Climate financing in Latin America and the Caribbean: How are public development banks supporting the climate transition?

Executive summary
 Latin America and the Caribbean countries are paying a disproportionate price for the climate 
transition, given their low contribution to global CO2 emissions. Several countries in the region, mainly 
in the Caribbean, have some of the largest exposures to physical risks, despite their relatively small 
contribution towards global emissions. These risks have been particularly evident over recent years, with 
several examples of severe economic and human damage associated with climate events across the region, 
ranging from wildfires to floods, droughts and cyclones. Latin America and the Caribbean countries also 
face significant transition risks related to a high contribution from the agricultural sector, particularly in 
Central and South America. However, they are relatively less exposed than other regions in the world.
 Climate-related financing needs for the region are sizeable, reaching between 1.9% and 4.9% of 
the region’s gross domestic product (GDP) per year ($110-290 billion) according to estimates by the 
International Monetary Fund (IMF) and the Economic Commission for Latin America and the Caribbean 
(ECLAC), respectively. More than 60% of these needs are related to mitigation of physical risks, but 
investment needs for adaptation are also significant.
 This need for climate finance is set against a challenging macroeconomic and fiscal backdrop. 
Latin America and the Caribbean countries are currently facing a combination of low economic growth 
and limited fiscal capacity. The region has one of the lowest investment levels in the world, reaching only 
20% of GDP, and limited room for fiscal manoeuvre, due to the increase in governments’ debt stocks 
following the COvID-19 pandemic and tighter financing conditions globally.
 The region of Latin America and the Caribbean has seen its share of global sustainable debt issuances 
increase, but current climate financing still doesn’t match growing needs. Sustainable finance has grown 
rapidly, particularly since 2020, driven by the official sector − government and state-owned enterprises − 
but the total annual issuance of climate-related bonds is still less than half of the yearly sustainable finance 
issuance and less than 10% of the climate financing needs. Given the significant needs, public financing will 
not be sufficient. Strengthening climate mitigation and adaptation in Latin America and the Caribbean will 
require an improvement in the institutional setup to attract private and foreign investors as well.
 Public development banks are more relevant in Latin America and the Caribbean than in other regions 
of the world and are of paramount importance to climate financing, potentially stepping in where 
the sovereign and private sectors do not. The aim of this paper is to assess how public development 
banks are contributing to supporting the climate transition, and what is holding them back from further 
scaling up green finance.
 Our analysis shows that public development banks are already fulfilling their role in accommodating 
climate risks but will need to increase their climate lending. The European Investment Bank (EIB) and 
the Latin American Association of Development Financing Institutions surveyed 28 public development 
banks in 15 countries, representing close to 50% of total public development banks’ assets in the region. 
The survey shows that despite climate financing being seen as an opportunity, the majority of public 
development banks do not see themselves as trendsetters in climate finance. They identify the main 
constraints for scaling up green lending to be climate investments having a low priority for clients,  
ack of technical capacity from both clients and development banks and, for some banks, the lack of 
long-term funding to match the profile of climate investments.
 Policy priorities to increase climate financing in Latin America and the Caribbean should focus on long-
term financing and building technical capacity. Most countries in the region face financing constraints, 
and need to have access to affordable, long-term financing, largely provided by international financial 
institutions and multilateral development banks. However, given the sizeable financing needs, that alone 
will not suffice because, as shown by the EIB and the ALIDE survey, there is a significant need to raise 
awareness and build technical capacity for both clients and public development banks. Building this 
capacity is the key to boosting climate lending by development banks and reassuring private investors, 
catalysing much-needed private investments.

 In this paper, we start by proving an overview of climate risks in Latin America and Caribbean countries, 
using the EIB’s country climate risk scores. This introduction is followed by an assessment of the region’s 
climate investment needs and potential sources of financing, against the current macroeconomic and 
fiscal backdrop. We describe the role of public development banks in the region, their current contribution 
to mitigating climate risks, and the results of our survey. In the last section, we present the main findings 
and policy recommendations.
 Climate risks
 Latin America and the Caribbean are increasingly experiencing the effects of climate change. 
Caribbean countries are the most exposed in the world to acute climate events, while the impacts 
of climate change are increasingly visible in both Central America and South America. No country in 
the world is immune to climate change, but some areas are more exposed than others. Climate change is 
disproportionately affecting countries in hot areas – as heat impacts the productivity of labour significantly 
− small island states exposed to storms and rising sea levels, and countries where sectors sensitive to the 
climate – especially agriculture – play a large role in the economy. Moreover, in low- and middle-income 
economies, governments and firms are generally less able to invest in adaptation and mitigation measures 
to protect from and reduce the effects of climate change.1 The combination of higher exposure to climate 
events and lower adaptation and mitigation capacity is making some countries particularly vulnerable. 
This region is already paying a high price for climate change, despite contributing less than 5% of 
global CO2 emissions. Rising temperatures, changes in typical rainfall patterns, flooding and hurricanes 
have induced severe human and economic impacts through acute events, and through gradual impact 
on productivity and economic growth, adding to existing economic and social challenges. Over the past 
two decades, the countries in the region have experienced as many as 1 350 natural disasters attributable 
to the climate, affecting more than 170 million people and causing almost 30 000 deaths. The economic 
damage associated with these events is estimated at over $170 billion.2 Since 2022, there has been an 
increase of natural disasters in the region:
 • wildfires in Argentina, Chile and the Pantanal region;
 • heavy flooding in Guatemala, Peru, Bolivia, Colombia, Trinidad and Tobago, venezuela, Honduras, 
Paraguay, Ecuador and Mato Grosso do Sul in Brazil;
 • droughts in Argentina, uruguay, Honduras and Brazil, which are heavily reliant on agriculture; and
 • tropical cyclones in several countries, including Costa Rica, Guatemala, Belize and Honduras.
 To assess climate risk at country level, the EIB has developed a methodology to map both physical and 
transition risks at country level. These risks are reflected in the EIB climate risk country scores (Ferrazzi 
et al., 2021). To build the physical risk component of our climate risk assessment, we estimate the impact 
of climate events on GDP for a short-medium term (between five and ten years). The total physical risk 
is given by the sum of damage deriving from natural disasters (“acute” events such as storms, floods, 
droughts, etc.) and the gradual long-term damage stemming from climate change, such as losses in 
agriculture due to rising temperatures and desertification, the impact of sea level rise on infrastructure, 
the impact of heat on labour productivity and the effects of water scarcity. The EIB’s transition risk 
scores for countries are based on five main building blocks: (1) the level of emissions, (2) the exposure 
of the economy to fossil fuels and the level of mitigation, which is built on (3) energy efficiency, (4) the 
deployment of renewable energy and (5) country preparedness.

Climate financing in Latin America and the Caribbean:  How are public development banks supporting the climate transition?