This article appeared in the Sustainable Finance & Investment newsletter, a monthly roundup of the latest ESG news, analysis and opinion on the sustainable finance and ESG markets of Latin America and the Caribbean. Free to read thanks to IDB Invest SIGN UP HERE >

Paraguay Finance Minister Carlos Fernández Valdovinos
Credit: IDB Group

The Inter American Development Bank (IDB) should rebalance its climate financing with greater participation of the private sector via the lender’s IDB Invest division, Paraguay’s Finance Minister Carlos Fernández told LatinFinance. 

The IDB’s private sector financing arm could replicate the bank’s public sector biodiversity and climate-linked mechanism, known as IDB Clima, which was launched last September, Fernández said in an interview on the sidelines of the lender’s annual meeting in the Dominican Republic.

The IDB has said it is the first multilateral development bank to offer a financing tool that rewards countries for achieving nature and climate objectives. 

“You need to have the right incentive. If you are investing in this field, the interest rate that we are charging needs to be lower than usual. That is the model of IDB Clima, with variable interest rates for environmentally friendly projects. It is just a way to give incentives to the private sector to invest in areas that are of interest to the world,” the minister said. 

“It is only an idea. Of course, they need to fund it. Somebody has to pay the difference in interest rates. We would need to enhance the power of IDB Invest, which we are doing in this meeting,” he said.   

He said the private sector should also have incentives to engage in climate financing in Latin America. He said rebalancing is necessary as more than 81% of climate mitigation is currently financed by the private sector in developed countries and China, compared with only 14% in the rest of the world where the cost of capital is high, according to IDB data. 

“We need to enhance the power of IDB Invest. The largest part of investment is being done by the private sector in the developed world, but not in developing countries. We need more money coming from the private sector in developing countries,” Fernández said. 

IDB Clima will provide the borrower with a discount when nature and climate objectives of selected loan projects are met. The discount is provided in the form of a grant equal to 5% of the loan’s principal, according to the bank. 

“Initially, it is easier for developing countries to get money abroad when you are a  government. Governments go first with IDB. We already have IDB Clima. Now we have to work with the private sector,” the minister said.  

More from LatinFinance at the IDB Annual Meetings | Dominican Republic 2024