The world is facing a climate crisis, with increasingly severe weather events and a rising global temperature. To address this challenge, we need a massive global effort to adapt to the changing climate and transition away from fossil fuels to cleaner energy sources. This requires a substantial amount of funding – trillions of dollars, in fact. Enter climate finance, a broad term encompassing the financial resources dedicated to addressing climate change.
For developing countries, which lack the resources and access to credit enjoyed by wealthier nations, climate finance is particularly critical. These nations rely heavily on multilateral development banks (MDBs) – institutions like the World Bank and the Asian Development Bank, funded by contributions from various countries – for financing climate-related projects. These banks play a crucial role in shaping how developing countries respond to the climate crisis, making their funding decisions some of the most consequential in the world.
In 2022, the world achieved a goal set in 2009 to provide developing nations with $100 billion annually for climate action. However, experts argue that this figure is far from sufficient. The Climate Policy Initiative, a non-profit research group, estimates that the world needs five times the current annual climate financing to limit global warming to 1.5 degrees Celsius above pre-industrial levels – a crucial target to avoid the worst impacts of climate change.
The upcoming United Nations climate conference in Azerbaijan will likely focus on how to generate trillions of dollars for climate finance in the coming years. Tim Hirschel-Burns, an expert at Boston University’s Global Development Policy Center, emphasizes the need for a more ambitious goal to address the significant funding gap faced by developing countries. “The core of it is getting a goal that is going to catalyze the actions that fills the really significant climate finance gap that developing countries face, which is much bigger than $100 billion,” he said.
As the global community acknowledges the reality of climate change, the conversation has shifted to the question of funding the transition to a clean energy future. Dharshan Wignarajah, director of Climate Policy Initiative’s London-based office, highlights this shift: “The question is not ‘are we going to transition?’, but ‘how quickly can we engineer the transition?’” Financing, therefore, has become a central focus in climate negotiations.
While MDBs are crucial for climate financing, they are not without their challenges. The analysis of Climate Policy Initiative shows a stark contrast in funding sources for climate-friendly projects between developed and developing countries. In the U.S. and Canada, commercial banks and corporations provided over half of the funding for such projects in 2022. In contrast, in sub-Saharan Africa, these private lenders accounted for only 7%. This disparity is attributed to the higher interest rates developing countries face due to their lower credit ratings.
MDBs, however, possess better credit ratings than many developing countries. This allows them to borrow money at more favorable rates and then lend to developing countries at more reasonable interest rates than they would receive if they borrowed directly from private lenders.
Despite their commitment to climate action, MDBs have been criticized for their continued investments in fossil fuel projects. While their policies have evolved and the number of fossil fuel projects they fund has decreased, they remain significant funders of fossil fuels, contributing to the “lock in” of high-carbon pathways in some countries.
Jane Burston, CEO of the Clean Air Fund, advocates for development aid to enable developing nations to transition directly to renewable energy, skipping the fossil fuel-dependent path historically taken by developed countries. “This is development aid we’re talking about, and it should be assisting countries to leapfrog,” she said.
The World Bank, for example, has provided loans for the rehabilitation of coal plants in India, while also funding renewable energy projects in the same country. While the World Bank maintains that its recent policies prioritize renewable energy and subject all projects to rigorous climate impact assessments, critics argue that their continued support for natural gas as a transition fuel undermines their commitment to a clean energy future.
The Asian Development Bank, another major MDB, has similarly funded both coal and renewable energy projects in Vietnam. The bank has since announced a policy shift to cease funding coal-related projects, emphasizing its commitment to supporting renewable energy, particularly wind energy, which is experiencing significant growth in Vietnam.
Despite broad commitments to align with the Paris Agreement, many MDBs continue to maintain the possibility of funding gas projects. This has led environmental groups like Oil Change International to call for increased financial contributions from developed nations to developing countries to accelerate the transition to clean energy.
“The MDBs can’t be climate bankers if they are still fossil bankers,” said Bronwen Tucker, global public finance co-manager at Oil Change International. “Relying on banks that are locking in fossil fuels and the worst-ever debt crisis is not working.”
The path toward a sustainable future hinges on effective and ambitious climate finance. MDBs play a crucial role in facilitating this transition, but their funding decisions must be guided by a clear commitment to a clean energy future. The need for increased funding from developed countries and a shift in the priorities of MDBs away from fossil fuels are essential for ensuring a more sustainable and equitable future for all.
