How the World Bank can be bolder on climate finance after COP 26

With the 26th United Nations Climate Change Conference falling short on meeting lower-income countries’ funding needs, experts say the World Bank and other multilateral lenders need to step up and be more ambitious on climate finance, as time is quickly running out.

The World Bank has stepped back from many types of carbon investments over the past decade, including direct financing for coal. Earlier this year, it launched a climate change action plan with much fanfare — and after years of deliberation — declaring it would align with the Paris climate accord by July 2023.

Bank officials promised further details would be announced in Scotland at COP 26, which wrapped earlier this month. But observers were left wanting after the bank didn’t follow through with a clear road map. It continues to grapple with what exactly “Paris alignment” will look like for its programs.

“That they are dragging their feet, that doesn't give a lot of confidence,” Christian Donaldson, a policy adviser at Oxfam International, told Devex.

“There is much greater capacity for the bank to scale up its climate investments,” he continued. “The bank had been preparing for [the conference in] Glasgow since early this year. Unfortunately, their action plan was not as ambitious as we had hoped.”

The disappointment comes as wealthy nations are still lagging on their promise to deliver $100 billion in annual climate finance.

As part of its action plan, the World Bank said it will allocate 35% of its financing for climate-related investments and more generally integrate climate concerns into its programming. The bank also said it will refrain from most investments in gas.

But even with the World Bank yet to finalize exact methodologies for Paris alignment across all the countries it works in, experts say there is greater scope for it to step up its financing of green energy, mitigation projects, and adaptation measures. Moreover, they say its finalized plan should be aspirational and set an example for other banks and stakeholders.

Donaldson said the World Bank should use its soft power to paint a clear picture of how exactly it will help clients transition away from carbon and invest in adaptation.

“It’s about how they sell the story to a country,” he said.

“We really do need to see a lot more detail on this topic,” said Rishikesh Ram Bhandary, an assistant director at Boston University’s Global Development Policy Center. The bank will have to clearly mark where it “draws a boundary around its scope of activity.”

He pointed to issues such as the ongoing investments by the International Finance Corporation — the World Bank’s private sector arm — in utilities with ties to fossil fuels and the bank’s links to natural gas projects. The bank has set 2025 as the target year for IFC to come into full compliance with the Paris accord.

Mustafa Zakir Hussain, a climate change specialist at the World Bank, told Devex that the institution is still formulating guidance, both internally and for clients, as it designs a “whole-of-economy development” framework focused on a low-carbon and climate-resilient future.

“The bank would not support anything that would have a carbon lock-in,” he said. He also stressed that while the bank continues to include mitigation aspects in its work, there is a growing element of adaptation, which entails identifying and addressing specific climate risks facing countries.

Eurodad, an advocacy group, noted that lower-income nations are calling for some $50 billion in adaptation finance, while even a pledge by wealthy nations in Glasgow striving to double current funding would only bring the total to just north of $40 billion. This gap makes the role of multilateral development banks even more crucial.

This year, the World Bank deployed a record $26 billion for climate-related projects, a whopping figure showing the institution’s heft.

World Bank President David Malpass recently touted the institution’s work on adaptation finance, emphasizing in a piece released as COP 26 was wrapping up that part of the goal was attracting private capital.

“The key is to prepare national plans with market assessments that can crowd in the private sector,” Malpass said, saying that more room was available for his institution to help.

“Going to the places where these solutions are hard to devise are really what the institutions are built to do,” said Valerie Laxton, a senior associate at the World Resources Institute, referring to MDBs.

She was also sympathetic to the bank’s reasoning on the need to be country-specific and avoid cookie-cutter programs. “Adaptations are very context-specific and localized, so you do need an approach that is tailored to countries’ needs,” she said.

However, to make this happen, banks will need to stake out a leadership role — and do so quickly, as projects can take years to implement. In a recent piece co-written with colleagues, Laxton noted that MDBs are not acting in concert — with some more climate-aligned than others — despite a 2018 pledge to all get on the same page.

“There really is a question around the ambition,” Laxton said. “Clearly, there needs to be an increase in the ambition to strengthen everything from the initial stages of the dialogue with member countries to design and lending.”

The World Bank, though, is not the only player in Washington. A recent issuance of Special Drawing Rights has raised hopes for new financing through the International Monetary Fund that could help countries not only cope with the ongoing debt crisis, but also invest in a greener future.

With talks still ongoing around rechanneling SDRs from wealthy nations, there is heavy lobbying — by civil society organizations and the Vulnerable Twenty Group states, among others —  to make sure the outcome supports the immediate financial needs of countries battered by the COVID-19 pandemic, as well as a strong climate focus.

Advocates are also pushing to include middle-income countries that are climate-vulnerable or suffering from problems around the balance of payments. Bhandary, for example, said that without the fiscal headroom that IMF could offer, nations facing tough financial conditions may refrain from making green investments.

At the Paris Peace Forum this month, IMF chief Kristalina Georgieva said she hopes that the new Resilience and Sustainability Trust will be fully designed by April 2022. The goal is “to start with about $30 billion, building it up to $50 billion and beyond,” she said.