Climate cash hopes hang on development bank reforms

Chief Europe Correspondent
White pillars hold up the Earth, symbolizing international banking.
Illustration by Samson Awosan.

When the World Bank holds its annual meeting later this month, the leadership will home in on how the world’s biggest multilateral lending institution can play a larger role addressing climate change. 

Much of the discussion will center on ways the bank can leverage its existing capital more effectively to lend more and remove financial risk to encourage private lending in low- and middle-income countries. But experts warn adding fresh money to bank coffers must be part of the plan to have the impact many hope to see. 

Debate over reforming multilateral development banks so they can contribute more climate finance has swirled for more than a year. Critics want these large lending institutions to vastly increase their support for the energy transition in poorer climate-vulnerable countries.  

Low- and middle-income countries will need an estimated $1.7 trillion a year in clean energy investments; last year, those countries received about a third of that amount.  

This is the second in a series of stories Cipher is publishing ahead of the United Nations climate summit (COP28) in December to explain the clean energy investment gaps between rich and poor countries.

“There is a broad agreement that multilateral development banks can and should be playing a much bigger role in climate change financing because they can provide loans with a much longer duration compared to banks on the ground and with better or more concessional interest rates,” said Rishikesh Ram Bhandary, assistant director of the Global Economic Governance Initiative at Boston University’s Global Development Policy Center. 

The focus so far has mainly been on how to stretch the existing balance sheets of major lenders like the World Bank. Through a series of accounting tweaks, they would lend more money without asking for additional cash from shareholders, predominantly the United States and other major industrialized countries.  

The World Bank has been the largest single global provider of climate finance in recent years, providing almost $32 billion or more than one third of its overall lending. Any changes to how it operates is expected to rewire the workings of similar regional multilateral lenders such as the Asian Development Bank or the African Development Bank. 

But even small-scale change comes gradually. While some adjustments are already under way, others are still being mulled. 

There has been a huge political energy around these reforms,” said Alex Scott, who leads climate diplomacy and geopolitics at the environmental think tank E3G. “The decisions that need to be taken to reimagine the international financial system are taken in small doses and in various venues.” 

Following a push from shareholders, including its largest, the U.S., the World Bank came out last year with a roadmap meant to re-envision its mission, operations and resources. Barbados Prime Minister Mia Mottley also elevated the issue last year with the Bridgetown Initiative, calling for ambitious multilateral bank reform to supercharge climate lending 

At the annual World Bank meeting, which starts October 9 in Marrakech, Morocco, the board of governors, together with finance ministers, private sector executives and others, will discuss progress in tweaking the rules that govern financial operations — known as capital adequacy frameworks — to free up more capital for loans.  

As part of that effort, they’ll also consider progress in lowering the equity-to-loans ratio, which refers to how much money the bank needs to hold in relation to how much it loans out. This accounting adjustment is set to allow the World Bank’s concessional lending arm, the International Bank for Reconstruction and Development, to take more risks and free up an additional $50 billion over the next 10 years.  

Regional banks, like the Asian Development Bank, are also tweaking their own rules to free up more lending capital.  

Other accounting adjustments are still up for debate. One is how so-called “callable capital” might be leveraged. When a country pledges a sum of money, it actually only sends a portion of that pledge in cash, making the rest “callable” in case it is needed. The idea is that if banks count this callable capital, their final balance sheet would be much bigger.   

Other reforms look at how to boost blended finance, which aims to mobilize private sector capital for projects those investors would otherwise deem too risky. 

One goal of all these reforms is enabling the banks to guarantee more private sector investments without losing their triple-A bond rating, which allows them to raise money in financial markets at low rates and then lend it or guarantee private loans for projects. 

Critics say the banks are too conservative and sit on too much money out of fear of losing their triple A rating. But there are limits to how much banks can achieve by tweaking accounting rules. Bank leaders are deeply wary of ratings agencies downgrading them for lending too much against their existing capital.  

“I’m not willing to lose the triple-A rating… because if you do, you actually cannot get the magic of the bank to work,” World Bank president Ajay Banga said at a recent event at the Council on Foreign Relations, a foreign policy think-tank. 

A July report from an independent expert group commissioned by the Group of 20 countries found that endowing multilateral banks with more capital is also necessary. That finding raised the question of asking for additional contributions from shareholding countries, something many shareholders have resisted.  

“It’s not an either or, but you need to do balance sheet optimization and a capital increase concurrently to utilize the synergies across [the two], Bhandary said 

María José Romero, policy and advocacy manager on development finance at the European Network on Debt and Development, a civil society group, described efforts to leverage the World Bank’s balance sheet as “window-dressing type of reforms.” 

“This reform agenda is promoted by major shareholders who are lagging behind on meeting their own commitments on climate finance,” she said, referring to wealthy countries’ failure to fulfill a pledge to provide $100 billion in climate financing a year to developing countries or to devote enough of their budget to development aid.  

“Now they are saying ‘let’s have a greater role for the bank, but without giving more money to the bank,’” Romero added. 

She said the push to reorient the banks around climate finance has created “some recognition that without more capital we are going to advance baby steps.”  

Yet, “when this is going to happen this is quite unsure,” she added.  

The need for more climate finance money is also on the mind of World Bank head Banga, who was appointed earlier this year after his predecessor resigned under pressure from critics. Banga described additional lending that would result from the current reforms on the table “as a pimple on a dimple on an ant’s left cheek compared to what we need in the world.” 

Bhandary said it’s important that calls for fresh capital increase, despite shareholder resistance.  

“We need to avoid saying there is no appetite because it is clear that what we need is more capital,” he said. “If we hold back the conversation on a capital increase, we can never make a case for why it’s important.” 

Romero also lamented that reforming the wider governing structure of the bank is not on the agenda. 

“The powerful voices are trying to reform the institution from the inside, when what we need is a fundamental reform that changes the unbalanced power structure and gives greater voice to developing countries as well,” she said. 

Bill Spindle contributed reporting to this article.