The vital role of development banks in the ‘Green Recovery’ to tackle the ‘Green Swan’ risks of climate change

By Cihan Urhan

Michele Wucker, a policy analyst, uses the metaphor of the "Gray Rhino" to describe a highly probable but overlooked threat. In other words, the “Gray Rhino” is defined as an event which is neither unpredictable nor surprising, but rather which occurs after a series of precursor warnings and the emergence of solid evidence. Outbreaks of contagious viruses, such as SARS, swine flu and EBOLA, actually provide some clues of how the Covid-19 pandemic, which is now painfully being experienced by the whole world, could affect not only human health, but also social and economic life.

Covid-19 has affected almost all our daily habits in some way, along with disruption of global supply chains, a slowdown in economic activity, the loss of millions of jobs, restrictions on social life and even changes in the way of doing business. International organizations, funders, governments, academics and people in the private sector are making assessments to estimate the extent to which the uncertainties brought about by the "new normal" are shaping our lives. Many governments have already included “Green Recovery” measures in their crisis recovery packages, with funding of around USD 312 billion being extended to environmentally friendly transport, the circular economy and clean energy research, as well as to development and deployment in the form of grants, loans and tax relief. (Preliminary OECD estimates)

During this recovery phase, it is more crucial than ever that joint action is taken with coherent policies drawn up to tackle the climate emergency, which is the major obstacle to sustainable and inclusive development. The awareness, determination and cooperation of all stakeholders is imperative to combat the "Green Swan" scenario of unexpected climate risks with a high destructive potential. Multinational Development Banks (MDBs) will play a critical role in ensuring that the recovery is a green one. In 2019, the climate funds provided by MDBs reached a record USD 61.6 billion. The consequences of climate change, such as drought, floods, diminishing biodiversity and loss of human life, will undoubtedly affect less developed countries more deeply and threaten their prospects for development.

A total of USD 61.6 billion in Climate financing was extended by seven of the world’s largest MDBs in 2019, of which USD 41.5 billion (67%) was in low- and middle-income economies.

Climate change will also trigger job losses and worsen persistent gender inequality. The ILO projects that rising temperatures and increasing heat stress at work will lead to the loss of 80 million full time jobs and result in global economic losses amounting to USD 2.4 trillion in 2030. Given that women are more often responsible for gathering and producing food and collecting water, and represent 70% of the world’s poor population, extreme weather events such as drought and flooding have a proportionally greater impact on women.

In the next six to 18 months, countries are expected to invest more than USD 20 trillion to mitigate the effects of the Covid-19 outbreak. During this time, allocating financial instruments to the right channels will improve the ability to create effective solutions to ongoing climate and environmental crises. Many leaders underscore the need for a green economic recovery to overcome the economic bottlenecks which have mounted during the pandemic. It is quite clear that a holistic approach is essential to tackle the climate crisis and the socio-economic impacts of Covid-19. In this regard, the Industrial Development Bank of Turkey (TSKB) recently initiated the “Green Swan Platform”, bringing together multiple institutions and organizations such as NGOs, international organizations, academia and the private sector act in coordination to understand and manage the risks associated with the global climate crisis. Development banks, focused on a green and inclusive recovery and structural transformation, are even more important now than they were before the pandemic. In achieving these goals, MDBs should collaborate with national development banks, and they will need to step up their pioneering role in climate finance and develop more innovative approaches to pave the way for flexible and less risky financing for less developed countries. It is also crucial for MDBs to continue their efforts to enhance international cooperation in unlocking new sources of green finance for investments in the SDGs.  Moreover, MDBs can play an important role in incentivizing the design and the implementation of comprehensive quantification methods and systematic collection of data on climate finance, particularly for private actors to move forward with the required low-carbon investments.

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Cihan Urhan, manager for TSKB’s Economic Research team, has managed multiple financial- and social-based studies targeting increasing inclusiveness for SMEs, women and youth. He develops content for the “Gender Equality Working Group” that TSKB formed to follow up developments in gender issues; plans and carries out actions and potential projects TSKB can undertake both within and outside the company.