World Bank must act on climate change to check poverty, development

As warming intensifies and extreme weather worsens, the developing world will increasingly suffer the worst harms, making it more difficult for countries to meet their development goals

Time is running out for the World Bank to become the leader on climate change that we need it to be. While all multinational development banks should be doing more, the World Bank in particular lags behind — and is still not aligned with the Paris climate agreement. The good news is that what needs to change at the bank is clear, and it seems to be moving in the right direction. But it must move more boldly, and more rapidly.
 

The heart of the World Bank’s mission — reducing poverty and increasing economic development — is severely threatened by climate change. As warming intensifies and extreme weather worsens, the developing world will increasingly suffer the worst harms, making it more difficult for countries to meet their economic and social development goals. Putting access to clean, reliable and affordable energy at the center of its work is the only way the bank can fulfill its mission of supporting economic development and improving lives.

While many developing nations are eager to move beyond fossil fuels, they aren’t getting the support they need from the World Bank and other development banks. At the United Nations’ COP27 climate summit in November, one of the few points of consensus was the need for development banks to fully incorporate the urgency of climate action into their lending models. In the leadup to the summit, G-20 nations recommended changes to development banks that would facilitate more capital flows to climate-related projects. And months earlier, leading environmental groups made their own recommendations for change.

For any large organization, adapting to a changing landscape is difficult. But the World Bank’s history — it came into existence to help rebuild countries shattered by World War II — shows the power of multinational development banks to tackle global challenges. And no challenge is bigger, or requires more international cooperation and coordination, than climate change.

There is broad overlap on the changes being called for by environmental groups; economists like Larry Summers; the leaders of the major financial institutions; the Bridgetown Initiative led by Barbadian Prime Minister Mia Mottley; and French President Emmanuel Macron, who is planning a summit for a new global financial pact next June. Some steps can be taken immediately, such as making the data it collects on credit risk available to outside investors — something all development banks should do — which would help investors assess opportunities in countries where they lack experience. But far more fundamental changes are needed, and they fall into two main categories: ambition and risk.

Ambition. The World Bank has agreed to direct 35% of its financing to climate-related projects by 2025. That’s a step forward, but not far enough. The Asian Infrastructure Investment Bank and European development banks set their targets at 50%. The 550 financial institutions that comprise GFANZ (the Glasgow Financial Alliance for Net Zero), as well as thousands of companies, cities and other organizations, have made ambitious net-zero commitments. It’s critical that the World Bank follows suit by setting higher investment targets, putting more of its capital to work in ways that align with the Paris Agreement, and increasing the amount of private-sector capital it mobilizes.

The fact is: If emerging markets and developing countries don’t transform their energy systems, the world will not be able to meet its goals under the Paris Agreement. Nor can that transformation take place without a tremendous amount of new energy investment, which neither the public nor private sector alone can supply. While the World Bank has stopped investing in coal plants, it is still supporting the construction of gas plants, without adopting energy transition timelines.

Risk. In the developing world, clean energy projects can run up against any number of obstacles that lead private investors to view them as too risky: weak credit ratings, concerns about a nation’s fiscal or political stability, uncertainty about exchange rates, and fear of inflation. But those obstacles can be overcome if public financing is used as a form of insurance for private investors, by reducing the risk of losses. This can be done, for instance, by having the World Bank be first or second in line to accept losses if an investment proves unsuccessful, or by guaranteeing loans.

The World Bank already has deep experience providing guarantees to support both public and private investment in developing countries. It just needs to do more. The whole point of a publicly funded bank is to take risks that the private sector would not, to achieve a goal that carries broad public benefits.

Critics charge that private investors should not be able to push losses off on the World Bank. And certainly, there should be guardrails. But that criticism ignores all the public benefits that come with accepting higher tolerance for risk, and it pretends that private investors can be pushed into accepting higher risks simply because the public needs them to. That’s not the real world, where there are regulatory, fiduciary and other binding constraints. Incentives are necessary and could unlock financing at enormous scale, given that hundreds of global financial institutions are actively seeking investment opportunities aligned with the net-zero transition.

Of course, the World Bank would like countries to give it more capital to finance green projects. And more funding is necessary, but it must be accompanied by a commitment from the bank to leverage it more aggressively, to mobilize more private capital.

Each of those areas will require operational reforms to the World Bank’s traditional ways of doing business, and bringing that kind of change to a large organization is no small task. But it can and must be done. The bank was created through US leadership, and it’s imperative that Washington lead the charge in transforming it, so it can rise to the epic challenge facing our generation, just as it did after World War II.

Disclaimer: This is a Bloomberg Opinion piece, and these are the personal opinions of the writer. They do not reflect the views of www.business-standard.com or the Business Standard newspaper