Guest article: Multilateral Development Banks and Climate Finance: More talk than action | SDG Knowledge Center

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By Dr. Ayse Kaya, Professor, Swarthmore College; Assistant Professor, The Wharton School

Multilateral Development Banks (MDBs) provide concessional and non-concessional development finance to low- and middle-income countries. The adverse effects of climate change are a growing obstacle on the path to development and poverty reduction. In this context, the World Bank and its regional counterpart institutions, such as the Asian Development Bank (AfDB) and the African Development Bank (AfDB), have an increasingly important role to play in channeling their financial resources for climate-related projects in the Member States. countries. Yet they are lagging behind in providing multilateral climate finance and need to become more transparent and rigorous in their existing approaches.

Like other forms of climate finance, multilateral financial flows can help developing countries embark on low-carbon growth pathways and reduce their emissions, while building their capacity to withstand the current impacts of climate change. climate change, including by facilitating adaptation and resilience. The World Bank, for example, cites the desire to provide clean energy – where electricity currently lags behind – to facilitate green growth. Adaptation takes different forms, but often requires costly interventions, such as building new, more climate-resilient infrastructure. Thus, there is a great need for money, especially for the most vulnerable communities in the most affected but poorest pockets of countries.

MDBs have great leadership potential in climate finance: they have capital and can raise additional funds in international markets. For example, the World Bank’s main lending agencies, the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA), had committed a total of over US$40 billion during the year. fiscal year 2021 (as of July 2022) . Mindful of their own role in climate finance, the MDBs have published joint reports on their climate finance flows since 2011. They have also published a joint assessment framework to comply with the 2015 Paris Agreement, in which they outlined project activities considered “aligned” versus non-aligned. Many MDB reports also contain many references to the SDGs.

More data, more money

Alas, this combination of the ability to lead and the declared desire to do so did not translate into adequate action. MDB efforts to realize their climate finance potential are hampered by a lack of detailed, transparently tracked data and lagging financial commitments.

The joint MDB reports include aggregate figures on what each bank has committed (in the past) as climate finance. However, no project-level data sets are available to accompany these reports. Such a data set is essential for others to hold these institutions accountable – without knowing how their flows for climate change are accurately accounted for, we need to take the MDBs at their word. In national contexts where external funding can easily be diverted to new purposes or wasted through corruption, this transparency is doubly important for national actors and international observers.

However, even when we take the joint reports at face value, the pattern that emerges suggests that MDBs have significant leeway to increase their climate finance disbursement ambition. The initial pledge from rich countries at the Copenhagen climate summit in 2009 (UNFCCC COP15) was “30 billion dollars for the period 2010-2012 with balanced distribution between adaptation and mitigation”, then 100 billion dollars per year by 2020 (emphasis added). The increase in MDB financing from 2013 to 2020 has been unimpressive and bumpy: MDB climate finance only increased to $40 billion in 2018 and has since fallen to $35 billion in 2020. During the same period, total MDB climate finance remained below one-third of total MDB operations.

This is especially true for money earmarked for adaptation; most of the world’s poor live in areas most affected by climate change, and their lives continue to depend on activities that are disproportionately influenced by shocks and environmental degradation. Adaptation remains vastly underfunded compared to mitigation, with MDBs typically devoting nearly two-thirds of climate funds to mitigation and only one-third to adaptation. This asymmetrical allocation to attenuation should be rectified. In addition, the concessional share of these multilateral flows remains relatively low: it has always been less than 50% of total climate finance. This raises questions that multilateral climate finance increases debt burdens, thus defeating the purpose of building capacity, especially for adaptation in the developing world.

What does increased ambition on the part of the MDBs look like? For example, the World Bank should formally commit a significant portion of its lending to climate-related activities and publicly announce a rigorous metric to designate the contribution of projects towards this end. Moreover, the temptation to provide mitigation finance to smaller emitters should be tamed: mitigation funds are praised for their contribution to overall public goods, but with the exception of large emerging economies, the drop-in-the-bucket approach of many small mitigation projects in poor countries will fail to effectively reduce greenhouse gas (GHG) emissions . Certainly, the existing governance structures of the MDBs may hamper their ability to stimulate multilateral climate finance. These banks tend to be led by blue chip shareholders, which means that the major players need to converge to scale up climate finance for MDBs.

New Climate Finance Oversight Committee

These considerations also suggest that there could be a role for an MDB climate finance oversight committee, whose members could include technical experts and national and international representatives. While it is still up to the MDBs themselves to increase their climate finance ambition, such a committee could provide valuable advice and help the MDBs to:

  • Ensure that only funds strictly related to climate and environment are counted as climate finance. For example, general MDB support for economic development, such as strengthening education, should not count towards their climate finance targets;
  • ensure that these flows do not increase the debt burden; and
  • Reaching the most vulnerable populations in the most vulnerable countries.
  • Publish an open database of detailed project-level data on climate and environment-related projects led by MDBs.

Since taking development seriously requires taking climate change seriously, by strengthening their role in multilateral climate finance, MDBs can demonstrate the institutional adaptation needed to fulfill their mandates.

This article was written for a Perry World House workshop on global climate finance, organized on October 3, 2002 in partnership with the Climate Center of the Environmental, Social and Governance (ESG) Initiative of the Wharton School of the University of Pennsylvania. This workshop was made possible in part through a generous grant from the Carnegie Corporation of New York. The views expressed in this article are solely those of the author and do not reflect those of Perry World House, The Wharton School, The University of Pennsylvania, or The Carnegie Corporation of New York.

The author acknowledges the Joel Dean Swarthmore Fund and thanks his students, Sky Park and Kendall Praitis Hill, for their excellent research assistance.

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