G20 leaders have agreed to a “New Delhi Leaders’ Declaration” at the beginning of this year’s G20 Leaders’ Summit.

The summit included historic milestones like the African Union’s inclusion in the G20, a commitment to triple renewables capacity by 2030, and support for financial reform including multilateral development banks.

However, the lack of concrete action on energy efficiency and fossil fuel phase-out raises concerns for the global energy agenda that need to be actioned by COP28.

Amidst geopolitical challenges, a joint declaration that at least advances some elements of the international climate agenda is a positive step for international collaboration.

This week had already seen leaders at the African Climate Summit appeal to global cooperation to provide financial and technical support to their climate goals, and the report on the Global Stocktake, which highlighted big gaps in global delivery. All eyes were on G20 leaders to design and follow a political roadmap to COP28 and indicate how to close global delivery and finance gaps.

The summit featured many firsts, including addressing a big gap in representation by welcoming the African Union as a permanent member of the G20 and making a commitment to pursue and encourage efforts to triple renewables capacity by 2030. The agreement to pursue reforms for better, bigger, and more effective Multilateral Development Banks, along with facilitating low-cost financing solutions for developing countries, is also positive and can help create fiscal room and fast-track implementation of climate actions.

Yet, progress on the global energy agenda remains patchy at best, as the summit declaration failed to detail more concrete action on doubling energy efficiency (the text is weaker than the energy ministers’ outcomes document) and to phase out fossil fuels. Also unfortunate is the absence of recognition for private sector transition plans and stronger endorsement of the work achieved by the International Sustainable Standards Board (ISSB) on disclosures. Both transition plans and a common standard for disclosures are critical to align financial system flows with the need for transitions.

Leaders need to use the remaining 12 weeks until COP28 to set out and build support around clear, ambitious visions for COP decisions that address the fossil fuel culprit and loss and damage consequences of climate change, as well as amplifying a renewable future. The UAE has opened the door to addressing the phase down of fossil fuels at COP28 — they need to seize the opportunity.

Madhura Joshi, Senior Associate at E3G, said:

“This G20 has seen many firsts, welcoming the African Union’s G20 membership, making the G20 more inclusive. We have seen a landmark decision to support tripling global renewable energy capacity by 2030, important for both development and climate goals; support for doubling the rate of energy efficiency, crucial for energy transitions; and for reforming multilateral banks, which can help unlock affordable finance for implementation.

However, increasing renewables needs to go hand in hand with phasing out fossil fuels, which is completely missing. We need stronger, bolder action from leaders on both. All eyes now on COP28 – can the leaders deliver?”

Lisa Fischer, Programme Lead for Climate Neutral Energy Systems at E3G, said:

“It is disappointing that because of a few blockers the G20 could not agree on the phasing down and out of fossil fuels, an integral part of the COP presidency’s vision and of just energy transitions. Leaders agreed to the bare minimum, a repetition of the 2022 Bali commitment on coal phase down. If they restrict themselves to coal, we need to see much faster action on ending the global coal buildout.

There is no hiding from the fact that a peak in the use of all fossil fuels is needed as early as possible this decade, and countries must cooperate towards their phase out. Abatement technologies will not significantly alter this trajectory so cannot substitute for phase down. In the run-up to COP28, leaders must steer instead of running behind the re-structuring of the global energy economy.”

Sima Kammourieh, Programme Lead on international sustainable finance at E3G, said:

“This year has been difficult for the G20, especially on the finance agenda. The Indian presidency’s focus on the twin challenges of climate and development faced by many emerging economies was welcome, but more concrete progress could have been achieved, especially by endorsing in stronger terms the work done by the Independent Expert Group on Strengthening MDBs. The ambition of the Sustainable Finance Working Group of the G20 was also quite low this year. Leaders missed the opportunity to more strongly support the work achieved by the ISSB on global disclosure requirements and to deepen work on norms to align financial flows with climate safety.” 

Alden Meyer, Senior Associate at E3G, said:

“G20 leaders have embraced the goal of tripling renewable energy capacity by 2030, but much work lies ahead, particularly on mobilizing the trillions of dollars in annual public and private finance needed to turn that aspiration into reality. To have any chance of meeting the Paris Agreement’s 1.5°C temperature limitation goal, sharp reductions in the production and use of all fossil fuels – including, but not limited to, coal – are also essential, and on that issue, the G20 leaders are missing in action.

It’s time to stop letting a handful of countries block progress on the rapid transition away from polluting fossil fuels that are driving the mounting impacts of climate change and threatening the lives and livelihoods of people across the world.”

E3G is an independent climate change think tank with a global outlook. We work on the frontier of the climate landscape, tackling the barriers and advancing the solutions to a safe climate. Our goal is to translate climate politics, economics and policies into action. About – E3G

For further enquiries email press@e3g.org or phone +44 (0)7783 787 863

Under current trends, global gas demand is set to peak before the decade’s end. Bringing forward this peak in line with climate imperatives can bolster economic growth, security, and resilience. Structurally reducing demand must become a focus of international collaboration. Read more: Global gas demand – E3G

As the largest single source of emissions, ending coal power is the central pillar of all climate mitigation scenarios. Outside of China, last year total pre-construction coal capacity fell below 100 GW for the first time ever, and only 20 new coal plant proposals were initiated or restored. Read more in E3G’s global coal pipeline analysis: Boom and Bust 2023: Tracking the global coal plant pipeline – E3G

G20 Leaders’ Summit sees climate cooperation, but much remains to be done

U finance ministers will soon appoint a new president of the European Investment Bank (EIB). Following two six-year terms, the incumbent, Werner Hoyer, will step down, and a new captain will take the helm of the world’s largest multilateral financial institution. The new president comes at a critical time for the bank. Between the need to support Ukraine, the imperative to accelerate the energy transition and the pressure to reform the international financial architecture, the challenges faced by the largest multilateral development bank (MDB) are not for the faint-hearted.

As CGD prepares a series of interviews with candidates for the presidency of the bank, in this blog we revisit the bank’s structure and mandate and look at why this appointment matters not only for investments within the European Union (EU) but also for the rest of the world.

The EIB: The world’s largest multilateral financial institution

The EIB was founded in 1958, with the primary objective of providing loans for Europe’s infrastructure projects, and the six founding members of the European Economic Community. In 1962, the Bank was authorised to finance projects outside of the European Community.

Today, EIB subscribed capital totals EUR248.8 billion.  The 27 EU Member States are the shareholders of the bank. In 2022, the EIB Group provided EUR72.4 billion in financing, including EUR10.8 billion for investments outside of the EU (of which EUR1.7 billion was allocated to Ukraine). With a balance sheet of EUR544.6 billion at the end of 2022, the EIB is the MDB with the largest assets in the world (see Figure 1).

The EIB  plays an important role in EU international development policy as it accounts for more than a quarter of the total EU’s official development assistance. The bank provides this financing to partner countries in the form of concessional loans and equity investments.

The EIB has 30 offices outside of the EU, which play a representative role, but it centralises its technical and financial expertise at its headquarters in Luxembourg. It does not have significant policy and project capacity at country level, but has asserted a global influence through large projects and sizable borrowing, often public, and by working with financial intermediaries such as local banks and microfinance institutions to reach Micro, Small and Medium-Size Enterprises.

EIB Global: The bank’s new development arm

In 2022, the EIB set up EIB Global—a branch for all its investments outside of the EU. With EUR10.8 billion, including a EUR1.8 billion support package to Ukraine, EIB Global provided 14 percent of the EIB Group’s total financing for 2022.

EIB Global is almost entirely dependent on EU budget guarantees for its operations as the latter cover the risk of EIB loans outside the EU. The branch has a key role in the implementation of the EU’s Neighbourhood, Development and International Cooperation Instrument (NDICI)—Global Europe through a EUR26.7 billion guarantee for projects for sovereign and commercial sub-sovereign counterparts and EUR3.5 billion for private sector operations in Africa, Caribbean and the Pacific . Additionally, the branch secured EUR2.2 billion in guarantees under the open architecture of the European Fund for Sustainable Development (EFSD+).

Mirroring the EU’s external priorities, EIB Global’s investments are heavily skewed towards the EU’s Neighbourhood and Sub-Saharan Africa. In 2022, these two regions accounted for more than two-thirds of the branch’s financing. In terms of sectors, EIB Global invests heavily in infrastructure, including energy, transport and digital, but the branch also provides financing to the health and financial sectors. Despite opening a few regional hubs, the Bank still has a limited country presence in low- and middle-income countries of operations.

Growing financing needs for the bank in the years to come

In recent years, there has been increasing pressure on the EIB to raise its level of financing to support the priorities of the EU and to respond to multiple global challenges. Having already increased its financing during the COVID-19 pandemic by around EUR47 billion, there are three burning challenges for which the EIB will need to increase its firepower even further.  

Firstly, the EIB will be expected to support the energy and digital transition in the EU. In 2019, the EIB pledged to phase out investments in fossil fuels by 2021, becoming the first multilateral development bank to do so. Often labelled as the “EU Climate Bank”, in 2020, its Climate Bank Roadmap for 2021-2025 committed it to increasing support for climate action and environmental sustainability, with a target of more than 50 percent of its lending activities, and to fully align its financing activities with the Paris Agreement.  

Secondly, the EIB will have a key role to play in financing the recovery and reconstruction of Ukraine. In 2022, the bank committed EUR1.7 billion for immediate relief in Ukraine and provided a EUR4 billion credit line to EU Member States to support the integration of Ukraine refugees. In 2023, the EIB Board of Directors approved the EU for Ukraine Initiative (EU4U) to finance the country’s most urgent infrastructure needs and sustain its economy. Yet, to date, EU Member States have only pledged EUR400 million to the initiative; a drop in the ocean when you examine the latest reconstruction and recovery estimates—around US411 billion.

Thirdly, beyond Ukraine, financing needs worldwide are at an all-time high. The SDG financing gap in developing countries increased by more than 50 percent in 2020 reaching USD3.9 trillion. In parallel, debt distress risks have risen among low- and middle-income economies. Coupled with a tight fiscal space, these debt vulnerabilities prevent a large number of countries from investing in infrastructure and human development. The Global Gateway, the EU’s EUR300 billion worldwide infrastructure and connectivity programme, of which the EIB is a key player, will be critical in filling the gap.

A new president to respond to these challenges and set a new course

Five candidates have been nominated by their country to become the next president of the bank: two current vice-presidents of the EIB—Thomas Östros (Sweden) and Teresa Czerwińska (Poland); Margrethe Vestager (Denmark), Executive Vice-President of the European Commission; Nadia Calviño, First Vice-President and Minister of Economy and Digital Affairs in Spain; and Daniele Franco (Italy), former Italian Minister of Economy and Finance. The nomination is part of larger reshuffling of top jobs among EU institutions. In 2024, following the European elections, the mandates for the president of the European Commission, of the European Parliament and of the European Council all come to an end. The choice for the next president of the EIB might well be considered when it comes to horse-trading for the top jobs.   

The nomination also occurs at a crucial time for MDBs as they engage in a reform agenda. As the Bretton Woods institutions and other MDBs reconsider their financial models and missions, the next president of the EIB will have to define how they want the bank to fit in this new system in the making. Should the bank add the protection of Global Public Goods to its mandate? Should it change its risk approach? Should it ask for a capital increase from its shareholders? These are all questions that the new president will face.

The designation of the new president will have major implications for the future of the EU, its neighbourhood and its development policy. Faced with growing financial needs and an important reform agenda, the next president will have to step up to the challenge.

In an upcoming series of interviews with candidates, CGD will investigate how they plan to respond to these challenges and set a new course for the bank. Watch this space.

CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.

Who the Next President of the EIB Is Matters for Global Development

On August 10, the White House submitted a $40.1 billion emergency supplemental request to Congress that includes $2.25 billion for the World Bank. The request for the Bank is well balanced: it would provide $1.25 billion to support “global challenges” (a more politically palatable term than climate change, which is nowhere to be found in the request) and $1 billion in emergency funding for the poorest countries reeling from the impacts of global interest rate hikes, rising debt burdens and the war in Ukraine. The $1 billion request would bolster crisis funding for IDA, the World Bank facility that supports the poorest countries.  The inclusion of this request sends an important signal that the Administration is not going to seek funding for middle income countries (MICs) at the expense of low income countries—a concern that has emerged in the context of large assistance packages for Ukraine and negotiations over the World Bank reform agenda (and how to fund it) which have largely excluded IDA. 

The $1.25 billion includes $494 million for loan guarantees for the World Bank and $756 million for the World Bank’s “Innovative Global Goods Solutions” trust fund, some of which could be used to offer project loans on reduced (or concessional) terms to middle income countries.

Notably, the rationale for this funding is not that it would support green energy transitions but that it would allow the World Bank “to provide a credible alternative to PRC financing” by leveraging an additional $25 billion in new lending to help countries respond to global challenges.  

There is no firm agreement yet on what constitutes global challenges – the Bank’s evolution roadmap suggests these could include climate change, pandemic preparedness, fragility and regional development, but the bulk of the funding is likely to support climate programs because this is clearly a top Administration priority.  Moreover, the Bank already has facilities dedicated to other global challenges, including a multil-donor pandemic fund, a concessional facility that enables MICs most affected by refugee movements to access financing on exceptional terms, a comparable refugee window in IDA for low income countries and a dedicated window in IDA for regional development projects. 

If approved, this request would fulfill commitments made by President Joe Biden, Vice President Kamala Harris, and Secretary Janet Yellen over the last three months as conveyed in:

the joint statement on the June 22 meeting between Biden and Indian Prime Minister Narendra Modi characterizing both leaders as “united in their determination” to advance the multilateral development bank (MDB) evolution agenda, including mobilizing new concessional financing at the World Bank to support all developing countries;

Yellen’s July 17 statement on MDB reform which emphasized “the immediate need to boost the Bank’s concessional lending capacity for global challenges and support low-income countries;” and

the press release from Harris’s June 5 meeting with World Bank President Ajay Banga, which promised to provide “significant” new concessional financing to incentivize action on global challenges and funding to address the “urgent needs of low-income countries.”

The package would also enable the United States to exert leadership on the MDB reform agenda during an exceptionally dynamic period, especially at the World Bank. But the recent congressional track record on MDB funding does not provide a basis for optimism. For example:

Amid considerable uncertainty in the FY24 appropriations process, outstanding requests for guarantees appear unlikely to be met: World Bank guarantees are a good deal for donors (and taxpayers) because they only need to pay a fraction of the total amount, with the balance provided as a commitment to pay in the extremely unlikely event that the guarantee is called. In the administration’s FY24 budget request, Treasury sought $84 million to cover the subsidy cost for a $1 billion guarantee for a new climate facility at the Asian Development Bank and $26.8 million to enable $2 billion in new World Bank lending for Indonesia’s energy transition. These high leverage ratios should appeal to Congress. Unfortunately, neither the House nor the Senate versions of the Foreign Operations spending bill include dedicated funding for these programs. This—combined with more substantial disagreements over topline funding in the regular appropriations process—does not bode well for the much larger World Bank guarantee request in the supplemental. 

The “alternative to China” rationale is not compelling. In its transmission to Congress, the Administration asserts that expanded World Bank funding would help countries like Columbia, Peru, India, Indonesia, and Vietnam break reliance on funding from China. But while the rhetorical sleight of hand makes sense politically, these countries have ample access to markets and are not dependent on China. Moreover, there is no evidence to suggest that these countries are borrowing from China because they can’t access enough MDB funding (i.e., they could do both). Another complicating factor is that China still benefits indirectly from World Bank financing by winning the procurement bids under those contracts (e.g., for solar panels). In fact, a Government Accountability Office report found that China won 29 percent of World Bank contract dollars between FY2013 and FY2022. Finally, China could itself be eligible to borrow from the “global solutions” trust fund. 

Funding for the poorest is a hard sell: The $1 billion request would help replenish the crisis response window of IDA and provide fast-disbursing aid for countries most affected by external shocks (e.g., food insecurity stemming from the war in Ukraine and natural disasters). There is no doubt the funding is needed, but it is in addition to the FY24 IDA request, which has not yet been approved. This request includes $1.43 billion for IDA’s current replenishment and $48.7 million to cover arrears to IDA, which stand at about $338 million. The FY24 request is very unlikely to be met in full—neither the House nor Senate bill includes funding for arrears and only the Senate proposes to fully fund the $1.43 billion commitment. This compares to $1.097 billion in the House version. Getting lawmakers to provide additional funding for IDA is unlikely—it’s just too difficult to explain why this should matter to constituents.

All of this, of course, is against the background of a dysfunctional Congress, more urgent legislative priorities, and the risk of a government shutdown if a new budget or a continuing resolution is not passed by September 30. 

This prognosis is unfortunate. The financial package could materially strengthen the impact of the World Bank’s climate change agenda at a relatively low cost to the American taxpayer, especially if matched by other donors, an outcome that is very much in our national interest.  The fact that the Administration cannot make this case directly to the US Congress is a grim reminder of domestic political realities.

The Administration’s World Bank Request: Bullish in a China Shop

The African Development Bank (AfDB)’s first Integrated Safeguards System (ISS) was approved in 2013, becoming operational in 2014. Following an evaluation by the AfDB’s Independent Development Evaluation (IDEV) group in 2019, the ISS underwent a review involving internal and external consultations in 2021 and 2022. 

The updated ISS, approved by AfDB’s Board of Directors in April, is expected to go into effect in 2024. The new policy makes forward progress on a number of environmental and social issues, including on the priorities that civil society raised with the AfDB through the consultation process. 

The policy commits to “zero tolerance for reprisals, sexual exploitation, abuse, and harassment (SEA/H), gender based violence (GBV), or discrimination on the grounds of sexual orientation and gender identity.”

The environmental and social assessment policy (OS1) directs Borrowers to consider direct, indirect, contextual, and cumulative project-specific risks and impacts, and requires an assessment of vulnerability to climate change.

The policy includes specific definitions and requirements to promote the inclusion of, and prevent harm to, “vulnerable groups” as well as Indigenous People and “highly vulnerable rural minorities.”

OS4 on Community, Health, Safety, and Security includes positive language around climate change and the provision of universal access in new construction to enable everyone, including persons with disabilities, to use the new structures, though it stops short of recognizing the increased vulnerability of persons with disabilities to climate change. Instead, it only highlights persons with disabilities a group to consider with risks related to community health or an influx of project workers. 

The policy includes requirements to disclose project grievance mechanisms and the Independent Recourse Mechanism (IRM) to affected communities, including for Financial Intermediary projects.

The policy requires risk assessment, mitigation, and response to the risks of SEA/H, GBV, child labor, or modern slavery when identified and/or a related complaint has been filed/registered.

The policy includes a standalone safeguard on stakeholder engagement and information disclosure (OS10) which requires Borrowers to develop stakeholder engagement plans to facilitate engagement and information sharing throughout the project cycle.

However, significant recommendations from civil society were not taken on board. One such recommendation was that there should be a separate and standalone safeguard policy for Indigenous People or “highly vulnerable rural minorities,” rather than an umbrella policy on Vulnerable Groups, due to the specific and differentiated requirements for projects impacting Indigenous People. The ISS also misses an opportunity to reduce climate pollution by failing to directly exclude  activities that contribute significantly to greenhouse gas (GHG) emissions in its Environmental and Social Exclusion List (OS1 Annex 3).

Based on BIC and partners’ experiences monitoring projects including the East African Coastal Corridor Development Project in Kenya, where project implementers lacked adequate knowledge of ISS requirements, civil society also remains concerned that advances in the updated ISS will not be implemented. Our experience has shown the AfDB to be slow to respond to civil society’s concerns, reluctant to address Borrowers’ noncompliance with the requirements of the 2013 ISS, and unwilling to dedicate the resources (human and financial) to provide the level of monitoring and supervision necessary to prevent noncompliance with the existing standards. The new requirements add to the need for expertise and load of due diligence, capacity building, and supervision. With this in mind, the AfDB must make a significant shift and demonstrate strong commitment to full implementation and resourcing of the new ISS, from the top levels of management to the direct engagement with project implementers. This is especially important for areas in which the AfDB will need to build its own expertise and capacity in order to meet new requirements, including disability rights, LGBTQI+ inclusion, and the prevention of reprisals and SEA/H.

As the AfDB moves toward implementation of the updated ISS: 

Consultation is important on supplemental guidance and requirements to be developed by the AfDB, including all Guidance Notes and planned staff Directives on sexual orientation and gender identity (SOGI), reprisals, and SEA/H/GBV. All of these supporting documents should also be made public once finalized. Civil society have submitted input on the draft Guidance Notes and hope to see that input taken into consideration in final guidance.

It is imperative that there be robust training for Borrowers and AfDB staff on the new ISS, paying particular attention to new areas around social inclusion, SEA/H, and climate change assessment, among others.

The AfDB must strengthen its supervision role so that project documents and implementation are in line with the requirements of the new ISS.

The AfDB must publish a detailed timeline and action plan for training and rollout of the new ISS.

The Board must approve adequate resources and capacity improvements for implementing the new ISS requirements. The updated ISS represents a significant progression for the AfDB in terms of necessary due diligence, Borrower support, and supervision requirements. However, broadening the scope of the ISS in order to incorporate additional social issues, including ones that impact children, will require the development of new staff capacity, expertise, and training for existing staff at both headquarters and country offices. Without additional resources, any advances in the new policy will not be realized at the project level, perpetuating dangerous compliance gaps.

The AfDB should be more open and responsive to civil society and communities who  raise issues during the implementation of the updated ISS.

The AfDB has approved new safeguards, but is it ready to implement them?

Written by Danny Scull, Claire Healy, Erin Landy, Jonathan Walters, Sonia Dunlop

This is E3G’s response to the World Bank Group’s consultation on its Evolution Roadmap. The roadmap outlines how the Bank will review its vision and mission, operating model, and financial capacity and model. 

Our response welcomes the World Bank’s proposed updated mission statement. Its explicit acknowledgement that global challenges must be addressed to achieve the Bank’s twin goals of ending poverty and boosting shared prosperity is important. However, the proposal does not give a quantifiable end goal or timeline for what it hopes to achieve on the challenges of climate change, pandemic preparedness and fragility / conflict. The Bank must demonstrate its ambition; we anticipate that it would have to deliver finance in the range of $100bn per year to have a meaningful impact on climate change. 

The proposed changes to the Bank’s operating model are a good starting point to expand on. We identify several areas that should be prioritised or developed further. Among these is increased concessional lending to incentivise borrowing countries to pursue finance for global public goods. 

Any new climate lending must be additional to the Bank’s current commitments. Shareholders need to find a way forward that ensures the development goals of low- and middle-income countries are not traded off against each other. First and foremost, they must explicitly protect baseline IDA lending so low-income countries’ development needs are not superseded by global challenges. 

The Word Bank’s reforms are desperately needed to reverse the development backsliding trend of the last several years. The Bank should therefore expect shareholders to formally agree the roadmap by the 2023 Annual Meetings and be prepared for full implementation by 2025. We broadly support the proposed next steps to advance the Bank’s evolution agenda. However, World Bank Group management must be fully bought into deep reform of the institutions from day one. 

Read our full consultation response with further comments and recommendations here. 

Over the course of the past year, E3G has worked on several papers related to the World Bank Evolution Roadmap. These papers reflect E3G’s views on the potential for the World Bank to evolve its mission, strategies and operations to become a driving force among the MDBs on climate action. The papers are the result of an ongoing dialogue with the World Bank and its shareholders, as well as collaborations with other civil society organisations such as the Center for Strategic and International Studies (CSIS). 

E3G’s consultation response on the World Bank Evolution Roadmap

Multilateral development bank (MDB) reform remains a hot topic among the G20, and the G20 Chair's Summary negotiated during the July 17–18 finance ministerial aimed to advance the agenda—especially on balance sheet stretching and effectively integrating global public goods (now referred to as global challenges) into the DNA of the World Bank.

World Bank President Ajay Banga came prepared to offer several concrete proposals in line with shareholder requests to stretch the Bank’s balance sheet. These measures could meaningfully boost lending capacity for the IBRD but would not benefit IDA. While Banga flagged the current fundraising effort for IDA’s crisis window as another priority, the G20 were notably silent on the issue in the Chair’s Summary. This effort deserves more attention as Russia’s decision to pull out of the Black Sea grain agreement has already driven wheat prices up nearly ten percent, imposing yet more hardship on the poorest countries. Meanwhile, the G20 called for an ambitious IDA 21, the go-to line for every replenishment.

The G20 independent review of MDBs’ Capital Adequacy Frameworks (CAF) received prominent mention— something that has become standard fare in G20 outcome documents. Released almost a year ago, the report has benefited from strong and sustained political support. The G20 call for “an additional push” on CAF implementation and encourage “continued and further impetus on CAF implementation.” This emphasis makes sense given that any freed-up capital from the MDBs relieves pressure on donors.

Banga pre-empted the G20 with three proposals to help “stretch every dollar.” These are: 1) $5 billion in shareholder guarantees, which he estimates could generate $30 billion over ten years; 2) a hybrid capital offering, with a target of $1 billion to support $6 billion in lending; and 3) an effort to extract more value from callable capital – funding commitments made by donors to backstop the World Bank in the extremely unlikely event of severe financial stress (e.g., portfolio wide defaults). The guarantees in particular offer terrific value for money as shareholders only pay in pennies on the dollar. For instance, at a similar facility launched at the Asian Development Bank this year, $84 million in US funding will support $1 billion in guarantees.

The G20 acknowledged this year’s independent report on how to strengthen the MDB system. The just released report co-led by CGD board chair Lawrence Summers and NK Singh (on behalf of India) proposes that the MDBs adopt a triple mandate (global public goods, poverty reduction, inclusive growth), calls for a tripling of MDB funding by 2030 (sovereign and private), and advocates for a new financing window that could attract official and non-traditional donors (e.g., sovereign wealth funds, philanthropies). A second report, due at this year’s Annual Meetings, will delve more deeply into some of the proposals. The G20 were briefed on the report while in India—too late to collectively reflect on any of its contents.  In contrast to last year’s G20 report, which focused on options for increasing MDB capacity through internal reforms, this year it is the donors who are being asked to dig deep financially. For that reason, we can expect a more muted response. In her brief comments on the report, US Treasury Secretary Janet Yellen cautioned that it was premature to explore capital increases, among the key recommendations for scaling up MDB capacity.

Finally, the G20 called on the MDBs “to evolve their vision, incentive structures, operational approaches and financial capacities so that they are better equipped to maximize their impact in addressing a wide range of global challenges, while being consistent with their mandate and commitment to accelerate progress towards Sustainable Development Goals (SDGs).” This statement closely mirrored Yellen’s comments, which called for more ambition with respect “to the MDBs’ vision, incentive structures, operational approaches, and financial capacity to better address global challenges.” What all this means in practice remains to be seen. But among the pending proposals to watch out for is a new World Bank framework to guide the use of concessional (i.e., below market) finance for borrowers at all income levels to incentivize investments in climate, among other global public goods.

My judgement is that the MDB reform needle wasn’t so much moved as sharpened—the G20 Finance Ministers have made clear what the immediate priorities are. The G20 will have a chance to weigh in on the MDB agenda again in September when India chairs the Leaders’ Summit. Ideally, they will have a bit more to say about the poorest. The impact of the suspended grain agreement will be easier to assess by then and the G20 should be prepared to be more forceful—and generous—with the aim of minimizing the collateral damage on IDA countries.

Did India’s G20 Finance Ministerial Move the Needle on MDB Reform?

In the fall of 2022, World Bank shareholders (member governments, including the United States) called for a suite of reforms aimed at better enabling the institution to respond to today’s global development challenges, such as pandemics, climate change, and natural disasters. The World Bank is one of the largest sources of development finance, providing resources to low- and middle-income countries around the globe. Its overarching goals are to reduce extreme poverty and promote shared prosperity.  

The reform agenda is being negotiated by representatives of World Bank shareholders and the institution’s management, which  put forward an evolution roadmap laying out key issues for discussion. Among these issues is whether the World Bank should take on a bigger and stronger role in addressing major global challenges. The United States has been a leading voice in the push for World Bank evolution (see below). However, some shareholders have voiced concerns that the evolution agenda could detract from the bank’s core development mission or create financing trade-offs in the absence of significant new resources.

“Last fall, I issued an urgent call ahead of the World Bank and IMF annual meetings for the evolution of the multilateral development bank system. My reasoning was simple: The world has changed, and we need these vital institutions to change along with it. In today’s world, it’s important that the multilateral development banks make progress on their core mission of poverty reduction and inclusive economic growth. But it’s also important that they take decisive action on global challenges like climate change, pandemics, and conflict and fragility. These goals are all essential, and they’re closely linked.”

— US Treasury Secretary Janet Yellen, February 9, 2023

Shareholders supporting the World Bank’s evolution, included the United States, argue the institution’s country-based approach fails to adequately address shared global challenges. The compounding nature of challenges related to health security, climate, and crises contributing to protracted displacement, is taking a toll on countries and setting back development gains. Still, under the current country-led financing model, governments have little incentive to borrow from the World Bank for programs where the benefits are not directly captured by their country. For example, the national returns of preserving a tropical forest that spans across multiple countries may pale in comparison to the short-term economic losses.  

Recent crises underscore the limits to the bank’s existing country-led model. For instance, despite calls for the bank to provide an early guarantee of financial commitment to COVAX—the multilateral platform for supplying COVID-19 vaccines to lower-income countries—the bank’s existing financial framework constrained it from deploying timely capital, delaying vaccine deliveries to low- and middle-income countries. 

Where the World Bank has stepped up to address these shared issues, it has frequently set up special facilities (e.g., trust funds) outside of its standard model. For instance, the World Bank established the Global Concessional Finance Facility in 2015 to support middle-income countries hosting large numbers of Syrian refugees. Some shareholders championing reform argue it’s impractical and inefficient for the World Bank to create new windows, funds, and approaches for each new challenge.

The World Bank Group is a global organization made up of five entities with complementary roles in promoting global economic development. Of the five, three offer loans and other forms of financing, one offers insurance, and one provides arbitration.

(1) The International Development Association (IDA) provides grants and concessional (e.g., below market) loans primarily to low-income countries. IDA is one of the largest sources of development assistance for poor countries, most of which are in sub-Saharan Africa.  IDA is funded by donor governments and requires new financing roughly every three years. 

(2) The International Bank for Reconstruction and Development (IBRD) provides loans mainly to creditworthy middle-income countries at market rates, usually below what they can access on their own. As an AAA entity, the IBRD can borrow on international capital markets at attractive rates and relend these funds, charging a slight premium to cover operating expenses.  It does not require regular support from donors, but from time to time they have provided new capital to enable the World Bank to scale up lending (e.g., during the global financial crisis).

(3) The International Finance Corporation (IFC) supports private sector development by investing in companies through loans, equity investments, debt securities, and guarantees, and by mobilizing capital through loan participation. 

Over the last three financial years, these lending arms of the World Bank Group have committed $232 billion and disbursed $182 billion.

The two non-lending arms of the World Bank Group are:

(4) The Multilateral Investment Guarantee Agency (MIGA), which provides guarantees (political insurance and credit enhancement) to investors and lenders seeking to do business in World Bank client countries.

(5) The International Centre for Settlement of Investment Disputes (ICSID), which acts as a third-party dispute settlement recourse for investors and governments.  The goal is to promote international investment by increasing confidence in an impartial dispute resolution process.

For more background, see ABCs of the International Financial Institutions: The World Bank

In January 2023, the World Bank produced an Evolution Roadmap, which was revised and updated in March 2023. The purpose of the roadmap is to guide shareholder discussions and build a consensus around reforms, with the goal of reaching agreement on major proposals by the 2023 Annual Meetings to be held October 13-15. It underscores three critical areas of reform.

1. Review the World Bank Group’s vision and mission. This is focused largely on how to integrate and finance global challenges into the World Bank’s mandate without diluting the bank’s focus on poverty and inclusive growth.

2. Review the World Bank Group’s operating model. This is focused on how the World Bank could improve efficiency, scale up impact, engage more effectively at the regional and global levels, and strengthen response capacity. 

3. Explore options to enhance the World Bank Group’s financial capacity and model. This is focused on reforming financial policies to free up capital that could be used for additional lending. A G20 independent report on multilateral development bank capital adequacy (the CAF report) drew new attention to opportunities to make the most of existing institution balance sheets.[1] The report, released in July 2022, proposes a series of reforms to free up significant additional capital even absent new shareholder resources.

The proposed reforms are expected to have positive implications for middle-income and upper-middle-income countries, which borrow from the IBRD—the World Bank’s hard loan window. The reforms would allow IBRD to scale up its lending and potentially provide cheaper sources of financing for these countries to invest in global public goods.

To date, the reform agenda has not focused on IDA—the bank’s arm that serves primarily lower-income countries. Demand for IDA financing has been at a record high since the COVID-19 pandemic, and IDA provided a record $42 billion in financing in 2022. While not directly linked to the evolution roadmap, in May, the World Bank announced a special fundraising campaign to help the most vulnerable borrowers manage the impact of food and energy prices spikes as well as extreme weather events.  

In the run-up to the World Bank Spring Meetings in April 2023, the World Bank board and management held extensive discussions on the mandate and vision question and examined the scope for financial reforms. While no final decision has been reached on a revised mandate, shareholders agreed that the World Bank’s goals of ending extreme poverty and promoting shared prosperity should remain at the core of its vision, while acknowledging the need for a stronger focus on sustainability, resilience, and inclusiveness.

On financial reforms, management revisited the World Bank’s financial capacity and suggested revisions to its capital adequacy framework. If adopted, these reforms could add up to $50 billion in new lending over the next 10 years. This would add roughly $5 billion per year in new lending above the current annual commitments (which average of $30.3 billion)—a roughly 16.5 percent increase. One of the proposals, to remove the Statutory Lending Limit from the bank’s Articles of Agreement,[2] would require congressional approval.

While the reform process could take several years, the next few months will be critical if its champions hope to sustain momentum and see results. Amid negotiations on the Evolution Roadmap, the World Bank’s new president, Ajay Banga, took office. President Banga articulated his ideas for World Bank reform during an event at the Center for Global Development in April, including  plans to focus on job creation, increasing access to and use of digital technology, leveraging the World Bank’s existing finance, and using private capital markets—domestic and international—more effectively.  President Banga focused on similar issues in his June interview with CNN’s Fareed Zakaria.

If negotiations proceed smoothly, management is expected to seek approval from World Bank shareholders for its first set of reforms during the next annual meeting in mid-October. 

Outstanding questions in the reform agenda

Though there’s interest from some in seeing this agenda advance quickly, a number of fundamental questions about the details of a World Bank evolution remain:

How can IBRD create incentives for countries to borrow for global projects? 

How many additional resources can be created through balance sheet optimization measures? 

Will the bank target the world’s most climate-vulnerable countries using concessional climate finance? 

How will the World Bank ensure contributions for climate subsidies in middle-income countries don’t come at the expense of future IDA rounds? 

The Center for Global Development’s Wish List for the World Bank’s Evolution Roadmap

The Spring Meetings Should Launch a Climate-Dedicated IBRD Capital Increase

Concessional Finance for Addressing Climate Change: A System Ripe for Reform  

Thanks to Erin Collinson, Justin Hurley, Clemence Landers and Scott Morris for comments and suggestions on an earlier draft.

[1] A capital adequacy framework measures a financial institution’s ability to honor its financial obligations if its debtors are unable to pay back what is borrowed. Measures can be risk-based or focus on financial leverage. Unlike other financial institutions, multilateral development banks are not regulated, and shareholders have sole authority over the capital adequacy policy.

[2] The World Bank is governed by its Articles of Agreement, which contain a Statutory Lending Limit (SLL) in Article III, Section 3. This SLL prevents the World Bank from providing loans and guarantees in greater value than what the World Bank holds in equity.

The ABCs of the IFIs: Understanding the World Bank Group Evolution

On Monday, G20 Finance Ministers hold their third meeting hosted in Gandhinagar by the Indian government. The gathering comes as IMF global economic growth forecasts remain the lowest in decades. 

“Global economic challenges are pushing countries deeper into debt,” said Eric LeCompte, Executive Director of Jubilee USA Network, who has followed IMF and G20 policies for more than a decade. “The pandemic, the Russia-Ukraine war and high interest rates are raising debt in developing countries and these countries don't have the resources to respond to their food and climate crises.”

In June, after more than two years, governments holding Zambia debt announced agreement to reduce collection by the equivalent of 40%. However, payments will increase if Zambia’s economy does better, and will not decrease if it does worse than expected. Zambia still has to negotiate a restructuring of near $7 billion in debt owed to private creditors.

“More than 60% of Zambia's people live in poverty,” noted LeCompte. "Not enough debt was cut to address the suffering of Zambia's people."

The debt renegotiation took place under a process set by the G20 in late 2020 to cut developing country debts, the Common Framework for Debt Treatments. Zambia and Chad are the only countries to receive some relief so far.

Finance Ministers will review a report on additional needs for multilateral development bank lending. Former US Secretary of Treasury Larry Summers and former chairperson of the Fifteenth Finance Commission of India Nand Kishore Singh chair the group issuing the report. 

“Development banks need more money and need to implement reforms to effectively distribute additional resources to respond to regional crises,” stated LeCompte. 

G20 commitment to transfer $100 billion in emergency pandemic aid – Special Drawing Rights (SDRs) – from wealthy to poor country economies will also be on the agenda. More than $400 billion, out of $650 billion the IMF created in 2021, went to wealthy economies which committed to redirect $100 billion of their share to developing countries.

G20 Finance Ministers Focus on Debt, Development and Dismal Economic Outlook in Gandhinagar

The Paris Summit for a New Global Financing Pact held in June sought to address the key issues currently facing development finance. The mobilisation of private finance for development outcomes formed a central part of the discussions during the two day event. While this focus is not new, it has been somewhat reconfigured with emphasis placed on the need to mobilise “at scale”. However, without improved measurement and increased transparency, it will be impossible to tell whether or not these new commitments deliver on their promises.

It is also critical that any new commitments – and the metrics used to measure them – do not incentivise investments with greater mobilisation potential at the cost of those which have the greatest impact. More granular transparency would help to minimise this risk and keep the focus on development and climate impact.

“A key question in the mobilisation debate is how stakeholders will be able to monitor progress and hold MDBs and DFIs to account. There is currently far too little transparency around mobilisation rates.”

One of the central outcomes of the summit has been a (re)commitment to mobilise private finance to meet global financing gaps. The summit’s official communique calls on greater efficiency in mobilisation where “Each dollar of lending by MDBs should be complemented by at least one dollar of private finance. Based on this, we expect from them to leverage at least 100 billion dollars of private money each year in developing and emerging economies”. Similarly, a group of thirty countries called on multilateral development banks (MDBs) “to develop relevant and harmonized metrics for private capital mobilization and set quantified targets that reflect their ambition, while also establishing incentives for staff to mobilise international and local private capital”.

If this commitment doesn’t sound particularly new, it is because it isn’t. MDBs ambitiously targeted high levels of mobilisation in a 2015 declaration that financing for development needed to be transformed from “Billions to Trillions” and that the mobilisation of private finance was a key element of achieving this. The leverage ratios implied in this old objective appeared unrealistic to many, and indeed proved to be so. Analysis of mobilisation from the Overseas Development Institute found that leverage ratios from MDB and development finance institution (DFI) investment ranged from $1.06 for every $1 invested in lower middle income countries, to $0.37 for every $1 invested in low income countries. Meanwhile, Charles Kenny declared the Billions to Trillions narrative to be “still dead” in an analysis of the limited mobilisation achieved by the International Development Association (IDA) Private Sector Window (PSW). In comparison to the previous goals, the new target of leveraging $1 for each $1 invested by MDBs appears more realistic, although it still implies an increase from current rates.

One of the key changes in the narrative surrounding the mobilisation of private finance that emerged from the summit was an emphasis being placed on the need to mobilise “at scale”. To date, much of the focus on mobilisation has been through the lens of transaction-level mobilisation, in effect co-investment of MDB resources with private capital. This is reflected in the current methodologies for measuring and reporting mobilisation; both the OECD approach and the MDB joint approach only capture mobilisation that occurs in individual investments. However, the summit notably focussed on a broader array of tools that may mobilise private finance. The thirty-country vision statement called for “expanding the use of innovative risk-sharing tools and platforms with a strong leverage effect”, reflecting a recognition that to mobilise at scale would require solutions and products that are more attractive to investors that are seeking larger participation such as institutional investors and pension funds. These proposals have strong synergies with recent work from British International Investment and from Neil Gregory that have argued for a reconceptualisation of mobilisation to include mechanisms that occur at levels or stages in the investment cycle that are not currently captured by the existing measurement methodologies.

A note of caution is required when treating mobilisation in this way. MDBs and DFIs have long deployed many of the tools and leveraging mechanisms that are now being hailed as pathways to increasing mobilisation. Given that leverage ratios are currently significantly below those required to close finance gaps for achieving the SDGs and in climate finance, it is necessary for these mechanisms to be deployed at greater volume. Otherwise, there remains a risk that we begin accounting for existing mobilisation that to date has been unaccounted for, while failing to change the absolute amounts of private capital that are mobilised.

The need for new data and more transparency

A key question in the mobilisation debate is how stakeholders will be able to monitor progress and hold MDBs and DFIs to account. There is currently far too little transparency around mobilisation rates. Publish What You Fund’s inaugural DFI Transparency Index found that none of the institutions included in the assessment systematically disclosed disaggregated mobilisation data. While MDBs and DFIs have reported aggregate mobilisation data through a joint report, and the OECD maintains a database and periodic reporting on mobilisation, none of these sources contain detailed, disaggregated data. Without such data it is impossible to see which tools and investments are effectively mobilising private capital, which are less effective, and where future efforts should be focused. One of the key outcomes of the summit was a call for “Multilateral Development Banks to examine and possibly adopt relevant and harmonised metrics for private capital mobilization and to set quantified targets at the institutional level within their Key Performance Indicator (KPI)”. While this call is to be welcomed, if the metrics are to be of real use they must also be transparently disclosed.

Publish What You Fund is currently working on the issue of mobilisation transparency. The work has two aims:

To improve measurement of mobilisation to better capture the totality of mobilisation efforts at MDBs and DFIs.

To introduce a new framework for reporting mobilisation for adoption by the leading MDBs and DFIs.

We are currently holding many discussions with MDBs and their stakeholders as we work towards these goals. Our discussions have indicated that there is a recognition of the need for both better and more data that can help MDBs and DFIs and their stakeholders better understand what works, and what doesn’t, in the drive to mobilise private finance for better development outcomes.

Reflections on the Summit for a New Global Financing Pact: more mobilisation promised, but will we ever know if it has been delivered?

InterAction, the largest U.S.-based alliance of international NGOs and partners working on development and humanitarian issues, is alarmed that the House is proceeding with a woefully inadequate FY2024 State, Foreign Operations bill.

We appreciate the work of the Appropriations Committee, but we are disappointed that it drafted a bill that cannot be effectively conferenced with the Senate or signed by the President.

Foreign Operations Bill: Dubious Maneuver

To achieve an overall funding level of $52.5 billion—which is still inadequate—the bill relies on a $11 billion rescission that is outside the jurisdiction of the subcommittee and will likely be rejected by the Senate and the White House. This dubious and untenable rescission maneuver results in a staggering 22% shortfall within the bill, raising concerns about the feasibility of meeting all the recommended funding allocations.

Moreover, we find it disheartening that the bill not only falls short of providing adequate funding for critical international programs but also imposes substantial cuts of nearly one-third to key development accounts—jeopardizing existing programs and relationships with local populations and governments.

The bill would decrease USAID Operating Expenses by nearly one-third and put the efficient and effective allocation of resources and the implementation of crucial programs at stake. This reduction would raise major concerns regarding the agency’s ability to respond promptly and appropriately to evolving global challenges.

Furthermore, the bill’s proposed reduction in funds allocated to address mounting humanitarian crises is alarming. Rather than shrinking, these crises demand increased attention and support.

345 million people are facing severe hunger—that is more than double the 2020 number. 900,000 people are suffering catastrophic hunger or are one step away from famine. There are 100 million forcibly displaced people—that is more than the populations of California, Texas, and New York combined.

We have said it before and will say again: the math does not add up.

America is Surrendering Its Role as a Global Leader

The inadequate funding levels will forcefully cut short life-saving programs and weaken the United States’ position as a global leader. When America surrenders its role as a global leader, we create a vacuum that our competitors are eager to fill.

U.S. leadership, diplomacy, and national and economic security cost money. Through these cuts, the bill actively withdraws the U.S. from the world stage, surrendering America’s position as a leader and a force for good in the world while making Americans less safe.

Statement on Woefully Inadequate FY2023 Foreign Operations Bill

Svenja Schulze - Federal Minister for Economic Cooperation and Development, Germany

Climate change, biodiversity loss, conflicts and pandemics simply cannot be addressed only at country level. Today’s global challenges require a broader intervention that takes into account global interdependencies and spill-over effects. The World Bank urgently needs to adopt a broader view, focussing not only on poverty reduction and economic growth but also on promoting a just transition: it needs to support countries worldwide in adopting more sustainable and climate-friendly ways of living, producing and consuming.   

Moreover, the World Bank needs to play a bigger role in mobilizing resources for sustainable development. With regards to attracting private sector investments it currently lags far behind its potential. This is one of the reasons why, together with other Governors of the World Bank Group, I have called for a substantial overhaul of the World Bank’s business model. The World Bank has to become a true “Transformation Bank”. It needs to lead the way in creating the necessary pre-conditions and incentives for sustainable development – and in bringing all hands on deck!  

Addressing global challenges by protecting global public goods – the earlier, the better!

The World Bank estimates that addressing climate change, conflict, and pandemics in developing countries will cost 2.4 trillion USD in public and private spending per year through 2030[1]. This figure might seem daunting but, as the World Bank rightly underlines, it is “a small cost compared to not addressing these issues.” Indeed, the sooner we make headway on facing these challenges, the more negative effects and future costs we will be able to avoid. Thinking ahead and investing in prevention pays off. Studies show that for every dollar invested in prevention and sustainability four dollars are saved long term on crisis reaction.   

Mobilizing more private investment for sustainable development   

But how can this substantial financing gap be filled? It is clear that no single institution can achieve this by itself – not the World Bank, and not even all the multilateral development banks combined. To raise the required capital, both domestic and international resources, as well as public and in particular private finance, will need to be adequately scaled up.

Private investment will not happen automatically. Appropriate policy decisions are needed to attract and guide private investors and channel their capital towards sustainable investments. As the new World Bank president, Ajay Banga has underlined that “the only way forward is to find a way to get the private sector to believe that [helping developing countries adapt to and mitigate climate change] is part of their future.” I welcome Banga’s plan to promote “informed risk-taking” by the World Bank so as to take on risks private investors cannot shoulder, thus encouraging them to get more engaged in climate transition and helping countries leapfrog fossil fuel energy sources. This is an important step in the right direction.

However, in order to mobilize private investment at scale, policy reforms are needed, in particular related to decarbonizing the energy, transport and agricultural sectors. To date, international development policy has not managed to mobilize adequate levels of private sector investment, in particular in climate-related areas. In 2020 only 13.1 billion USD was mobilized for climate finance – that is less than 0.5 percent of the above-mentioned required 2.4 trillion USD. Furthermore, instead of picking up speed, the rate of mobilization is slowing down.

In the renewable energies sector in particular, private investment remains far below its potential. This is all the more surprising as, in recent years, the cost of key technologies has been substantially reduced. The costs for electricity from utility-scale solar photovoltaics fell 85 percent between 2010 and 2020[2]. Renewable energy is increasingly becoming the lowest costing and thus theoretically the best commercial option.

One key factor holding back private investment is bad policies – policies that set the wrong incentives for investors. Governments spent about 577 billion USD on direct fossil fuel subsidies in 2021, contributing to toxic air pollution, inequality, inefficiency, and mounting debt burdens. The size of implicit subsidies is even higher[3]. In many countries, the tariffs imposed on sustainable goods are substantially higher than those for less environmentally friendly goods[4]. In most countries there are no feed-in tariffs for renewable energy. Sector regulation is often biased against renewable sector investments. These are just a few examples of widespread policy barriers that are limiting and blocking private sector investment in sustainable business opportunities.

Such inappropriate policies not only lead to missed business opportunities and lost economic growth. They also make it substantially more difficult and costly for the international community to reach the Sustainable Development Goals and international climate targets. Against this backdrop, it is incomprehensible that multilateral development banks currently only use a small fraction of their overall financing to support policy change. In the case of the World Bank, policy support only makes up a small fraction of its total climate financing.  

Ramping up the World Bank’s policy support for global public goods

Structural reforms are thus urgently needed with regards to the modus operandi of the World Bank Group. With the largest policy-lending program of all the multilateral development banks and 110 country offices worldwide, the World Bank is well placed to deliver hands-on support for policy reforms and systematically help level the playing field for climate-neutral and socially sustainable growth.

There are some promising signs that the World Bank Group has started to head in the right direction. The Equitable Growth, Finance and Institutions (EFI) Vice Presidency, which accounts for 80 percent of the World Bank’s policy financing, has started ramping up its climate policy reforms. And the International Finance Corporation (IFC) has worked on “if-then” rules that will enable it to provide increased funding to countries with climate-friendly policies. However positive examples like these are still few and far between. 

Let me highlight which levers I consider to be of utmost importance with regards to bringing the World Bank up to speed in enabling private sector investments related to climate protection:

1. Adopting a “One World Bank Group” approach

The three institutions of the World Bank Group – the World Bank, the International Finance Institution (IFC) and the Multilateral Investment Guarantee Agency (MIGA) – need to work together more closely. To address global challenges, we need close co-operation between the public and private sectors. Therefore, a joint approach by the public and private sector arms of multilateral development banks is necessary.  

Under the “One World Bank Group” approach that I am advocating all three institutions would provide coordinated support to (client) countries: They should base their interventions on joint and complementary analyses (using tools such as the Country Private Sector Diagnostics (CPSDs) and Climate Change and Development reports (CCDRs)). And they should deploy their respective instruments with a view to creating synergies. This approach would help the Bank to better identify and effectively address constraints to private investment.

2. Creating new markets which are attractive for private investors

For example, in order to incentivize private investment in the generation of renewable energy at scale, countries need to invest in the required infrastructure (e.g. transmission lines), put in place new regulatory frameworks (e.g. C02 emission standards, feed-in tariffs) and engage in risk mitigation (e.g. guarantees such as first-loss tranches). Such a market creation approach is also at the core of the Just Energy Transition Partnerships (JETPs) between the G7 and several climate-ambitious developing countries. Market creation is fast becoming the new paradigm for private sector mobilization. With private sector investment being particularly important in countries which have few public resources at their disposal, the World Bank (Group) should quickly follow suit.

3. Providing policy-based lending and improving incentives to protect global public goods

The World Bank has to move from an approach focused on incentivizing individual transactions to one aimed at market creation: that is, it needs to help create a policy environment that is conducive to attracting private investment in public goods such as climate protection. To encourage private investors to invest in climate-neutral technologies and environmentally friendly innovations, appropriate incentives have to be in place. A successful market creation approach requires the synergetic deployment of various instruments: regulatory and fiscal reforms (e.g. reduction of fossil subsidies, feed-in tariffs, and emission standards), training and capacity development for state institutions and utilities, and targeted risk-taking for private investments, as well as complementary public investments.

To support and accelerate market creation, the World Bank Group should systematically set up policy-based lending programs. These programs would provide both technical and financial support to interested partner countries for implementing ambitious reforms and transformative policies that promote sustainability. These could be fiscal, regulatory, trade and financial policies designed to increase desired private investment. The countries engaged in the G7 Just Energy Transition Partnerships (JETPs) would be a good choice of countries to start with.

The World Bank needs to put in place more and better incentives to help countries implement policies that advance sustainability and protect global public goods. Although such transformational reforms bring many benefits, some countries might still be reluctant to request funding from the World Bank. One reason is that policy reforms can often be politically challenging even if they are economically smart and indicated. Another reason is that client countries fear a zero-sum game: they fear that, for example, money borrowed to invest in climate protection will then no longer be available for other urgent national development goals.

The World Bank should therefore provide additional financial support to countries that are willing to undertake particularly transformational policy reforms. Ex-ante analyses of potential reform outcomes – both positive and negative – should be pro-actively supported in order to strengthen the arguments for reforms and develop adequate mitigation measures. Intense policy dialogue with partner countries based on such evidence is another crucial component. Last but not least, concessional loans should also be used. Such “global public goods credits” should also be available to middle-income countries. After all, countries like Brazil and India are key for advancing efforts to protect biodiversity and the climate. Hence it is in the global interest to support them on this path.  

Lastly, the World Bank management and shareholders should set up a co-financing arrangement between the World Bank and donor institutions focused on policy-based lending for climate action. Currently, a total of 81 funds exist to support climate financing. This highly fragmented set-up is difficult for borrowers to navigate and is not conducive to producing the best impact. Support to borrowing countries should be better aligned for better reach and higher impact. Systematic co-financing arrangements would contribute a great deal here.

In order to avoid cumbersome coordination regarding the type of reforms to be supported (the so-called prior actions[5]), the World Bank Management and shareholders should work together on a joint understanding about the kinds of reforms that are truly transformational. Co-financing could also improve the overall concessionality of the package, e.g. by providing co-financing on grant terms. This would be particularly important, given that many countries are confronted with high levels of debt and a shrinking fiscal space. Germany stands ready to support climate policy-based lending in a systematic way.

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