Ensuring transformational results towards the climate transition: the case of public development banks and intermediated financing

Context

The next two years (2024 and 2025) will be decisive in building a reformed international financial architecture that adequately addresses the polycrisis the Global South is currently facing. Critical decisions on how to mobilise more and better finance for climate action will be made by 2025, when COP30 and the 4th International Conference on Financing for Development are due to take place (among other events). 

Much of the focus of the reform of the international financial architecture is on how to mobilise more funds for climate action, whilst avoiding increased debt burden and ensuring equitable distribution among the countries and sectors that need it most. Financial intermediation potentially has a key role to play in this respect by channelling existing funds and leveraging additional funds towards activities that contribute to transforming local economies.  

Many international PDBs rely strongly on financial intermediation to deliver postive impact on the ground. In 2019, several MDBs (including EBRD and EIB) committed over one third of their funds through financial intermediation (with these amounts reaching up to 63% for IFC). Financial intermediation has gained significant momentum over recent years and is increasingly seen as a promising avenue to mobilise finance at scale as it channels funds to a larger number of economic actors that would otherwise not benefit from climate or development finance. 

By fostering the engagement of the broader financial system, financial intermediation could also play a critical role in supporting the alignment of all financial flows with Paris Agreement objectives, thereby delivering positive and transformational impact across economies and supporting the more efficient use of scarce public funds.  

In response, Public Development Banks (PDBs) have developed methodologies to assess and guide the Paris alignment of all their operations, including the requirement to align the use of intermediated proceeds or ensure that financial intermediaries (FIs) are taking credible steps to align their own operations with the Paris Agreement. These methodologies, however, have room for improvement.  

In addition, the impact of financial intermediation has been blurred and slowed down by one-size-fits-all practices. Reporting of impacts through financial intermediaitions has largely relied on volumes of climate finance and some incomplete and inconsistent impact metrics which are inadequate to assess and drive up positive economic impacts.  

Objectives

The overall goal is to determine to what extent and in what manner financial intermediation can maximise the impact of public funds on the transformation of the real economy. It is broken down into specific objectives: 

• Identify the most adequate levers for engaging with different types of FIs (in terms of processes and instruments), while pursuing positive climate results.  
• Clarify the conditions (taking into account size, sector, geography, mandate of the FIs) under which these levers may serve the alignment of different types of FIs and of intermediated operations. 
• Lay the groundwork for more evidence-based and fit-for-purpose impact metrics. 
• Shed light on financial intermediation’s relevance for transformative action, thus supporting PDBs and their shareholders in making informed decisions on how to prioritise the use of scarce public funds.  
• Contribute to current debates on the reform of the international financial architecture. 

Period

April 2024– May 2025