The landscape of development finance has changed significantly over the last five years. There has been a dramatic increase in private capital flows to developing and transition economies, a shift in the ratio of public to private financial flows, and an increase in the share of securitized investments as a proportion of the total. The concentration of these flows in a few countries and regions has led to a widening gap -- obscured by aggregate statistics -- between the poorest countries and those that have successfully attracted the lion’s share of the increase.

The environmental implications of the surge in private capital flows to developing and transition countries are complex, contested, and poorly illuminated by empirical data and analysis. Increased investment in area- and sector-specific data and analysis is essential for improved understanding of those implications. Nevertheless, the increasing scale and accelerated rate of investment, as well as its increasingly private and securitized character, raise concerns about its direct and indirect impacts on environmental sustainability, in particular the role of large-scale investment in infrastructure that is locking developing societies into energy-intensive development trajectories.

The landscape of institutional mechanisms to govern the environmental impacts of international financial flows is currently characterized by significant gaps and discontinuities, and important Aresponsibility vacuums” exist at global, national, and sub-national levels. The ability of governments of developing and transition countries to exert influence over the environmental character of foreign investment is often constrained by capacity and legitimacy deficits. Governments of industrialized countries face legitimacy and capacity deficits of their own, particularly with respect to the integration of foreign economic and environmental policies, and in the harmonization of standards across countries.

In the multilateral realm, the infrastructure of intergovernmental environmental organizations and agreements is weak; the infrastructure governing trade, investment, and finance provides inadequate coverage of environmental concerns; and articulation across the two arenas is poor. Public interest organizations have an important role to play in defining and bridging key Apolicy communities” and associated institutions related to international investment and the environment. Continuing engagement with the World Bank and other international financial institutions at a level disproportionate to the financial flows that they control directly is justified both by the leverage points that those institutions provide in national-level policy-making, and by the need to consolidate reforms achieved thus far.

Influencing private capital flows controlled by transnational corporations and the financial services industry will be difficult, and will require strategies that build on, but go beyond, the experience of the corporate accountability movement. Direct engagement of international business by the public interest community should be highly selective, and focus on those industry segments and companies for which improved environmental performance is in their own self-interest, or for which opportunities to build alliances for policy change are ripe.

While important threats to environmental sustainability must be engaged at global and local levels through international institutions and project-specific interventions, significant opportunities to Ashift the curve” remain centered at the national level in developing and transition countries. Effective engagement of those opportunities will require increased issue-specific and geographic focus. Choice of issue focus should be based on a joint Asignificance test” for environmental sustainability and sensitivity to international financial flows; choice of country focus should be based on the area’s significance for the issue, opportunity, and portfolio diversification.

Effective engagement of these opportunities by the public interest community will also require an investment in broad-based basic literacy about macroeconomic and financial issues and institutions, as well as access to more in-depth expertise through staff recruitment and collaboration with other organizations. Investment in the capacity of partner organizations in developing and transition countries and in the cultivation of international networks continues to be a high priority.