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What should COP28 urge from multilateral development banks and their shareholders?

Written by Rachel Kyte, Hans Peter Lankes, Annalisa Prizzon

Image credit:UNFCCC

To achieve the Sustainable Development Goals and the Paris Agreement in emerging and developing countries, an estimated $2.4 trillion will be needed annually for climate-related investments by 2030, four times more than current levels.

Savings on subsidies and reduced investments in fossil fuels might contribute significantly. The majority of finance will realistically be raised domestically. But this still leaves around $1 trillion to be found from external sources.

Of the various potential sources of external finance, multilateral development banks (MDBs) offer by far the ‘ripest’ opportunity, and at a considerable scale. An Independent Expert Group (IEG) on Strengthening MDBs reported to the G20 finance ministers that, with relatively modest shareholder support the main MDBs alone could:

  • Grow their annual financing levels by $200 billion (to $300 billion);
  • Increase concessional finance by $60 billion (from $30 billion); and
  • Contribute significantly to catalyzing a further $500 billion annually in private financial flows for climate, nature and development.

But MDBs have to change now to seize this opportunity.

While COP28 is not a forum for decisions related to MDBs, it can help their shareholders, clients and MDB staff discover common ground, provide guidance and clarify goals. For example, the Sharm El-Sheikh Implementation Plan produced at COP27 called

"On the shareholders [of MDBs] to reform multilateral development bank practices and priorities, align and scale up funding, ensure simplified access and mobilize climate finance from various sources and encourages multilateral development banks to define a new vision and commensurate operational model, channels and instruments that are fit for the purpose of adequately addressing the global climate emergency”.

COP28 should align emphatically behind the proposed reforms for MDBs, building on the momentum coming out of India’s successful G20 presidency and providing guidance to Brazil who take over the G20 mantle and will also host COP30 in 2025.

What’s the latest on MDB reform?

Prime Minister Mia Mottley pushed international financial reform firmly on to centre stage in 2022, and we summarised the state-of-play for ODI’s Rolling Insights series at COP27. But momentum has only accelerated in the past year.

The IEG on Strengthening MDBs referred to above—commissioned by India’s G20 presidency—has proposed a radical agenda for MDBs to expand their mandates, finances, and instruments. G20 leaders endorsed the crucial role of international financial institutions, such as the World Bank and regional development banks, in addressing global challenges. This builds on previous recommendations to increase the financial firepower of the MDBs by optimizing their balance sheets.

Partly in response to these policy developments, the MDBs have been pursuing a variety of measures. The World Bank Group has recently agreed to adopt a new vision and mission of ‘creating a world free of poverty on a liveable planet.' They have also laid a roadmap for reforms to enhance their financial resources and improve operational efficiency and effectiveness, the Evolution Roadmap. The European Bank for Reconstruction and Development (EBRD) and IDB Invest are preparing for capital increases. The Asian Development Bank (AsDB) is creating new financial instruments to facilitate mobilizing funds for climate change initiatives. The AfDB led the preparatory work for potentially redirecting Special Drawing Rights (SDRs) through MDBs.

The Paris Summit on a New Global Financing Pact in June 2023, leveraged on these various initiatives and gave greater voice to client countries on the reform of MDBs and the global financial architecture.

What can and should be achieved next?

Building on our experience within the IEG for Strengthening MDBs and the G20 Panel on MDB Capital Adequacy Frameworks, we identify five priorities for MDBs to increase the quantity and enhance the quality of climate finance.

  1. Boost non-concessional and concessional finance. There is far more scope to bolster the balance sheets of MDBs to meet the demands of client countries. Tripling the lending capacity of MDBs will require a fresh injection of capital, which offers good value for money and should be committed early—even if disbursed later—as a signal of shareholder support for the strategy. IDA is the largest source of unearmarked concessional funds, generating $4 in low-cost lending for every $1 in contributions. We urge contributing donors to replenish IDA in 2024 with at least $100 billion, reversing years of flat and falling contributions.

  2. Help countries design and deliver climate-smart economic development strategies. The integration of climate and development into the mandates of MDBs reflects the evidence that poverty cannot be eradicated without tackling the climate crisis. The World Bank’s Country Climate and Development Reports (CCDRs) are analytically excellent, but the ideas need broader ownership. Drawing in national expertise, facilitating national dialogue and coordinating donors could help realise the potential of CCDRs and unlock the concessional finance necessary to implement these strategies. A key marker of success will be a deeper and more effective relationship with domestic entities. Working with national development banks, for example, would allow MDBs to share diagnostics, project preparation, and joint financing. It can also build domestic capacities and mitigate risks, for example by harnessing national development banks’ greater knowledge of local markets and ability to lend in local currencies.

  3. Continue to streamline the operations of MDBs. According to a survey conducted by ODI, almost 90% of government respondents identify quick access to finance as a top priority. However, less than half of the respondents believe MDBs perform well in this area. MDBs could harmonise their rules and procedures, and further delegate project approval to management (something that the Asian Infrastructure Investment Bank already does more than the other MDBs). A risk-based approach to environmental and social standards and procurement throughout the project cycle will be necessary to streamline existing processes, and the IFC must urgently update its Performance Standards.

  4. Rethink MDBs’ approach to technical cooperation. In the same client survey, only a third of government officials in client countries think that MDBs are responsive to their demands when providing technical assistance and policy advice. They are also frustrated by the way that technical cooperation and policy advice – in particular project preparation and project development – are usually highly fragmented across providers. The architecture of climate finance is extraordinarily incoherent. It is disbursed through over 20 bilateral channels, eight MDBs, and 15 multilateral climate funds. MDBs should revisit how advice and analysis are funded, finding ways to prioritize longer-term relationship-building over fly-in, fly-out standalone reports and facilitating coordination across donors.

  5. Build strategic cooperation between the public and private arms of MDBs. MDB should draw in a coordinated way on the full range of their capabilities - sovereign and non-sovereign, lending, convening and advisory - to ‘co-create’ markets, develop project pipelines, and crucially, to mobilize and catalyse much higher volumes of private finance for the low-carbon, climate-resilient transition. For such a strategy to be effective, MDBs must place engagement with the private sector at the centre of their activities. Incentives need to be aligned to transform this kind of cooperation into the regular modus operandi and reshape the culture of these institutions.

All these solutions should be implemented through a new country engagement model, anchoring them through country-led mission-driven platforms. As recommended in the first volume of the G20 IEG report on strengthening MDBs, country platforms could play a vital role in some cases, mainly if they are structured around concrete sector collaboration (as in the proposals of the MDB Climate Working Group). MDBs need to collaborate closely among themselves and with other public development banks to support and finance country-owned strategies and platforms that integrate climate and other global challenges and development through the most effective investments and policies shifting in the process from a tailored project-by-project approach, to a much faster programmatic approach in their operations. The joint statement of MDB Heads just released on promoting their coordinated interventions through country-owned platforms goes in the right direction. But there should be concrete commitments. For example, by COP29 in 2024, we expect many diverse countries to achieve their climate and development objectives through country platforms.

COP28 must add its voice to calls for MDB shareholders to pursue reforms and MDB management to fix processes and ask MDBs to come to the Bonn Intersessionals in July 2024 with reports on progress. While the UN climate convention has no formal authority over the MDBs, the decision text emerging from a COP represents a consensus or compromises reached among 196 countries. It is therefore a powerful signal of the direction of travel and level of ambition we should expect from the MDBs over the year ahead.