Multilateral banks are key to financing the fight against global warming. This is how they work

As climate change leads to a seemingly endless stream of weather disasters around the world, countries are struggling to adapt to the new reality. It will cost hundreds of billions of dollars to prepare to better withstand hurricanes, floods, heat waves, droughts and wildfires.

And then there is tackling the root cause of climate change – the burning of fossil fuels like coal, gasoline and oil – by transitioning to clean energy like wind and solar.

This will cost trillions of dollars.

Let’s move on to climate finance, a general term that means different things to different people, but is limited to: financing projects to adapt to and combat the cause of climate change. Climate change-related financing is particularly important for developing countries, which do not have the same resources or access to credit as rich countries.

International megabanks, funded by taxpayers’ money, are the largest and fastest-growing source of climate finance for developing countries. They are called multilateral development banks because they receive contributions from different countries. There are only a handful of these banks in the world, with the World Bank being the largest among them.

The way these banks allocate resources is among the most important decisions in determining how poorer countries can respond to climate change. They were one of the main reasons that in 2022 the world met the 2009 goal of providing developing countries with $100 billion annually to combat climate change.

At the annual U.N. climate conference starting Monday in Azerbaijan, world leaders are expected to discuss how to generate trillions of dollars in climate finance in the coming years. The nonprofit research group Climate Policy Initiative estimates that the world has needed about five times current annual climate funding since the late 19th century to limit warming to 1.5°C (2.7°F). Currently, global average temperatures are about 1.3°C (2.3°F) higher.

A new goal must aim higher and require institutions and governments to live up to their promises, said Tim Hirschel-Burns, an expert at Boston University’s Global Development Policy Center.

“The core of this is achieving a target that catalyzes the actions that close the really significant climate finance gap that developing countries face, which is much larger than $100 billion,” he said.

“As the international community accepts the reality of climate change, the debate has shifted to where the money to finance the energy transition will come from,” said Dharshan Wignarajah, director of the London office of the Climate Policy Initiative.

“The question is not ‘Will we transition?’ but ‘How quickly can we transition?'” said Wignarajah, who led the climate negotiations convened as a Conference of the Parties when the United Kingdom hosted in 2021 “This has led to finances becoming increasingly important in the COP discussions, because ultimately it comes down to who pays.”

Developing countries are significantly more dependent on these banks to finance climate projects than industrialized countries.

Commercial banks and corporations in the U.S. and Canada financed more than half of climate-friendly projects in 2022, according to the Climate Policy Initiative. In sub-Saharan Africa, these private lenders accounted for just 7%.

This is because it is more difficult for developing countries to achieve low interest rates.

“If you are from Kenya and want to borrow from private lenders, they may charge you 10% interest because your credit is not very good,” said Hirschel-Burns.

But the multilateral banks have better credit ratings than many other countries. For example, the International Development Association – an arm of the World Bank and the largest international aid donor to Kenya – has the highest possible rating from Moody’s Investor Service, while Kenya itself has a junk rating.

The banks borrow money with this better rating and then lend it to developing countries. In doing so, they offer a lower interest rate than governments could receive if they borrowed directly from private lenders.

The development goals of multilateral banks are diverse. Its goal is to improve human health and the environment, expand access to energy and end poverty. By improving energy access, banks have committed billions of dollars to fossil fuel power plants, even as their policies have improved and fewer such projects have been financed in recent years, according to an AP analysis.

According to the International Energy Agency, fossil fuel investment continues to rise worldwide, reaching $1.1 trillion in 2024. And multilateral banks remain among the largest financiers of fossil fuel extension projects, helping countries “go down a carbon-intensive path,” according to a report by the Clean Air Fund, which advocates for financing projects used to improve air quality.

“This is about development aid, and it should help countries leap forward,” said Jane Burston, CEO of the Clean Air Fund, referring to the idea of ​​developing countries industrializing with renewable energy and such Rich development could skip nations that have historically been produced using fossil fuels.

“It is baffling why development aid is given to something that continues to harm people’s health while harming the planet,” she added.

Seemingly contradictory measures can be seen in a loan made by a branch of the World Bank, the International Bank for Reconstruction and Development. $105 million has been borrowed to clean up coal-fired power plants in India, with the last loans for the project expiring in 2018, according to an Associated Press analysis of Organization for Economic Co-operation and Development data.

Coal causes carbon pollution, contributes to climate change and causes respiratory problems for those exposed. However, according to project documents, the improvements made coal-fired power plants operate more efficiently and reduce their greenhouse gas emissions.

The Clean Air Fund report estimates that the World Bank provided $2.7 billion in “fossil fuel extension financing” between 2018 and 2022. During that time, the bank also lent about 32 times more to renewable energy than to non-renewable energy in India, including $120 million for rooftop solar.

“Supporting renewable energy is always our first choice as we work to provide access to electricity to the nearly 700 million people who still cannot power their homes, schools, hospitals and businesses,” a World Bank spokesperson said in a statement.

The bank’s policies still “selectively support natural gas as a transition fuel” if its research shows the project poses a low risk to the climate, the spokesman said. The bank’s recent guidelines require a rigorous review of each project to ensure that its investments reduce climate impact.

The World Bank provided $42.6 billion in climate finance in the last fiscal year, a 10% increase from the previous year. And at the recent COP, the bank promised that almost half of its loans will soon go to climate finance.

In Vietnam, around half of electricity generation comes from fossil fuels, primarily coal power. The Asian Development Bank lent about $900 million to coal in Vietnam, with its fossil fuel spending in the country ending in 2017. The bank’s updated climate policies “will not support the mining, processing, storage and transportation of coal, nor any new coal-fired electricity generation,” the bank said in a statement. The bank provided $9.8 billion for climate finance in 2023 and aims to finance $100 billion in climate-friendly projects between 2019 and 2030.

The country’s largest growth area for energy is wind energy. The Global Energy Monitor ranks Vietnam seventh in the world for planned wind energy. And the Asian Development Bank has provided around $60 million in loans for wind energy in Vietnam between 2021 and 2022.

Banks have made significant commitments in recent years to align with the landmark 2015 Paris Agreement. But those promises leave open ways to continue financing fossil fuels, said Bronwen Tucker, co-manager of global public finance at Oil Change International.

According to the Green Group’s monitoring of bank commitments, all nine of the major banks covered can finance gas projects in at least some cases. Rich countries should step in and match the trillions of dollars needed for climate action through donations to less developed countries “to prevent climate collapse and save lives,” Tucker said.

“The MDBs cannot be climate bankers if they are still fossil bankers,” she said. “Relying on banks that rely on fossil fuels and are experiencing the worst debt crisis of all time is not working.”

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