We need to mitigate climate change for developing countries who have done comparatively little to harm the planet. Is there cash in the bank for that?

The planet Earth surrounded by money.
This article is the ninth in a series of decoders examining critical aspects of climate change. They are part of a project, funded by the European Union’s Erasmus+ program and managed by News Decoder and the Climate Academy at the European School Brussels II, that will create innovative resources and strategies for schools to integrate climate science into their teaching.

As greenhouse gas emissions warm the planet, unprecedented extreme weather events — cyclones, droughts, floods and more — hammer communities around the globe. This damages agricultural production, exacerbating hunger and food insecurity.

Even before the COVID pandemic, global progress on climate action was beginning to lag.

A 2022 report from the UK and Egypt found that low and middle-income countries (other than China) need $1 trillion each year to meet the carbon reduction goals set out in the Paris Agreement and avert the climate catastrophes they play only a small role in creating.

Where will the money come from?

Since 2009, developed countries have committed to ‘mobilizing’ $100 billion annually for climate action. So far, they are well below target. 2020 contributions amounted to only $83.3 billion. And that money mainly targeted Asia and middle-income countries, missing many that need it the most.

There’s the will to reduce carbon but is there the money?

The biggest player in climate finance is the World Bank, a group of five financial institutions with combined assets of more than $300 billion.

In 2022, the World Bank spent $31.7 billion on climate actions. With wealthier nations tightening their foreign aid budgets, it is set to play an even bigger role.

Created in 1944 at Bretton Woods to finance the rebuilding of Europe ravaged by World War II, the World Bank is now key to financing efforts to save a planet ravaged by climate change.

“The WB matters because everyone looks to it for money and leadership,” said Paul Cadario, distinguished fellow in global innovation at the Munk School of Global Affairs and Public Policy at the University of Toronto. “Notwithstanding what critics say, the WB is a trusted source of advice and money.”

Bianca Getzel, research officer at the global affairs think tank ODI concurs. “There is no way the international system will be able to finance climate and development challenges without it,” Getzel said.

Global funds for a greener globe

The World Bank is a multilateral development bank (MDB) to which every country in the world is a member except Cuba and North Korea. It lends money to countries for economic development to eradicate poverty. It produces important studies of the global issues affecting prosperity, particularly in the poorest countries.

It also provides important technical support to countries for the development of appropriate policies and to design climate adaptation and mitigation projects.

Furthermore, the World Bank administers many financial intermediary funds (FIFs) that channel money from governments and private foundations to specific issues such as climate action, HIV/AIDS, health, education and women’s access to finance. 

The Global Fund, for example, provides money for programs to eradicate malaria and treat and prevent HIV, and the Green Climate Fund (GCF) provides money for climate projects. These funds, both administered by the World Bank, provide “concessional financing,” which includes grants, loans with highly favourable terms and guarantees. FIFs are the largest sources of concessional finance for developing countries.

 As development assistance budgets are shrinking, this becomes increasingly important.

Private sector funds for the planet

Back in 2015 the world adopted the 17 Sustainable Development Goals to end poverty and hunger and provide health and education to all by 2030. It was clear then that member nations would never be able to come up with enough money to reach those goals.

The World Bank, by mobilizing funds from the private sector and emerging donors — including India and the Gulf states — can bridge the finance gap by offering affordable financing to countries to reduce investment risk sufficiently to attract other investors.

The pressure to fund the climate change battle has put the World Bank under pressure to reform how it operates. In July 2022, an independent panel of experts submitted to the G20 finance ministers a framework for MDB reform that could unlock billions of dollars in additional lending. While this report is technical for the uninitiated, it is central to improving the response of the World Bank to global climate change crises.

Recommendations include re-evaluating risk limits and recognizing the benefits of what’s known as callable capital. Callable capital is money pledged as security by member nations that can be called up when needed, thus allowing the World Bank to lend more money without damaging its AAA credit ratings.

The World Bank and other MDBs get most of their money by borrowing on international bond markets. This is the key to the financial power of MDBs. With a small amount of shareholder capital and a strong financial track record, MDBs can borrow substantial amounts from bond investors at excellent financial terms.

As borrowing costs skyrocket, heavily indebted countries depend on the World Bank to pass on these preferred rates.

Fighting climate change should not be a credit risk.

In a speech last fall, U.S. Treasury Secretary Janet Yellen called on the World Bank to also speed up decision-making and address cross-border and hyper-local issues by shifting away from lending only to sovereign states.

Cadario and others believe the World Bank should lend directly to provinces and cities to build, for example, resilient water supplies.

“In some cases, cities may be more creditworthy than the country itself,” Cadario said. “Bank lending to cities without a sovereign guarantee would bring in institutional investors, multiplying the funds available.”

The Bank is also pressured to do more to attract new investors to countries and projects otherwise considered too risky. Concessional finance is the spark that brings in other investors. As the trustee for 12 climate FIFs, the World Bank can improve the performance of these concessional funds and drive more donors to invest more efficiently and with greater impact.

A recent report by the Center for Global Development (CGD), a think tank based in Washington, D.C., found that while public and private sector investments flow primarily to energy and transportation, climate FIFs support many more types of projects.

The World Bank can mobilize funds for the Earth.

Alarmingly, the report found that the three largest FIFs, with money from donor countries and large philanthropic organizations, do little reporting on their impact and how much additional capital they mobilize. This makes it difficult for donors to assess value for money.

“The findings around allocation [where the money is going] should startle donors,” said Clemence Landers, senior policy fellow at the CGD and one of the report’s authors. “There is no clear ability to determine if they are going to the countries that matter the most. These funds are not strategic.”

Landers said the funds must be streamlined to improve effectiveness, reduce administrative costs and increase results.

“In a world where the question is whether donor resources are going to projects and countries where they are most needed, most impactful and most catalytic,” said Landers, “the hope is that pressure like this will start bearing fruit.”

With its central role in climate and development finance, World Bank reforms are central to reallocating the trillions of dollars sitting on the balance sheets of financial firms, pension funds and insurance companies to mobilize climate-positive investments at the magnitude required to slow catastrophic global warming.

“Mobilization should be one of the top priorities for MDBs,” said Getzel. “Mobilization is the first step to building local capital markets and fruitful economies in developing countries. Because at the end of the day, that is what countries want. There is no longer the same demand for poverty handouts of the 1980s and ‘90s. We’re living in a new era of development finance.”

The climate as a long-term investment

In response to calls for reform, the World Bank put forward late in 2022 a new “Roadmap” to boost its lending capacity, create new financing tools — including guarantees for private sector loans — and shift away from the sovereign state lending model used since its creation at the end of World War II.

With a year-long timeline for consultation on the Roadmap, proposed reforms will be pushed to 2024 or later. Will that be fast enough for the Biden administration, the Bank’s largest shareholder? Probably not.

The reputation of the bank on climate action is also at stake. After appearing to question the science of fossil fuel-driven climate change, the Trump-appointed World Bank chief, David Malpass announced he would step down this June, almost a year before his term ends.

As the largest shareholder with 17% of paid-in capital, the United States has traditionally nominated the World Bank’s president.

President Joe Biden wasted no time in announcing Ajay Banka, the former president and CEO of Mastercard, as his candidate to replace Malpass. If approved by all shareholders at the World Bank’s spring meeting, reform will surely be at the top of Bank’s agenda. 

Questions to consider:

  1. What role can the World Bank play in mitigating the effects of climate change?
  2. Where does the money the World Bank can spend on climate change come from?
  3. Should some countries spend more than others to fight climate change? Why?

Susanne Courtney is a freelance journalist and writer based in Canada. A former Fellow in Global Journalism at the Munk School of Global Affairs and Public Policy, her writing focuses primarily on international affairs, international development and development finance. Recently she authored the 2021 State of the Sector Report on Canada's Impact Investing in Emerging and Frontier Markets.

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Climate decodersDecoder: World Bank is key to averting climate catastrophe
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