The scientific consensus on climate change and biodiversity loss is overwhelming. But there is an urgent need to translate this understanding into new economic paradigms so that international financial institutions can reframe their lending practices accordingly.
Bridgetown/Berlin – We must face and act upon an inconvenient truth. The impact of human activity on the Earth’s geology and ecosystems threatens the basis of life on Earth and decades of human development progress.We are acting contrary to the goals of UN 2030 Agenda for Sustainable Development – A future that guarantees a decent life for all. Our survival and continued prosperity require structural change and immediate action.
Scientists warn that breaking planetary boundaries will cause tipping points, leading to irreversible damage and catastrophic decline of natural systems. Collapse of fish stocks, thawing permafrost, rising antimicrobial resistance and loss of rainforests are just a few of the trends that are undermining the foundations of development. Large, acute disasters tend to get the most attention, but the continued depletion of valuable natural assets (aquifers, air, soil, etc.), while not making headlines, is one of the world’s most It is a chronic burden for poor communities.
These global challenges are also deepening economic inequality between and within countries and exacerbating social exclusion. This not only goes against the sustainable development agenda principle of leaving no one behind. It also hinders poverty reduction through inclusive economic growth, undermines the social contract between rich and poor countries, and threatens global security.
These cross-border problems cannot be solved by one country alone. In addition, there is a strong correlation with other risks, such as large-scale supply chain disruptions. All of these problems stem from an economic system that has proven to be more fragile than many thought. A well-functioning system can manage and absorb risk, but the current system does the opposite.
The world needs a global system that creates security, promotes sustainability and absorbs shocks. To achieve that, the international community can start this year by making some practical changes. spring meeting of the International Monetary Fund and the World Bank.
First, the World Bank’sevolution” (Which shareholder I was asked in October 2022), it should modernize its mandate by elevating sustainability and resilience as key institutional goals, and strengthening analytics and operations to meet emerging transnational challenges. .
Winter Sale: 25% Off New Items PS subscription
Get more access for a limited time project syndicate – Includes all commentary and the entire On Point suite of subscriber-only content – from Less than $6/month.
For every dollar invested in sustainability and resilience today, Save $4-7 down the line. But to introduce a new paradigm of resilience and sustainability, these principles need to be embedded in operating, lending and debt sustainability models with the right incentives and accounting standards. Many reforms and investments can have positive cross-border spillovers. But new and powerful incentives, both analytical and financial, are needed to encourage national investment in global public goods and support national conservation efforts.
We also need to consider all options for increasing the funding capacity of multilateral development banks. The key here is to leverage existing capital while maintaining the AAA ratings and countercyclical lending capabilities of these financial institutions. As a G20 Capital Adequacy Review Indicated, MDBs can reduce their minimum capital adequacy ratios to increase their risk appetite and increase their funding. Similarly, we welcome proposals for the issuance of non-voting hybrid capital to facilitate lending at even lower concessional interest rates offered through shareholder “coalitions” or sales to individual investors. increase.
We also need to explore options for reallocating the Special Drawing Rights (the SDR, the IMF’s reserve asset) to increase the capital stock of international financial institutions. IMF new Resilience and Sustainability Trust Based on this premise, it represents a promising first step towards maximizing the effectiveness of SDR allocation. However, given the challenges, the size of the current trust is too small. We also invite MDBs and development finance institutions to propose additional options, as the African Development Bank and the Inter-American Development Bank have already started. Either way, MDBs need to do more to leverage their balance sheets.
Apart from this, MDBs should also use their balance sheets to encourage private investment in the transition to low-carbon energy, transport and agriculture across developing countries. Without efforts to bring down the capital cost of these investments on a large enough scale, global warming will surge past 1.5 degrees Celsius, with cascading effects.
Finally, we urge all lenders and borrowers, including development banks and private sector creditors, to include or accept natural disaster and pandemic clauses in their financing instruments. These clauses are net and present value neutral and provide valuable assistance to countries by ensuring that they have sufficient liquidity when they need it most.
The scientific consensus on climate change and biodiversity loss is overwhelming. But there is an urgent need to translate this understanding into the new economic paradigm of international financial institutions. At this year’s Spring Meetings, the World Bank and its shareholders must recognize that the provision of global public goods is essential to the fight against poverty. In the face of an existential climate crisis, the only way forward is sustainability and resilience. The institution should be modernized accordingly.