Climate financing in Latin America and the Caribbean: How are public development banks supporting the climate transition?

Latin America and the Caribbean countries are paying a disproportionate price for the climate transition, given their low contribution to global CO2 emissions. Several countries in the region, mainly in the Caribbean, have some of the largest exposures to physical risks, despite their relatively small contribution towards global emissions (Figure 1). These risks are evident through the severe economic and human damage associated with climate events ranging from wildfires to floods, droughts and cyclones. Latin America and the Caribbean countries also face significant transition risks related to a high contribution from the agricultural sector, particularly in Central and South America. However, they are relatively less exposed than other regions in the world.

Climate-related financing needs for the region are sizeable, reaching between 1.9% and 4.9% of the region’s GDP per year ($110-290 billion) according to the International Monetary Fund and the Economic Commission for Latin America and the Caribbean. More than 60% of these needs are related to mitigation of physical risks, but investment needs for adaptation are also significant. This need for climate finance is set against a challenging macroeconomic and fiscal backdrop. Latin America and the Caribbean countries are currently facing a combination of low economic growth and limited fiscal capacity.

The Climate financing in Latin America and the Caribbean: How are public development banks supporting the climate transition? report assesses how public development banks are contributing to supporting the climate transition in Latin America and the Caribbean, what is holding them back from further scaling up green finance, and concrete policy recommendations.

Public development banks play an increasingly relevant role in leveraging public finance to address market failures and direct financial flows towards long-term sustainable investments.

• Public development banks contribute close to 50% of the total credit in the regions’ GDP, compared with 25% for the world.
• These banks provide additionality to commercial banks through capacity-building, affordable financing and innovative financing tools.
• Public development banks lend more compared to commercial banks to the sectors of economic activity most exposed to physical risks and also take more transition risk (Figure 12).

Much in line with the climate risks observed at the country level, public development banks have already experienced the damaging impacts of extreme weather events.

• 40% of public development banks experienced damage to their branches and headquarters in extreme weather events in 2023.
• For 59% of public development banks weather events contributed to a deterioration of their portfolio's asset quality in the same year (Figure 14).
• Around 46% identify micro-, small and medium-sized enterprises as the most affected borrowers.

An overwhelming majority of public development banks see climate transition as an opportunity, but they are more likely to be followers than leaders when it comes to defining a climate strategy.

• 93% of public development banks see climate transition as an opportunity rather than a risk.
• 77% integrate climate-related international standards, such as UN Sustainable Development Goals or the Paris Accords, into their practices.
• Around 7% of public development banks are still sceptical of the need for the green transition, not implementing any specific policies beyond minimum regulatory requirements.
• 46% of public development banks still only “follow” trends in the field with their motivation mostly competition-based and not driven by the results of a risk assessment.

Public development banks identify demand-side factors as the biggest barriers to further scaling up green lending (Figure 22).

• The clients’ lack of technical skills to make a bankable climate investment proposal, and climate adaptation being a low priority for clients are two major barriers to green lending.
• Clients are mostly unaware of the green finance opportunities available to them.
• Public development banks suffer from internal limitations related to the lack of standardised metrics for measuring climate risks in the industry (45% report it as a top three constraint), and their own lack of technical capacity and tools (36%).
• Limited access to long-term capital to match the long-term horizon of climate investments is still a significant challenge for 18% of banks.