Low carbon economy; Climate finance; Multilateral Development Banks; Green Bonds; Climate Bonds
The deep connection between the financial system and ecological sustainability has attracted increased interest from the academic community. Specifically, the shift to a low carbon economy is now the center of the public debate. Climate change remains a direct and indirect threat to the global economy, significantly affecting the financial sector. Financial institutions continue implementing new strategies to shift their position and align their mandates towards a low carbon economy. Financial Institutions are integral in bankrolling emerging nations’ efforts to moderate emissions and protect against climate change effects and are the primary sources of external finance, including government, public and private sectors. These financial entities encompass the International Monetary Fund (IMF) and the Multilateral Development Banks (MDBs). Financial institutions provide specialized funds, such as the Green Climate Fund, the Adaptation Fund, the Climate Investment Funds, Bilateral, and National Development Finance Institutions. There search paper evaluates the existing contribution by financial institutions, specifically Multilateral Development Banks, towards bridging the financial gap and innovations necessary for realizing a low-carbon economy. Besides, it assesses key challenges facing institutions attempting to incorporate climate change-related consideration in their lending approaches. The study also explores many financial instruments that help channel funds into solutions concerning low carbon economy challenges coupled with the barriers limiting scaling the financial instruments and leveraging financial Multilateral Development Banks’ full potential towards transitioning to a low carbon economy. The study employed interviews for data collection and gathered unique insight instead of compiling a comprehensive list of existing practice or similar data for benchmarking the survey. Participants included stakeholders from major Multilateral Development Banks. Study findings indicated that Multilateral Development Banks are essential vehicles for funding projects generally not bankrolled by commercial banks for multiple reasons. The study further underlines Multilateral Development Banks’ role in mobilizing funds, including acting as a channel for donors through climate funds and private sector capital. The study outlines Multilateral Development Banks’ role in the transition. It identifies vital instruments, such as green bonds and guarantees adopted by development banks to promote and fast-track the transition to a low carbon economy.