Q&A: Did World Bank and IMF spring meetings help to scale up climate finance?
Finance ministers, central bankers and activists descended on Washington DC last week for the spring meetings of the World Bank and the International Monetary Fund (IMF).
Generally seen as a focal point for global economic and development issues, this year’s event took place amid unprecedented pressure to accelerate climate action.
Climate-vulnerable countries, increasingly backed by wealthy nations, have been calling for major financial bodies to help mobilise the trillions of dollars required to limit and prepare for climate change.
Barbados prime minister Mia Mottley has said the global financial architecture was “never designed” for global south nations. She and her allies have proposed significant reforms to the World Bank, IMF and other development banks
There was some progress at the spring meetings. The World Bank shifted towards adopting climate change as a guiding part of its mission and made slight adjustments to free up around $50bn in additional lending over the next decade.
However, there is still some way to go if these financial giants are to “evolve” on the scale some say is required to address climate change.
Observers hope a much-anticipated summit in Paris in June – and the World Bank/IMF annual meeting in Marrakech in October – will usher in further developments.
In this Q&A, Carbon Brief lays out what went on at the spring meetings and what might happen next.
- Why are the World Bank and IMF important for climate action?
- What are the spring meetings?
- What are the World Bank’s plans for ‘evolution’?
- Has the World Bank agreed to provide new climate funds?
- Did the IMF offer debt relief for vulnerable countries?
- What comes next for financial system reform?
§ Why are the World Bank and IMF important for climate action?
Developed countries have collectively failed to meet the $100bn annual climate finance target by 2020 that they set for themselves in 2009.
Now, nations must set a new target, with the understanding that developing countries require trillions, not billions, of dollars to adequately address climate change.
The World Bank and IMF are seen as crucial elements in bridging these gaps for two reasons.
First, the World Bank is one of the largest “multilateral development banks” (MDBs). These institutions collectively accounted for nearly two-fifths of the international climate finance provided in recent years. Indeed, some nations, notably the US, channel most of their climate finance through MDBs.
The World Bank itself has been the largest single global provider of climate finance in recent years, albeit largely in the form of loans. Last year, the bank says it gave $31.7bn in climate finance, accounting for roughly one-third of its overall lending.
Second, the reform of the World Bank and IMF would be essential in order to rewire global financial frameworks to drive climate action. They are the most prominent of the Bretton Woods institutions, set up in 1944 as the global economic order was rebuilt in the wake of the second world war.
The IMF is distinct from the World Bank, with the stated aims of encouraging global “financial stability”, promoting international trade and “discouraging policies that would harm prosperity”.
It could also have a role in supporting climate action – for example, by channelling “special drawing rights” (SDRs) into relevant projects.
Both the World Bank and the IMF have memberships consisting of most of the world’s nations. But the World Bank has always been dominated by the US, which is its biggest shareholder.
In the run up to the spring meetings, there has been growing pressure for international financial reform. A key advocate for this has been Mia Mottley, the prime minister of Barbados, and a growing group of allies in both developed and developing countries.
Mottley launched her Bridgetown Agenda for the Reform of the Global Financial Architecture last year. Since then, it has gathered support from major World Bank stakeholders including the US and Germany.
Amid the Covid-19, cost-of-living and climate change crises, the agenda calls for MDB reform so that they can better serve the needs of the developing and climate-vulnerable nations that need them most. This includes expanding MDB lending by $1tn.
An Independent High-Level Expert Group on Climate Finance, established by the UK COP26 presidency estimated that MDBs need to collectively triple their annual lending volumes to $180bn over the next five years.
The World Bank, as the oldest and most influential MDB, is seen by many nations and civil society groups as essential in this reform process.
Change is already underway. The World Bank has released an “evolution roadmap” following calls for one from shareholders at last year’s annual meetings. (See: What are the World Bank’s plans for ‘evolution’?)
Meanwhile, the World Bank’s president, David Malpass, nominated by former US president Donald Trump and accused of being a “climate denier”, is stepping down from his position in June.
He is likely to be replaced by Indian-American businessman Ajay Banga, the only candidate nominated for the role. A former executive chair at Mastercard, Banga has some experience managing climate-related funds at General Atlantic’s BeyondNetZero initiative.
§ What are the spring meetings?
The spring meetings of the World Bank and IMF boards of governors bring together ministers, bankers and representatives from business and civil society. They take place every spring in Washington DC.
The core of these events involves meetings of the joint World Bank Group/IMF Development Committee and the IMF International Monetary and Financial Committee.
These committees consist of finance ministers and central bankers representing the breadth of the institutions’ memberships. They provide advice to the boards of the World Bank and IMF and set the course of action for the coming months.
By coincidence, this year the Development Committee is being chaired by the United Arab Emirates, the nation that is also hosting the COP28 climate summit.
Traditionally, the committees’ remit includes “the state of the global economy and issues of international concern, such as the growth outlook, financial stability and poverty reduction”.
As the global financial system comes under the spotlight, climate NGOs and thinktanks identified this year’s spring meetings as a pivotal point for mobilising climate finance.
Sonia Dunlop, programme leader on public banks at the thinktank E3G, summarised the mood in a press briefing ahead of the event. She said that this was a unique moment in recent decades, in terms of the attention being given to the spring meetings:
“Never has there been a time when there has been so much political attention on the World Bank, the IMF and other multilateral development banks, and specifically…on the climate change-related potential of these institutions.”
At the same time as the spring meetings, various other events also take place that can shape the international financial agenda.These include meetings of finance ministers from different country groupings.
Another gathering of the World Bank and IMF, the annual meeting, takes place towards the end of the year.
§ What are the World Bank’s plans for ‘evolution’?
At the end of 2022, the World Bank published a 20-page document titled: “Evolving the World Bank Group’s Mission, Operations, and Resources: A Roadmap.” It was a response to a request from the bank’s shareholders at the annual meeting earlier that year.
It includes a plan to expand the bank’s “vision and mission” from the “twin goals” of “ending extreme poverty and boosting shared prosperity”, stating:
“[The World Bank will] emphasise the importance of sustainability and resilience to reflect more clearly that our mission includes global public goods (GPGs), such as climate change, pandemic preparedness, prevention and response.”
Dunlop tells Carbon Brief that this specific focus on climate change is a significant step:
“If you think of the World Bank as a huge oil tanker…[this plan] fundamentally changes the direction it has been pointing in as an institution, so that’s huge.”
The initial reform document notes that “the WBG [World Bank Group] will need substantial additional financial capacity to respond to a more ambitious, updated mission”.
The document also mentions the importance of “serving all clients”, including middle-income countries. This is relevant for climate action because these nations currently pay more than other developing countries for loans from MDBs, yet their status as big emitters means supporting them in their energy transitions would provide global benefits.
Nevertheless, civil society groups were critical of the evolution roadmap when it was initially unveiled. In particular, they said it did not do enough to encourage better use of the bank’s existing capital. (See: Has the World Bank agreed to provide new climate funds?)
The first roadmap was followed by a more detailed, 37-page document at the end of March.
Dr Rishikesh Ram Bhandary, a climate-finance expert at Boston University Global Development Policy Center, tells Carbon Brief that this document was the “primary focus” of the spring meetings.
After discussion by ministers and bankers, the bank’s board of governors is expected to approve the amendment to its mission and vision during the annual meeting later this year.
Simultaneously, another evolution is also taking place at the World Bank. From July, all projects that go to the board for funding will have to demonstrate that they are in line with the goals of the Paris Agreement.
This process, which has its origins before the climate treaty was even signed, relates to Article 2.1c of the Paris Agreement text, which says the global response to climate change must include “making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development”.
Dunlop says the World Bank explored checklists to make sure projects were aligned with countries’ climate pledges (nationally determined contributions, NDCs). However, given these climate plans currently put the world on track for 2.5C of warming, they cannot be considered Paris-aligned.
The World Bank has now created its own Country Climate and Development Reports for countries. Dunlop says these documents, which are part of the wider effort to mainstream climate at the bank, could help guide it in determining whether projects are Paris-aligned or not.
The continued funding of fossil fuel projects remains a grey area. Only one MDB so far, the European Investment Bank, has completely ruled out financing fossil fuel projects. The others remain open to investments in oil and gas developments, at least in certain circumstances.
However, Dunlop says the tightening pressure from big MDB shareholders, particularly in Europe, means there are fewer oil-and-gas projects going to the World Bank and other institutions:
“We’re not there yet…but [it’s] becoming more limited and is broadly speaking going in the right direction.”
§ Has the World Bank agreed to provide new climate funds?
The headline figure to emerge from the meetings was a proposal, already agreed by shareholders, to lend an additional $50bn over the next decade.
The bank typically assigns around one-third of its finance to climate-related projects, meaning this would result in approximately $1.8bn extra each year in climate finance. This only scratches the surface of the hundreds of billions that are required from MDBs.
This money would largely come from what has been described as “balance sheet optimisation”. This refers to tweaks that free up more lending capacity for the bank, allowing it to do more with the money that it already has rather than requiring more money from governments.
Specifically, the bank’s International Bank for Reconstruction and Development (IBRD) arm will lower its “equity-to-loan ratio” from 20% to 19%.
This refers to the amount of capital held in reserve when distributing loans, in case anything goes wrong. Each percentage point reduction therefore frees up money to lend out, but slightly increases the risk.
The idea has been cautiously welcomed by backers of the Bridgetown agenda, including Barbados and Germany.
However, both have commented that such a reform should only be seen as a first step and, in fact, the ratio could be cut further to free up more loans with only minimal additional risk.
The World Bank has capital from governments, but it also raises a lot more money from international markets through bond issuances. Those bonds are credit rated and the World Bank has a triple A credit rating, meaning it can issue them at low interest rates.
Some governments have expressed concerns that cutting the equity-to-loan ratio could lead to the bank losing its triple A credit rating. This could raise borrowing costs for the bank and, in turn, make its lending to developing nations more expensive.
Joe Thwaites, an international climate finance advocate at the Natural Resources Defense Council (NDRC), tells Carbon Brief:
“There’s a lot of caution on behalf of the World Bank and particularly developing countries, because they are the ones that would be hurt most by a downgrade.”
Last year, an independent report for G20 finance ministers into “capital adequacy frameworks” identified a handful of measures that could unlock “several hundreds of billions of dollars” in additional lending from MDBs, without threatening their credit ratings. Adjusting the equity-to-loan ratio was just one of these measures.
Despite concerns, developing countries including China, India and Sudan all issued positive comments about balance sheet optimisation. However, they also said there was a need to go beyond such measures.
Some statements from developing countries called for the wealthy countries responsible for funding the World Bank to pay more money into it. For example, India’s finance minister Nirmala Sitharaman released a statement saying:
“Given the scale of the challenges and the quantum of resources required, we should not rule out going beyond [balance sheet optimisation] measures, albeit, in a waterfall approach, to consider a capital increase, which remains the most powerful mechanism for increasing lending capacity.”
Bhandary tells Carbon Brief:
“Given the sheer volume of finance required, balance sheet measures alone will not be sufficient. The World Bank will also require a capital increase to increase the scale of its lending.”
Developed countries have rejected these calls, preferring to focus on squeezing more value out of existing funds. The last time they provided a capital increase for the bank was in 2018.
In a statement released after the spring meetings ended, “civil society watchdog” the Bretton Woods Project issued a statement noting that the bank’s evolution roadmap remains too focused on encouraging private investment rather than generating more public funds:
“The bank remains committed to catalysing the private sector, promoting the same trickle-down economics that so far hasn’t delivered economic transformation.”
Indeed, another new pot of funding announced at the spring meetings was a $1bn “hybrid capital” pilot project, which involves raising money from private investors rather than governments.
While unlocking more money from the private sector is widely seen as vital for turning billions of dollars in climate finance into trillions, it has limitations.
There are many climate-related projects, particularly those related to adaptation, which are unlikely to generate much profits, meaning they may struggle to attract finance from the private sector.
§ Did the IMF offer debt relief for vulnerable countries?
An important role for the IMF is to assist nations that are under economic pressure and struggling with debt.
The number of nations in such situations has risen significantly since the Covid-19 pandemic. This has been further exacerbated by inflation and food insecurity.
The IMF estimates that 60% of low-income countries are at high risk of or already experiencing debt distress. This means they are unable to pay their debts and require some kind of restructuring.
This is relevant for climate action because nations under such pressure can struggle to finance emissions cuts or climate adaptation.
With this in mind, the V20 group of climate-vulnerable nations released its Accra to Marrakech Agenda at the spring meetings. The agenda included a call for restructuring and partial debt suspension in the most vulnerable countries.
In a communique, the V20 also states that “firm in our belief that the developing country debt crisis is perpetuated by the climate crisis”, there should be a doubling of climate adaptation finance from MDBs over the next two years. It also calls for a tripling of concessional financing from the World Bank’s International Development Association (IDA).
Progress on dealing with debt at the spring meetings was slow. Some developing countries indicated that they wanted a debt relief and aid package comparable to the 2005 Gleneagles Summit deal, where $130bn of debt was cancelled.
Instead, there was a Global Sovereign Debt Roundtable that brought together creditor and debtor nations. China, a major lender to many heavily indebted nations, agreed to abandon a long-standing demand that the US in particular had framed as holding up progress on debt restructuring.
There was also progress in the discussions of special drawing rights (SDRs). These “global reserve assets”, maintained by the IMF, can be exchanged for money at central banks and represent a potential pool of finance for climate-related projects.
The amount of SDRs that get issued is based on IMF shareholdings. This means that wealthy countries, which need SDRs the least, are given more of them.
One much-discussed idea for mobilising climate finance is “re-channelling” SDRs from wealthy nations to countries that need them more. The IMF has two vehicles for doing this, one of which, the Resilience and Sustainability Trust, was established last year to address pandemics and climate change.
Wealthier nations in the G20 and G7 have pledged to channel $100bn of SDRs towards climate investments using this method, but so far they have not met the target.
At the spring meetings, Japan surprised observers when it raised its rechannelling allocation from 20% to 40% of its SDRs – worth around $15.9bn.
(Note that the use of SDRs to boost climate investment does not count towards the developed country pledge of providing $100bn in annual climate finance support.)
§ What comes next for financial system reform?
In the short term, the World Bank board of executive directors and management are expected to come up with a work plan, based on last week’s discussions in Washington, that formalises the actions to be taken following the spring meetings.
Looking ahead, the coming year will see a number of other events that could prove pivotal for the reform of the World Bank and other international finance institutions.
First, French president Emmanual Macron is hosting the Summit for a New Global Financial Pact in Paris, on 22-23 June.
The event was sparked by Mottley’s Bridgetown agenda and French leaders have described it as an opportunity to “build a new contract between the [global] north and south”. It will address not only climate finance, but also funding for other key issues.
Reform of MDBs will be high on the agenda, as well scaling up the use of SDRs and also loss-and-damage finance.
The World Bank/IMF annual meetings will then be held from 9-15 October in Marrakech, in keeping with the tradition of hosting them every third year in another member country besides the US.
This event will mark the conclusion of debate around the “evolution” of the World Bank. It will also provide the opportunity for more discussions about the best ways to mobilise additional climate finance.
This could include more efforts to use existing capital, such as reducing the equity to loan ratio further, as well as new capital injections and private finance.
Finally, both the G20 leaders’ summit on 9-10 September in New Delhi and COP28 from 30 November to 12 December in Dubai are likely to provide more crunch points for the discussion of MDB reform and climate finance.