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What’s next for the multilateral development banks in the face of the climate crisis?

Written by Annalisa Prizzon

Image credit:World Bank Annual Meetings 2022. World Bank / Franz Mahr Image license:CC BY-NC-ND 2.0

The World Bank President David Malpass needs to offer a bold plan of reform to win over his detractors. Interlocking global crises including rising living costs, soaring debt and climate change are undoing much of the World Bank and Multilateral Development Banks’ (MDBs) good work.

These crises have a root cause: our dependence on fossil fuels. As COP 27 starts in Sharm El Sheikh, difficult questions will be asked of higher-income countries and global banks with tools at their disposal to tackle the crisis. The World Bank and other MDBs can at least claim to be the main financial contributors to the as yet unmet £100 billion climate finance target. But MDBs could do much more to achieve a low-carbon transition and help contain the rise in global temperatures. This starts with a clear mandate and plan to deliver on both development needs and the climate crisis.

At the IMF-World Bank Annual Meetings I attended last month in Washington DC, the climate emergency was high on the agenda. Leaders agreed on a new fund to disburse grant payments to low- and middle-income countries to achieve emissions reductions. But overall, progress is insufficient. Colleagues painted a very bleak picture of the World Bank as an institution that is perceived to be simultaneously too driven by the interests of high-income countries and too slow to reform. The rechanneling of Special Drawing Rights is not materialising yet. A debt crisis is mounting. Although the World Bank is vocal about it, the silence on concrete solutions and the political impasse are worrisome.

Yet positive changes may be afoot. Both high-income countries like the US and Germany and clients of the World Bank are asking for action. The Barbadian Prime Minister Mia Mottley and the UN Deputy Secretary-General Amina Mohammed are spearheading an initiative to reform the global financial architecture (the Bridgetown Agenda). Meanwhile, the US and Germany, G7 countries, Australia, the Netherlands and Switzerland called on World Bank management to set a work plan for the reform of the institution by the end of the year.

A work plan sounds like a minor ask in the grand scheme of things. However, that members of the Development Committee endorse the idea means World Bank management must deliver and be accountable for it.

The plan will include a new vision, incentive structure, operational approach, and enhanced financing capacity. This is no easy task given the tension between climate and development goals. Some fear that broadening the banks’ remit will mean diverting funds from poverty alleviation and growing prosperity. Furthermore, certain MDB clients do not see climate change mitigation and adaptation projects as a priority, as we have seen in our recent ODI survey.

There are three ways that the World Bank’s work plan could address this.

First, the World Bank should increase efforts to act as a knowledge bank on investing in low-carbon and climate-resilient infrastructure. Countries need help setting out climate-smart infrastructure investment plans as well as understanding why the short- to long-term trade-offs are necessary. For example, low-carbon and climate-resilient development may be more expensive up front, but will be less exposed to shocks and stresses of all kinds. Investment priorities like health, water supply and sanitation are all affected if investments do not consider climate impacts. Where there are tensions between climate and development, the World Bank should assist countries in accessing concessional finance to help make up the difference.

Second, the World Bank is seen primarily as a tool for lower-income countries. However, it can serve middle-income countries as well. These countries are central to tackling the climate crisis and achieving the world’s Sustainable Development Goals, but the current instruments the World Bank offers are not well suited to their needs. Middle-income countries require guarantees, insurance, buydowns of financial terms, allocation mechanisms (expanding regional or thematic windows on top of the country allocation) and cross-subsidisation between projects, especially from non-concessional country-level loans.

Third, reforming capital adequacy frameworks could unlock billions of dollars in new lending. At last month’s Annual Meetings, G20 finance ministers and Central Bank governors urged each MDB to assess how the solutions offered to boost lending capacity could be implemented. As the likelihood of a ‘green’ general capital increase for the World Bank is very low right now, finding ways to maximise the potential of existing capital in response to the climate and other crises should be fast-tracked.

Such actions could help the World Bank get itself fighting fit to meet the challenges of the 21st century and blaze a trail for other MDBs. The COP 27 summit in Sharm El Sheikh affords a chance to make progress on these plans as we look ahead to India taking on the G20 presidency.