National development banks: an untapped source of climate finance

Right now, multilateral development banks such as the World Bank or Asian Development Bank channel much of the climate finance for developing countries. They will continue to be cornerstones for climate finance going forward. But less appreciated is the critical role that national development banks (NDBs) could play in shifting and channeling the trillions needed for national transformation to low-carbon, climate-resilient economies.

Developing countries excluding China will need to invest US$2.3-2.5tn per year in nature and climate action by 2030, which is about four times current financing levels. Who will finance the rapid, people-focused and transformative action needed to slash emissions and build climate resilience?

That’s where NDBs come in. With combined assets of approximately $20tn, the collective firepower of NDBs far exceeds that of multilateral development banks whose assets amount to less than $3tn, and they could play a much bigger role in financing and implementing climate action.

In fact, NDBs already provide one-fifth of climate finance globally, yet they could be doing much more. According to a recent survey, the share of green assets in their credit portfolios is only 14% on average.

To build a more comprehensive picture of the role NDBs can play, we examined how a few of them are already supporting the green transformation of their respective countries and explored the barriers they need to overcome.

Why national development banks are key to environmental solutions

NDBs are public financial institutions typically created and owned by a single government. They use domestic public resources and leverage finance from private domestic and international capital markets to fund domestic development goals. Traditionally, NDBs have tended to support infrastructure projects in energy, transport and agriculture, as well as micro-, small- and medium-sized enterprises – all of which have a critical role to play in the green transition.

NDBs also share some of the features that have made MDBs such important players in the climate sphere. Like their multilateral counterparts, NDBs operate under public mandates which allow them to provide patient, long-term capital for climate projects that do not meet the risk-return profile needed for private investments. They also often benefit from a public guarantee which underwrites this approach to risk and allows them to raise money from capital markets.

Unlike commercial banks, these institutions prioritise development and usually have some form of concessional (or affordable) financing to support policy-related goals. They are well-placed to address financing gaps through their strong local presence and expertise, as well as their ability to support project development and smaller projects. Crucially, NDBs lend in local currency: this eliminates exchange rate risk, helping to bring down the overall risk to make green projects more viable.

While not all NDBs are deeply involved in climate action, several have introduced innovative approaches to green financing which provide excellent examples for other institutions.

Providing tailored financial solutions

NDBs have an intimate understanding of their domestic markets, allowing them to design and implement solutions that align with national priorities while addressing specific local challenges.

The Development Bank of Southern Africa (DBSA) has emerged as a key player in realising the country’s green, just transition. The DBSA disburses funds from global development finance institutions to municipalities, private companies and NGOs which tend to be too small for these international actors to reach.

The DBSA also oversees project implementation as an intermediary. In September 2024, the bank matched a 1.98bn rand ($104mn) loan from the European Investment Bank for its Embedded Generation Investment Programme. This contributes subordinated debt and concessional equity to help launch small- and medium-sized renewable energy projects by independent power producers.

The bank is also incorporating labor and social concerns. In November 2024, the bank secured a grant from the French Development Agency to help coal workers in South Africa’s Mpumalanga Nkangala district navigate the transition away from their carbon-intensive industries.

Addressing market gaps and financing public policy-oriented actions

NDBs can help fill a gap by financing projects that are not currently attractive to commercial banks. Financing climate adaptation is particularly challenging because projects can be small and fragmented and a range of investments are needed.

The National Bank for Agriculture and Rural Development (Nabard) is India’s primary development finance institution. It prepares annual plans to quantify investment opportunities in adaptation and resilience for all districts in the country. It has also developed a green taxonomy to identify and prioritise funding for climate projects.

For example, Nabard channels international finance – including from grant-making bodies such as the Adaptation Fund and Green Climate Fund – into local climate resilience projects, ensuring that underserved rural areas receive critical adaptation finance. As of March 2024, Nabard had supported 40 climate change projects with 19.71mn rupees ($237mn).

Another notable initiative is the bank’s tribal development fund which has supported over 600,000 families through more than 1,000 projects across the country.

Mobilising public and private actors to mitigate risks

Green projects, especially in developing countries, often face capital costs and perceived risks that can deter private investors.

Like multilateral banks, NDBs have a variety of tools at their disposal for de-risking. These include blended finance mechanisms such as guarantees and, in some cases, subsidised terms to catalyse private sector participation in green investments.

The long-term strategy developed by the Brazilian National Economic and Social Development Bank (BNDES) is particularly focused on attracting more private finance. Notably, BNDES reserves a portion of the profits from its commercial investments for seed funding to projects that support public objectives. For example, its socio-environmental fund matches up to one Brazilian real for every real invested by the private sector in these projects, a form of matchfunding.

By matching private sector investments with grants, BNDES shares the risks and stretches its public funds further. In 2021, BNDES used matchfunding to increase ecological restoration through the Floresta Viva (or Living Forest) initiative.

Challenges faced by national development banks

Despite their potential, NDBs face significant hurdles to increasing the scale of their green investments, from limited capital to a lack of technical know-how.

Starting with smaller balance sheets, some NDBs have looked to international funding to expand their capital base. The Trade and Development Bank operating in eastern and southern Africa has attracted institutional investors by syndicating loans with different segments of risk.

Others try to extend their limited concessional resources by working with international partners. For example, India’s Nabard set up a blended finance facility for adaptation in tandem with the World Bank through which it can leverage far more private investment than it could have alone.

Some NDBs may need to walk before they can run, since they may currently have insufficient technical capacity for developing green investments. Governments and international organisations can help build up institutional and staff capacity to improve NDBs’ ability to effectively design, implement and manage green projects and portfolios.

For instance, Nabard regularly organises training sessions to strengthen its institutional capacity so it can address climate needs through the Centre for Climate Change at the Bankers Institute for Rural Development.

NDBs may also need more robust frameworks for measuring and reporting on the environmental and social impacts of their investments. Aligning their reporting with government-wide frameworks and global goals – as South Africa’s DBSA does, in alignment with the country’s Just Energy Transition Investment Plan – can help enhance the relevance and impact of NDBs.

Accelerating green transformations

NDBs could be catalysts in countries’ green transformations. However, their potential remains largely untapped due to structural and financial constraints.

They can also play a more integrated role with other transition financiers by participating in country platforms. These typically bring together various sources of finance at the country level “to invest in sectoral or economy-wide transformations that achieve both domestic and international goals”. These allow NDBs to achieve far greater scale and impact by combining their strengths with dialogue on policy reform as well as financial instruments from MDBs and the private sector.

By helping NDBs make full use of their capabilities, the global financial system can accelerate countries’ transitions to a safer, more sustainable future.