Shoreline protection in Bangladesh. IMF Photo/K M Asad 2021 via Flickr (CC BY-NC-ND 2.0)
By Angela Churie Kallhauge, Executive Vice President, Impact
Addressing our planet’s climate crisis requires commitment, cooperation, and urgency – all underpinned by finance. But our international financial systems were not designed for a challenge of this scale, and we are falling behind in meeting the needs of developing countries in combatting climate change.
In response to this challenge, the World Bank, the world’s largest multilateral development bank (MDB), adopted a reform agenda last year to become more fit-for-purpose, by providing countries with easier access to money to face the climate crisis. Other MDBs are pursuing similar transformations.
We now need to ramp up the implementation of these reforms over the coming year. In November, the world will convene in Azerbaijan for the UN Climate Conference, COP29, to set a new target for climate finance. And unless we know how these reforms will allow MDBs to deliver and mobilize money where it’s needed most, the new finance goal may fall flat.
Why is MDB Reform Necessary?
Developing countries are often those hardest hit by climate change, yet they have limited resources to respond. Finance experts estimate that they may need up to $2.4 trillion per year in investment by 2030 to meet the Paris Agreement goals—far greater than current finance available.
MDBs can help fill this massive investment gap. They provide grants and low-interest loans to developing countries to foster development, fight poverty, and address climate change — making them well-positioned to support developing countries with climate-related challenges. For example, after Hurricane Maria displaced thousands in Dominica in 2017, the World Bank provided $115 million in emergency support to rebuild the island and foster resilience.
However, even with MDB support, when climate disasters strike, many developing countries face underlying financial pressures which have not been effectively addressed by international institutions. Nearly seven years after Hurricane Maria, Dominica remains incredibly indebted and at risk of debt distress. They are not alone: most Caribbean countries have high public debt, alongside limited access to private finance.
Other regions face similar challenges – many African states are struggling to finance their energy transition due to perceptions of high risk, and some climate-vulnerable countries like Kenya and Ethiopia have seen credit rating downgrades in recent years. Finance that is provided is often at incredibly high interest rates, and the costs of capital for clean energy projects in African countries is three times greater than in developed countries.
In response to these challenges, a chorus of calls for MDB reform have echoed across the global community in recent years. The good news is that these reforms are now underway. Last October the World Bank adopted a reform agenda which includes a new playbook for action and a new vision statement – to create a world free of poverty on a livable planet – firmly integrating climate change into its core mission.
The Bank’s new playbook seeks to “deliver impact at scale,” including by strengthening the mobilization of private finance and expanding financial capacity. Other MDBs are implementing similar reforms, with positive progress on issues such as cross-bank coordination and the use of debt pauses to prevent countries from falling into debt distress.
Why is Implementing MDB Reform Critical for the 2024 Finance Goal?
The international community is currently deliberating on a new goal for how much climate finance developed countries should channel to developing countries. The current goal of $100 billion per year, set in 2009, was only met for the first time last year. The new goal will be far more ambitious, with some countries calling for a target of $1 trillion or more. To meet this level of finance, we will need to draw from multiple sources including the public and private sector.
The MDBs will play a pivotal role in reaching this target, particularly when it comes to crowding in new sources of private finance. Currently, MDBs leverage $0.60 in private capital for every $1 of MDB financing, but G20 experts have called on them to double this ratio. This could have a transformational impact by catalyzing finance at far greater levels than before and helping us meet an ambitious finance goal. MDBs can unlock new private sector partnerships by doing more to reduce the risk of climate projects through tools like guarantees.
How can MDBs Seize this Moment?
At this week’s Spring Meeting of the World Bank in Washington DC, and across the rest of 2024, MDBs must make swift progress on implementing reforms to meet the urgency of the moment and build momentum towards a meaningful finance goal. Priorities should include:
- Mobilizing private finance through partnerships that can reduce and share risk.
- Enhancing lending terms and increasing concessional finance capacity to ensure vulnerable countries can deal with the consequences of heightened climate impacts.
- Streamlining bureaucratic procedures to hasten access to financing in disaster response situations.
- Implementing new mechanisms to limit debt burdens in countries facing climate shocks, such as making greater use of grants and non-debt financial instruments.
If finance is the key to climate action, then these reforms can have an outsized impact through improving the flows of finance to the Global South. And if we want to see an ambitious climate finance goal agreed to this November, then it will be pivotal that MDBs can build trust in responding to developing countries needs and assist them in pursuing a just transition for a better planet.