We know that global efforts to rein in climate change are far off track — and we know what’s needed to right the ship: Rapid and transformative action to slash emissions and build resilience to climate impacts, in a way which puts people at the heart. But who will finance and implement these changes?
According to the Independent High-Level Expert Group on Climate Finance, developing countries (excluding China) will need to invest $2.3-$2.5 trillion per year in nature and climate action by 2030, from both domestic and international sources. This is about 77% more than current financing levels.
Funding from international sources such as multilateral development banks (MDBs) — which are already key providers of climate finance — will play a major role in closing this gap. But additional sources will also be needed. How countries will mobilize their own domestic resources (both public and private) is therefore an increasingly important question.
National development banks (NDBs) don’t often feature in these conversations. But they could play a much bigger role moving forward.
With combined assets of approximately $20 trillion, the collective firepower of NDBs far exceeds that of MDBs, whose assets amount to less than $3 trillion. And NDBs have several features that make them uniquely poised to help drive countries’ transitions to greener and more sustainable economies. They’re focused on national development goals, have strong local expertise, can lend in local currency, may make decisions more quickly than MDBs and more.
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.
We examined a few NDBs that are supporting countries’ green transformations and which 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 (such as in energy and transport); agriculture; or micro-, small and medium-sized enterprises — all of which have a critical role to play in countries’ green transitions.
The Finance in Common Summit 2025, held in Cape Town, South Africa in February 2025, gathered the community of public development banks writ large, including national development banks. Messages from this summit underscored the urgency of mobilizing the full spectrum of capabilities from NDBs to deliver on development and climate goals.
NDBs share some of the features that have made MDBs such important players in the climate sphere. Like multilateral development banks, NDBs operate under public mandates and thus — while needing to make financially sound decisions — are not purely profit-driven like private sector banks are. This allows them to provide patient long-term capital for climate projects that do not meet the risk-return profile needed for private investments. NDBs also often benefit from a public guarantee, which not only underwrites this approach to risk, but also allows them to raise money from capital markets to fund projects and significantly increases the size of their lending portfolios.
Unlike commercial banks, these institutions prioritize development over profit, and they usually have some form of concessional (affordable) financing to support policy-related goals. They are well-placed to address financing gaps at local and national levels through their strong local presence and expertise, as well as their ability to support project origination and smaller projects. Crucially, NDBs lend in local currency; this eliminates exchange rate risk, helping to bring down the overall risk of green projects and make them more viable. And they may have more streamlined decision-making or faster processes than MDBs.
Moreover, NDBs exist in nearly every country. The most comprehensive estimates are that 480 national development banks exist across 154 countries globally. Most of these nations (60%) have more than one institution.
While not all NDBs are deeply involved in climate action, several have introduced innovative approaches to green financing.
1) Providing Tailored Financial Solutions
NDBs have an intimate understanding of their domestic markets, including local policy environments and economic conditions. This expertise allows them to design and implement solutions that align with national priorities while addressing specific local challenges and lending in local currency.
Example: Supporting a just energy transition in South Africa
As South Africa looks toward a low-carbon future, it’s grappling with many competing priorities: how to reduce its heavy dependence on coal while also expanding energy access, reducing poverty and helping workers in the fossil fuel sector shift to more sustainable jobs. Of the ZAR1.48 trillion (about US$98.7 billion) South Africa estimates it needs to meet its climate goals, almost half (45%) is still unmet.
The Development Bank of Southern Africa (DBSA) has emerged as a key player in realizing the country’s plans to transition away from fossil fuels and increase investment in renewable energy.
DBSA disburses funds from international development finance institutions (including MDBs) to municipalities, private companies and NGOs, which tend to be too small for these international actors to reach.
In addition to its own direct investments, DBSA oversees project implementation as an intermediary. In September 2024, the bank matched a ZAR1.98 billion (EUR100 million/about US$104 million) loan from the European Investment Bank for its Embedded Generation Investment Programme. The program contributes subordinated debt and concessional equity — notably, in local currency with DBSA managing exchange fluctuations through hedging — to help launch small and medium-sized renewable energy projects by independent power producers.
DBSA is also incorporating labor and social concerns in its support for a just energy transition in South Africa. In November 2024, the bank secured a grant from the French Development Agency (AFD) to expand skills development, training and entrepreneurial support in Mpumalanga Nkangala District, a major region for the country’s coal sector. These efforts aim to help workers navigate the transition away from coal.
2) Addressing Market Gaps and Financing Public Policy-Oriented Actions
NDBs can help fill a gap by financing projects that are essential for building more sustainable economies but 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 — from those that largely generate public goods and avoid losses to those that generate revenue streams.
Example: Financing adaptation projects in India
The National Bank for Agriculture and Rural Development (NABARD) is India’s primary development finance institution, driving sustainable growth and resilience in the country’s rural and agricultural sectors. The bank has recognized the importance of embedding climate in its funding considerations: Today, it’s leading projects that address adaptation and resilience needs across economic and social strata in the country.
NABARD prepares annual plans for all districts in the country, quantifying opportunities for investments in adaptation and resilience projects. It has also developed a green taxonomy to identify and prioritize funding for climate projects.
For example, NABARD channels international finance — including from the Adaptation Fund and Green Climate Fund — into local climate resilience projects, ensuring that underserved rural areas receive financing for critical adaptation efforts. As of March 2024, NABARD’s financial report mentions that the bank had so far supported 40 climate change projects with financial assistance of ₹1971 crores (about US$237 million).
Among these projects, the bank has financed over 1,800 water harvesting structures (such as check dams and percolation tanks) in the water-scarce areas of Rajasthan. This has improved water availability, supported irrigation and created local employment opportunities. It’s helping strengthen climate resilience in the region while sustaining both social and economic outcomes which rely on reliable access to water.
Another notable initiative is the bank’s Tribal Development Fund, designed to support diversified livelihoods for tribal communities. The fund has supported over 600,000 families through more than 1,000 projects across the country. One such project in Telangana has transformed 500 acres into sustainable horticulture farming and brought 115 acres under irrigation. The beneficiaries saw their annual incomes increase by over 200%, on average, from around ₹30,000-₹40,000 (about US$347-$462) per year to around ₹100,000-₹168,000 (about US$1,156-$1,942) per year.
3) Mobilizing Public and Private Actors to Mitigate Risks
Green projects often face high upfront capital costs and higher perceived risks that can deter private investors, especially in developing countries.
Like MDBs, NDBs have a variety of tools at their disposal for derisking. These include co-financing with private banks and using blended finance mechanisms (such as guarantees and, in some cases, subsidized terms) to catalyze private sector participation in green investments.
Example: Mobilizing private investments for green projects in Brazil
The Brazilian National Economic and Social Development Bank (BNDES)’s long-term strategy underscores its role in promoting a green and just transition. It’s especially focused on diversifying partnerships and developing blended finance approaches to attract more private finance.
Notably, BNDES reserves a portion of the profits from its commercial loans or equity investments for seed funding to projects that support social, cultural, environmental and technological objectives. For example, its Socio-Environmental Fund matches up to R$1 in grants for every R$1 invested by the private sector in projects that support education, the environment, or job and income generation — a model the bank terms “matchfunding.” By matching private sector investments with grants, BNDES shares the associated risks of these projects and stretches its public funds further by mobilizing private sector financing and partnerships.
In 2021, BNDES used matchfunding to increase the scale of ecological restoration projects using both native species and agroforestry systems across Brazil. The Floresta Viva (“Living Forest”) initiative aims to invest R$693 million (about US$118 million) over seven years to restore between 25,000-35,000 hectares across the country, with up to 50% financed by BNDES’s Socio-Environmental Fund and the remainder financed by private sector institutions.
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. But here, too, some NDBs are charting a way forward.
Limited capital and dependence on government support
Many NDBs’ balance sheets are insufficient for addressing the magnitude of domestic challenges. As governments face ongoing budget constraints, NDBs are looking to external funding sources to bridge their financing gaps.
NDBs can seek more international funding to expand their capital base. However, since they lend in local currency, the question of who ultimately bears the exchange rate risk (international actors or NDBs) is unresolved. A 2023 survey estimates that two-thirds of NDBs are exposed to currency risks and most external financing to these banks, including from MDBs, happens in hard currency.
NDBs can also syndicate loans to share risks across a group of lenders and mobilize private finance on a subordinated basis — for example, through secondary market mechanisms or an originate-to-share model. The Eastern and Southern African Trade and Development Bank (TDB) has grown its investor base to over 40 institutional investors in the past decade through capital layering, offering different segments of risk capital alongside debt issuance. In 2023 alone, TDB increased its lending by 10% from the previous year (to US$19.1 billion) through syndications and acted as a lead arranger for US$4.1 billion in lending.
NDBs in stronger and larger economies will likely have an easier time implementing such solutions. For example, if their domestic capital market is strong enough, NDBs can issue bonds in local currency to avoid exchange risks. South Africa’s Industrial Development Corporation (IDC) recently raised over ZAR2.0 billion (about US$112 million) for its inaugural sustainability bond, which included a significant subscription by International Finance Corporation (IFC), the World Bank’s private sector arm.
Scarcity of concessional financing
NDBs are well-versed in using their funds to leverage private resources. However, they can struggle to obtain the grants needed to blend with private finance for green projects where returns are — or are perceived to be — too low to mobilize private investment alone. BNDES overcame this challenge by reserving a portion of its profits for grants in projects that support social and environmental objectives, bringing about programs like the Floresta Viva initiative.
NABARD, in another instance, has been exploring alternative mechanisms to bolster its adaptation and resilience investments. The global Adaptation Fund metes out money for countries’ adaptation efforts, but it’s not a lot — the allocation for India is capped at approximately $20 million; too limited to adequately address the need of even any one state in India. Recognizing this, NABARD has sought to leverage separate, additional concessional finance beyond the Adaptation Fund. In 2024, NABARD signed an MoU with the Government of Goa and World Bank to set up a blended finance facility to leverage various sources of concessional finance through MDBs, bilateral institutions and philanthropic foundations for climate action. By attracting private finance through this World Bank-powered facility, NABARD can do more than it would have been able to do alone. It ensures that precious grant finance is used strategically to leverage far more investment.
Insufficient capacity and institutional barriers
Despite the lack of a project pipeline being a significant constraint in increasing climate finance — and the potential of NDBs to help with project development — NDBs often have insufficient technical capacity for developing green investments. Governments and international organizations can help build up institutional and staff capacity to improve NDBs’ ability to effectively design, implement and manage green projects and portfolios.
NABARD, for example, regularly organizes training sessions to strengthen its institutional capacity to address climate needs through the Centre for Climate Change at the Bankers Institute for Rural Development (BIRD).
NDBs also work with various implementation agencies and project partners who often lack technical expertise to develop high-quality project documentation. Regular capacity building can enhance their ability to craft robust investments that integrate climate goals.
Capacity challenges in NDBs can also be more structural, applying not only to their ability to develop green projects but to build lending portfolios that generate sufficient returns. In such instances, oversight and fiduciary management training are needed. These could be provided by capacity-building units of MDBs or other institutions that support NDBs in strengthening fiduciary frameworks and green finance capacity.
Lack of robust impact measurement frameworks
NDBs are often hindered in their ability to attract public and private co-financing due to a lack of 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 (such as the Sustainable Development Goals, Paris Agreement and Global Biodiversity Framework), can help to enhance NDBs’ relevance and impact.
In its role as a financial intermediary, DBSA overcomes this challenge by measuring and reporting the results of executed projects directly to the national monitoring system for South Africa’s Just Energy Transition Investment Plan. (This, in turn, is linked to the country’s national climate plan under the Paris Agreement.) DBSA supports implementing institutions that receive funds channeled through the bank to fulfil these reporting requirements. At the same time, DBSA becomes a more attractive intermediary for international co-financing since the environmental and social impacts of its projects are both clearly reported and linked to national priorities and goals.
This demonstrates the valuable role that governments can play: working with NDBs to ensure they are maximizing support for domestic priorities and plans associated with these international agreements — and monitoring their contributions to this effect.
Accelerating Green Transformations
NDBs could be catalysts in countries’ green transformations. With their combination of local expertise, public mandate and ability to de-risk investments and provide local currency lending positions, NDBs can be critical agents of change. However, their potential remains largely untapped due to structural and financial constraints.
Stronger partnerships with international institutions (such as MDBs and bilateral development finance institutions) can provide NDBs with technical assistance, knowledge sharing, and additional sources of funding or co-financing. Though the diverse landscape of NDBs can make it challenging for international actors to identify and form relationships with these institutions, many NDBs are engaging more in international forums like the Finance in Common Summit and environmental negotiations.
NDBs can play a more integrated role with other transition financiers by participating, or even leading (such as BNDES has), in country platforms. Country platforms allow NDBs to achieve far greater scale and impact by combining their strengths in project origination, local currency lending and smaller scale financing with dialogue on policy reform as well as financial instruments from MDBs and the private sector.
Moving forward, governments, international organizations and the private sector should work together to empower NDBs, ensuring they can combat environmental crises while fulfilling their sustainable development mandate, helping to support growth and jobs. Given the constraints on resources and importance of the task, making national and international, public and private finance work better as a system has never been more important. By helping NDBs make full use of their capabilities, the global financial system can accelerate countries’ transitions to a safer, more sustainable future.
