How are public development banks in Latin America and the Caribbean supporting the climate transition? There’s a glimpse of the report coming out mid-October this year

By Ricardo Santos and Joana Conde, European Investment Bank.

Banks know that climate change is hurting their businesses and also see climate as a business opportunity but need to build more technical capacity for themselves and for their client to be ready to address these problems in a big way.

This is one of the findings in a joint survey between the European Investment Bank/and ALIDE that assessed how public banks in Latin America and Caribbean are supporting the green transition and what is holding them back.

We surveyed 24 public development banks in 14 countries to understand their climate action plans, how they manage climate risks, how they measure the impacts of climate change, and what obstacles are stopping them from making more loans for the green transition.

A significant share of banks told us they are feeling the consequences of extreme weather events on their own physical assets, for example their branches. And a majority of their loan portfolios are being hurt by climate change.

Even with all these problems, roughly half of the banks are following only a few of the climate-action trends in the banking sector to stay competitive or are even sceptical about the changes required to make the green transition.

One of the main obstacles, the banks say, is that clients see the climate is a low priority. Also, clients say they lack technical expertise or knowledge of lending products, and they often don’t know how to apply for the right climate lending.

Surprisingly, the banks said that access to long-term capital is one of the smallest obstacles to giving more climate financing.

Public development banks mitigate physical risks

A previous EIB study showed that Latin America and Caribbean countries are paying a disproportionate price for the climate transition, with some of the largest exposures to climate risks, in particular physical risks.

In another study, we saw that commercial banks were mostly exposed to climate risks,  particularly physical ones, through the structure of their loan portfolio. This happens mainly through lending to corporates operating in vulnerable economic sectors, such as agriculture, mining and tourism.

In an upcoming recent report, we will also show that public development banks are generally fulfilling their role as shock absorbers that reduce physical climate risks. They are playing this role by lending even more money to climate-challenged sectors.

Climate transition as an opportunity

Because public development banks are so important in the region, we dove deeper into their work when it comes to climate action, the steps they have taken so far, and what’s holding them back from offering more green finance.  

Some other key finding from our survey of public banks in 14 Latin America and Caribbean countries:

• Climate-related weather events have damaged the physical assets of 42% of public development banks and deteriorated the asset quality of the portfolio of another 61% in 2023.
• 92% of the banks see the climate transition as an opportunity as opposed to a risk
• 77% are following the targets set in the Paris agreement
• only 50% see themselves as leaders or promoters of climate transition.
• 42% are followers of industry practices mostly to remain competitive
• 8% are still sceptical about the needs of a green transition

Around 79% of public development banks are already offering green products, while 17% are planning to do so soon. While public development banks seem to be rather advanced in more established best-baking practices for green banks, they are behind on more emerging trends – 52% hire climate technicians (e.g., engineers), 54% have a dedicated climate risk team and 50% include climate as “KPI”.

Main obstacles are client-related

When asked about the main constraints to green lending, public development banks first identify client-related factors.

Around 58% of banks say that climate strategy having a low priority is one of their top-three barriers to lending.

The public development banks also surveyed the clients’ lack of technical capacities or knowledge of available products and how to apply.

Only after these factors, public development banks mention their own shortcomings, such as their own risk management, monitoring & impact measurement practices.

What follows is the lack of access to long term capital – potentially due to a legacy of abundant liquidity or due to an increasing push by multilateral institutions to finance the green transition.

Finally, comes the misalignment of climate strategy and the public development banks’/clients’ commercial goals and the risks associated with climate lending. 

Building technical capacity

The message from our survey is clear: the main action point for large multilateral development banks and international financial institutions, like the EIB or ALIDE, to support climate financing seems to be mainly through building technical capacity, for example through technical assistance programs.

A good example of such programs is the EIB’s Greening of the financial sector technical assistance that covers so far more than 10 countries in Africa, Central Asia and Europe.

In the next steps of our study, we intend to complement the picture of climate by public development banks, adding elements such as, how have climate related flows to Latin America and Caribbean evolved by type of issuer and sector, and how public development banks climate financing compares with each country fiscal capacity.

We will also compare this survey’s results with other EIB surveys in different regions and with other players such as commercial banks and corporates.

The report comes out in mid-October.