• The G20 has set up a high-level committee to suggest reform of multilateral development banks (MDBs) so that they are fit for purpose in the contemporary global scenario. It is co-chaired by N K Singh, former chairman of India’s Finance Commission and Larry Summers of Harvard. A good augury is the appointment of Ajay Banga as president of the World Bank. Though best known as the CEO of Mastercard, Banga was schooled in India and is more than au fait with the requirements of the developing world.
• Poverty eradication and reduction of inequality has been the mission of the World Bank for years and the need to keep this emphasis has not disappeared, no matter the global gains on these fronts. However, with climate change now clearly recognised as the greatest global challenge, MDBs must rise and help developing countries in their “green” challenge.

Challenges of climate financing for the developing world

• Money estimates annually for greening in developing countries are in the range of $2-3 trillion. These are relatively manageable figures.Annual global savings, coming mostly in the developed world, is around $20 trillion. But, they are beyond the domestic capacities of developing countries.
• For example, in India, solar and wind energy attracted investments worth $66 billion in the last eight years. But, this requirement will increase manifold.
• India will require around $1.15 trillion in the next eight yearsto install 450 GW of renewables by 2030, for infrastructure of transmission and storage, Green Hydrogen push and increase the share of electric vehicles.
• A total investment of $1.15 trillion is the estimated requirement, with the debt requirementbeing around $850 billion and equity roughly $300 billion.
• The $850 billion debt requirement alone is more than a quarter of the total loansof all commercial banks in India. Moreover, these requirements will have to compete with other developmental and individual priorities.
• Other domestic financing routes such as bonds, pension funds and insurance funds have limited prospects for clean-tech segments. They are concentrated in high-quality assets, that is, AA+ rated assets.
• The gap of around 40-60%of the total debt requirement, can only be filled by foreign sources. But developed countries are reluctant to provide funding.

Solutions for climate financing for the developing world

• Global MDBs can be particularly instrumental. They can provide interrupted flow of private capital in the developed world for green projects in developing countries.
• This can be done by the creation of an International Foreign Exchange Agency linked to the WB. It will provide hedging support for foreign exchange borrowings by green projects in developing countries.
• Large-scale pooling of projects and currencies coupled with reinsuranceis an alternative to insurance. It can considerably lower the costs of foreign borrowed capital for green projects in the private sector in developing countries.
• Residual risks could be covered by sovereign support from developed countries.
• The idea of a foreign exchange agency is operational in a small manner between Europe and West Africa. But the requirement is for something on a truly large scale covering several currencies and reaching the largest populations in developing countries.

While the G20 committee will focus on several aspects of reforming the MDBs, including capital adequacy and borrowing parameters for MDBs, their governance and the issues of developing countries’ debt, climate financing in developing countries also needs to be accorded a high priority. Unlike many other areas of divergence in the present geopolitics, climate change sits well with all the major global economic players allowing for multi-partisan consensus. This must be leveraged at the MDBs with an agency or any other appropriate mechanism taking care of the currency risk. This is a relatively low-cost option for global well-being that could be piloted during India’s G20 presidency.