expertise in setting up successful renewable energy schemes – seek new opportunities, which leads to further investment.

IADB is working on launching the programme now, and is expected to send a request for proposals within the next few months, before Cop30. The initial portfolio of loans is likely to be about $500m to £1bn.

Several private and public sector experts said Persaud’s ideas could have a big impact.

Mattia Romani, a senior partner at Systemiq, a consultancy that is working with Cop30 on climate finance, said: “It is a very powerful initiative, both pragmatic and innovative. Given the constraints we will inevitably face in the coming years, securitisation is one of the few realistic tools to reach [the sums needed].

“This initiative is designed to unlock institutional capital by leveraging the balance sheets of domestic commercial banks – securitising their loans so that they can meet the fiduciary needs of institutional investors, and turning them into engines for transition finance. What’s new is the direct engagement with local banks – we are starting with a pilot in Latin America.”

Climate breakdown will hit global growth by a third, say central banks New modelling finds risk to global economies much worse than previously thought, but group of central banks says even this may be an underestimate

 

The business losses alone from the devastating floods in Valencia have been calculated at well over €10bn. Photograph: Ana Beltran/Reuters

 

The physical shocks caused by climate breakdown will hit global economic growth by a third, according to a risk assessment by a network of central banks.

The rise in the estimated hit to the world’s economies as a result of the shocks from flooding, droughts, temperature rises, and mitigating and adapting to extreme weather was the result of new climate modelling published this year.

The Network for Greening the Financial System, a membership body of global banks and financial organisations, said in a report this week that the huge increase in the risk from physical shocks to the economy marked a considerable change in the overall severity of the damage caused.

The report was published as the business losses alone from the devastating floods in Valencia, which killed more than 200 people, were calculated at well over €10bn (£8.3bn).

 

“This new study is based on the most recent climate and economic datasets,” the report said. “They offer highly granular and robust data with excellent geographic and temporal coverage. With the consequences of climate change gradually becoming more apparent, adding the most recent data makes our estimates much more robust.”

Despite the increase in risk to global economies, some experts say the analysis is a huge understatement of the impact climate breakdown will wreak on economic growth.

Sandy Trust, an actuary who works on sustainability and the climate crisis, said the small print in the report by the network of central banks revealed they had failed to take in to account the impact of climate tipping points, sea temperature rises, migration and conflict as a result of global heating, human health impacts or biodiversity loss. Climate tipping points, for example the melting of the Greenland ice sheet, and the deforestation of the Amazon, are critical thresholds that, if crossed, will lead to huge, accelerating and sometimes irreversible changes in the climate system.

 Climate tipping points, for example the melting of the Greenland ice sheet, are critical thresholds that, if crossed, will lead to huge changes in the climate system. Photograph: Luis Leamus/Alamy

 

Trust said: “This is a massive one-third hit from physical damage on GDP. It has increased more than five times, from about 6% to 33%.

“But while this is a much more severe damage risk, it is by no means comprehensive. The analogy I would use is a model of the Titanic where you can see the iceberg, but the modelling fails to recognise that there are not enough lifeboats on board, or that the cold water is a threat to human life. So this report is still systemically underestimating the risk.”

The NGFS is a group of global banks that provide environmental and climate risk modelling in the financial sector. Its update on climate risks using the new methodology foresees more than 30% losses due to the climate crisis by 2100 from a 3C rise in global average surface temperatures. The report said: “The new damage function does a much better job than its predecessor at representing the physical risks posed by climate change.”

This is a vast difference compared with previously used economic predictions that damages from global heating would be as low as 2% of global economic production for a 3C rise in global average surface temperature.

Yet the group warned that the future economic outlook may be significantly worse. “It cannot be excluded that the economic effects of climate change might turn out to be even more severe than visualised under the NGFS scenarios, for instance, if certain tipping points are reached,” the report said.

“Thus, users should also take into account the tail risks of climate change, along with other risks such as nature-related ones, which are not necessarily captured by these scenarios.”

Trust wrote a report last year with the University of Exeter, which said widely available climate crisis scenarios systematically underestimated the risks, and he said underestimating the impact of global heating was “extremely dangerous”.