How national development financial institutions can scale green finance

National development financial institutions (NDFIs) have emerged as a pivotal tool in advancing the global sustainable development goals (SDGs), including those related to climate action and the environment. Their significance was underscored in 2020 when public development banks launched a joint declaration at the Finance in Common Summit, reaffirming their commitment to the SDGs and the Paris Agreement.

With assets totaling $19 trillion and accounting for over 10 percent of global annual investments, NDFIs wield substantial influence in driving green finance initiatives worldwide. Despite this, green finance remains only a small share of their overall investments and lending, with most NDFIs still in the early stages of transitioning their portfolios.

To delve deeper into the role of NDFIs in green finance, the World Bank recently published a report that surveys 22 of these institutions, analyzing current trends and recommending policy actions for the “greening” of NDFIs. 

Greening NDFIs: Report Key Findings

NDFIs are crucial for catalyzing financing, including through their innovative strategies that promote private capital mobilization. Beyond their direct lending activities, NDFIs can test blended finance mechanisms and credit enhancement instruments to address financing obstacles, such as extended payback periods and perceived project risks. A prime example of this is the Climate Finance Facility initiated by the Development Bank of Southern Africa, which offers subordinated debt and tenor extensions to attract private financing for climate infrastructure projects.

To secure even more private climate financing, NDFIs can build pipelines of bankable projects by offering project preparation and technical assistance services. They can also test and stimulate promising green instruments and policies that are new to the market. For instance, NDFIs are often the first issuers of green bonds in their countries and can help demonstrate the feasibility of these instruments to potential corporate issuers.  

These efforts to scale green finance should be driven by ambitious targets and robust disclosures. For example, the Korea Development Bank has developed a strategy to support the Korean government’s 2050 carbon neutrality target. Türkiye Sinai Kalkinma Bankasi (TKSB) also monitors its green portfolio and provides disclosures in line with recommendations from the Task Force on Climate-Related Financial Disclosures.

Like other financial institutions, NDFIs’ investments and lending are exposed to climate and environmental risks, such as floods and droughts. But so far, surveyed NDFIs have looked at these risks mostly through the lens of environmental and social impacts, rather than assessing the financial risks to their portfolios. Some NDFIs are more advanced in their approach than others though. For example, in Mexico, Trust Funds for Rural Development is participating in a study to identify physical risks in financial institutions’ credit portfolios in Latin America, using climate models and climate scenarios of the Intergovernmental Panel on Climate Change.

The Road Ahead

Drawing from these insights, the World Bank is actively working with countries on their greening efforts of NDFIs. For example, with our support, the Development Bank of Rwanda issued a sustainability-linked bond, the world’s first development bank to do so. The World Bank has also recently approved projects to support TSKB and the Kenya Development Corporation to establish green funds to expand equity financing for green business ventures.

Moving forward, NDFIs should further collaborate with governments, international organizations, and other stakeholders to test new concepts to catalyze green finance. As they scale up operations to meet green financing needs, countries must also develop proper legal and oversight frameworks as well as adequate corporate governance and risk management practices to ensure the effective management of NDFIs. By working together, we can harness the potential of NDFIs to mobilize financing at the scale needed to transition to a low-carbon and sustainable future.