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In a new statement, development banks have pledged to reorientate their trade finance activities to help achieve the UN’s sustainable development goals (SDGs). However, they have avoided hard transition targets for fossil fuel financing, and some institutions, notably those in Asia, chose not to commit at all.

The declaration, signed by development banks across the world at a finance summit in Paris, sets out plans for the institutions to shift their strategies, investment patterns and activities to help achieve the SDGs and the objectives of the 2015 Paris Agreement.

“Finance is a major trigger for change,” the declaration reads. “Short-term decision-making must be aligned with longer-term goals. The time has now come for consistent action of all global finance players.”

As part of the pledge, development banks will realign their trade finance activities to support sustainable development and meet the SDGs, 17 goals which cover poverty, inequality, climate change, environmental degradation and governance, while also ensuring a level playing field.

Trade facilitation, financing and related regional infrastructure projects are important contributors to sustainable development, particularly in light of logistical gaps and inefficiencies in developing regions, as well as recent disruptions in supply chains caused by Covid-19 and rising trade barriers between some key economies, says the document.

When it comes to the energy sector, the banks do not outline any hard transition targets for fossil fuels. Instead, they say they are committed to “increase the pace and coverage of investment in renewable energy, energy efficiency and clean technologies”.

Institutions will support and promote sustainable alternatives to fossil fuel investments and consider ways and means of reducing these investments, helping to develop long-term low-carbon economies.

The declaration does not mention oil and gas, but it does take aim at coal. “We will consider the range of fossil fuel investments in our portfolios, avoid stranded assets, and work towards applying more stringent investment criteria, such as explicit policies to exit from coal financing in the perspective of COP26,” it reads.

Many private and public institutions have already committed to reducing their exposure to coal. French financial institutions have the most robust policies in place when it comes to eliminating support for coal projects and the phasing out of current commitments, finds data by Reclaim Finance.

Last year, France also prohibited any export credits for coal, shale oil and gas. Elsewhere, the Swedish government has banned export credits to fossil fuel exploration and extraction by 2022.

That said, most banks and insurers still allow direct financing or insurance cover for new coal and other fossil fuel projects, with relatively weak phase-out strategies.

 

Notably absent

Multilateral development banks (MDBs) across the world, including the African Development Bank (AfDB), the European Bank for Reconstruction and Development (EBRD) and the Islamic Development Bank (IsDB) signed the document signalling their commitment to sustainable development.

Notably absent from the list of signatories are MDBs in Asia such as the Asian Development Bank (ADB) and the Asian Infrastructure Investment Bank (AIIB).

“ADB supports many of the elements of the summit declaration but will not be signing it, as it contains policy commitments that have not yet been deliberated by the ADB board,” an ADB spokesperson tells GTR. They also highlight that there are other big players that are yet to commit.

Asia is home to fast-growing markets reliant on fossil fuel energy and projects, which can spur development by creating local jobs and building basic infrastructure.

As industrialised countries in the west, which have historically contributed more to global emissions, rally to set greener goals, one element of the SDGs is to create “decent work for all” which these projects generate in countries which may otherwise lack economic prospects.

The declaration encourages development banks to share and apply best practices and internationally accepted norms and standards on environmental, social and governance (ESG).

But sustainable finance still lacks universal standards and definitions, which makes it tricky for public and private banks to decipher what can be classified as sustainable. At the same time, it can encourage greenwashing.

In Asia, developed countries are making climate promises and leading by example. China, South Korea and Japan have all recently pledged carbon neutral targets. It is, however, unclear how they would meet a net zero target, given their high reliance on fossil fuels.

All three Asian nations are also big financiers of overseas fossil fuel plants. More than 70% of all coal plants built today are reliant on Chinese funding. Their domestic pledges may be seen as hypocritical if they continue to support large fossil fuel projects in other jurisdictions that contribute to climate change. Governments outside of Asia, such as the UK have been criticised for this as well. Meanwhile, Japan has pledged to cut its overseas support for coal projects.