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Greening the IDB's Lending Portfolio

As the Inter-American Development Bank (IDB) celebrates its 50th anniversary, Latin America is struggling to address the financial crisis and climate change.

To address the financial crisis, the IDB has focused on reinforcing Latin American economies with policy advice and special financial instruments, such as a $6 billion emergency liquidity fund. In a recent interview, IDB President Luis Alberto Moreno pointed to investment in infrastructure projects as central to economic recovery and growth in the region:

These projects not only stimulate the economy but ensure future growth... It is important to have in mind that there is no proven alternative to trade and integration as a path to prosperity and poverty eradication.

However, the IDB is missing an opportunity to help countries adopt “green” development and stimulus policies, such as those being pushed by the US government. A recent report by the UN Economic Commission for Latin America and the Caribbean (ECLAC) found that of the 32 countries reviewed, only Brazil has implemented any “green” measure as part of its response to the crisis. Recovery programs such as those recently adopted in the US present promising new approaches to meeting infrastructure and economic needs more sustainably.

At a more basic level, there is a lot that the IDB can and should do to "green" its own lending portfolio, particularly with respect to consideration of climate change. For instance:

IDB Can Do More on Climate Change

IDB can play a more central role in financing low carbon and climate resilient development. In Latin America, IDB is active in sectors that are key to reducing greenhouse gas emissions, such as energy, transport, forestry and agriculture. While it has made efforts to mainstream climate change considerations into its lending including by launching the Sustainable Energy and Climate Change Initiative (SECCI), these programs remain at the margins of its core business. IDB can do more to scale up its efforts to integrate climate change into its operations.

Climate Change Must Be Integrated Into Energy Lending

In a review of IDB energy lending between 2000 and 2007, WRI found that 83% of the portfolio ignored climate change. During this time period, IDB was the worst performer as compared to its MDB counterparts, with 4 consecutive years (2002-2005) where none of its energy investments considered of climate change (see charts).

While the run-up to the launch of SECCI led to a small increase in 2006 energy lending that considered climate change, 2007 saw a decrease, with the majority (88%) ignoring it completely. In a forthcoming update to this analysis, WRI found improvements in 2008, where most of the projects in its energy sector portfolio mentioned SECCI. However, not all of them explained exactly how they would carry out their climate change related objectives.

Support Client Governments To Create Enabling Environments For Low Carbon and Clean Energy Development

It is critical that IDB supports the establishment of the right conditions to encourage low carbon and clean energy development. This includes support for policy, regulatory and governance reforms that address domestic barriers to investment in clean energy. These barriers may include energy pricing structures and conventional energy subsidies that reduce the viability of clean energy projects. They may also include a lack of capacity within regulatory institutions to address clean energy, or within electricity utilities to promote efficiency and renewables. IDB can help to address these significant challenges.

The IDB’s Electricity Sector Support Program for Nicaragua, financed in 2007 shows that IDB has the capacity to promote low carbon and renewable energy in its projects. This program is an electricity sector modernization and optimization program that is not specifically focused on clean energy projects, but integrates the concepts of renewable energy and energy efficiency into its design. Renewable sources are considered as part of the portfolio of resources: large-scale hydropower and thermal energy are mentioned.

Additionally, the program will aid the Government of Nicaragua in promoting energy efficiency on both the supply and demand side. The program will help the government foster a “culture of efficiency” among energy consumers and will improve the efficiency of utilities by modernizing grid management equipment and making use of software to optimize operations. These are the types of projects that need to be prioritized.

There are many missed opportunities, however. Paraguay’s National Electricity Administration (ANDE) received IDB financing in 2006 to help it reform and modernize. To take advantage of clean and renewable energy sources and to promote energy efficiency, ANDE needs to transform its regulatory policy and planning processes. But project documents show that these important issues were not sufficiently addressed.

Measure and Manage GHG Emissions, Help Client Governments Do the Same

To date, the IDB does not systematically measure the GHG emissions associated with its lending portfolio. This gap is highly problematic as IDB works to support governments to identify the potential climate benefits or drawbacks of particular development choices.

Good information on greenhouse gas emissions associated with particular development options is necessary, and stakeholders within developing countries in the LAC have demonstrated interest in improving their GHG inventory management capacity. Such practices can also enable countries to have better access to carbon markets to finance climate friendly development projects.

The Mexican and Brazilian governments have emerged as leaders on GHG management. Mexico’s environment agency, SEMARNAT, has been working with the World Resources Institute since 2004 on the GHG Protocol Mexico. The approximately 30 participating companies include Mexico’s entire cement, petroleum, and beer brewing sectors, as well as a significant portion of its steel sector. Participants make a voluntary commitment to conduct and publicly report a corporate GHG inventory, and the program is now expanding to include the accounting for GHG reduction projects.

In May 2008, Brazil’s Ministry of Environment began working with WRI on the first GHG accounting program and emissions registry in South America. It is a pilot program working with 20 large companies, including Petrobras, which will include training and capacity building programs to adapt globally credible GHG accounting tools to Brazil. The program, the GHG Protocol, is also active in China, Mexico, the Philippines, South Korea, and India.

Promising Efforts Must Be Taken to Scale, and Risks Must Be Analyzed and Managed

The efforts of SECCI must be scaled up. Through SECCI, energy efficiency programs have been integrated into several projects in energy intensive sectors. SECCI is also supporting specialized environment and climate change policy programs in Mexico and Colombia. Support in Colombia will include leveraging Climate Investment Funds (CIFs) to support climate change strategy implementation.

To address an internal need to evaluate the complexity of issues behind biofuels projects, SECCI, with IDB’s Structured and Corporate Finance Unit, developed the Biofuels Sustainability Scorecard. Initially developed as an internal project screening tool, the Scorecard uses sustainability criteria developed by the Roundtable on Sustainable Biofuels to screen and assess biofuels projects that request finance from the IDB. The results of the Scorecard are then used along with other project data, as projects are evaluated for financing. Multiple governments in Latin America are interested in adapting the SECCI tool for use at the national level.

The Scorecard is particularly interesting because it requires biofuel producers to obtain the free, prior, and informed consent of affected communities before proceeding with project development. Unfortunately, there is not yet any systematic monitoring of SECCI biofuels projects, to examine how the use of the Scorecard results in projects that are truly sustainable.

Latin American and Caribbean countries are looking to the IDB for financial support in this time of crisis. IDB can and should seize this unique opportunity to play a leadership role in linking economic recovery efforts to sustainability and charting a path to a low carbon, climate resilient future.

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