Broadening green horizons

IFR IMF/World Bank 2021
11 min read
Nick Herbert

The World Bank Group plans to deliver record levels of climate finance over the next five years to support client countries in efforts to reduce the trajectory of emissions, strengthen adaptation and foster resilience. Alignment of effort from all parties will be key

In June 2021, the World Bank unveiled a new five-year Climate Change Action Plan, broadening its efforts from investing in purely green projects to help developing countries fully integrate climate and development goals.

The new 2021–2025 action plan builds on the bank’s efforts under its first CCAP, which delivered over US$83bn in climate finance in the five years to 2020, including a record US$21.4bn in its final year.

Expanding the remit is a bold shift in the bank’s commitment to climate change. It reflects the way in which the world has changed and the way in which the demands, interests and priorities of the bank’s clients have altered since 2016, when the first plan was instigated.

“The new plan is more ambitious,” said Genevieve Connors, manager for advisory and operations in the Climate Change Group, where she oversees tracking and reporting of climate mainstreaming and climate finance in the bank’s operations. “It has several new threads new philosophies, new tenets, new ways of thinking, new products, and new diagnostics.

“I think the simplest way to explain the difference is that it makes climate central to everything that we do. It’s less about greening projects but greening whole economies.”

And the aspiration to green whole economies is important in a world where, according to the World Bank Group’s Poverty and Shared Prosperity Report 2020, over 130 million people are at risk of being pushed into poverty over the next 10 years if climate change is not addressed.

As if the potential negative impact from climate change were not enough, the plan also comes at an important point in time as developing countries, already set to bear the brunt of climate related economic and structural challenges, seek pathways out of the disruption caused by the Covid-19.

The pandemic has dented the ability and willingness of many economies to finance climate action. It has also weakened the resolve of electorates to vote for radical action. Resolving the dual challenges of delivering economic growth and building economies for the long term, with climate change as a priority, illustrates the difficulties faced by a development bank.

The new elements of the latest CCAP are designed to address the dichotomy.

Paris-aligned pillars

There are three pillars to the plan: aligning climate with development; transition; and mobilising finance to fund the transition.

All World Bank Group members will align financing flows with the objectives of the Paris Agreement. Starting July 1 2023, all new operations in the International Bank for Reconstruction and Development and International Development Association will align with Paris, while its private sector arms, IFC and MIGA, have committed to aligning 85% of their operations on the same date with full alignment starting July 1 2025.

“The commitment to be fully aligned with the goals of the Paris Agreement in under two years’ time will really change the nature of how the group does business,” said Connors.

The second pillar focuses on supporting transformative public and private investments in five key systems transitions necessary for the world to adapt to climate change and to mitigate its worst impacts: energy; agriculture, food, water, and land; cities; transport and manufacturing.

These five systems are being targeted as they contribute over 90% of global GHG emissions and present significant challenges when it comes to adaptation. A sustainable transition strategy for these sectors is essential if countries are to reach their development goals.

Financing transition programmes in these sectors will take priority for the bank. Decisions will be made, once again, according to the goals of the Paris Agreement – but not necessarily in a binary way.

“There's some obvious no-go areas like coal,” said Connors. “We’ll categorically not be in coal because that's completely incompatible with the goals of the Paris Agreement, but there is lots of nuanced guidance about how to think through an investment.”

As opposed to investing in a pure green project, for instance, where there is transparent additionality, financing the transition is not quite so straightforward but arguably more important to hitting climate goals – particularly for a development bank. The bank is currently working on the methodologies for Paris alignment and how to approach investments.

“We need to better understand the very limited circumstances in which an investment in natural gas, for example, might make sense in a particular country's transition,” said Connors.

Likewise, an investment in support of transitioning the transport sector will have to answer questions around the types of fuel used, the way the roads are built, the kinds of public transport that will support a country’s pathway to realising emission targets over time.

“I think we'll be thinking very, very differently from now on about how we programme our investment pipeline so that it is actively supporting our clients to undertake these transitions,” said Connors.

Deep green pockets

Financing the transition will not come cheap and that puts an additional imperative on the bank in its role as a development conduit. The World Bank is already the largest multilateral provider of climate finance for developing countries, but the new plan builds on the size of its commitment.

As part of the CCAP, it has pledged to deliver an average of 35% of total group financing for climate over the next five years, up from the 28% target in the previous plan – it actually achieved 26% on average over the five years. At least 50% of IDA and IBRD climate finance will support economies to adapt.

In its efforts with the CCAP, the World Bank walks a path bounded by support for climate reduction efforts and the promotion of client country economic development. In an ideal world, those two aspirations would be neatly aligned but, at the margin, there will be difficult decisions to make and difficult discussions to be had.

Decisions, decisions

To help in the process, to identify and prioritise opportunities for high-impact climate action, the bank has introduced the Country Climate Development Reports. The CCDRs are a new core diagnostic tool designed to help countries align climate action and development and absorb new climate-related technologies as they emerge.

“We've really tried to focus on ways to better integrate climate and development,” said Connors. “I think the real game-changer will be the new CCDRs, which will become a core diagnostic that the World Bank Group will undertake with all our client countries. It will inform all the units at the bank in their thinking about climate change and it will transform the way we engage with clients in the future.”

The tool will support every country in taking climate and development into account when they discuss trade-offs, transition costs, and challenges in the political economy with the bank and other stakeholders. It is not, however, a blueprint of what the bank will and will not finance but it will inform those considerations. The final decision on financing comes out of the Country Partnership Framework.

But, perhaps the most important aspect of using the CCDR is in going through the process with the client itself – examining the trade-offs, looking at what happens to coal, natural gas and other fossil fuels over time, and the implications for jobs and livelihoods.

“It's part of capacity-building for our client countries to also think through these transitions, and what makes sense for them,” said Connors.

“We are launching the CCDRs at scale,” she said. “We're already undertaking about 25 right now this first year, and they are essentially core mandatory diagnostics for the World Bank Group and every single one of our client countries. It’s the first time we have a diagnostic that's dedicated to the intersection of climate and development, that closely examines short-term trade-offs and the long-term measures needed for economies to succeed.”

Measuring success

The bank’s ambition is grand. Making choices as to what it finances comes with trade-offs, and while the decision to align flows to the Paris Agreement helps in those decisions, measuring its success is no mean exercise.

A popular benchmark in the private sector is reductions in GHG emissions, but the bank is not using that measure as an indication of success. Emission reductions are a long-term goal associated with 2050 net-zero targets but the path to that goal is not necessarily linear, particularly in some transition stories.

“We don’t have a target on GHG emissions,” said Connors. “But we do measure and we do publicly report our greenhouse gas emissions from the projects where methodologies exist.”

For every operation, the case will need to be made, and the evidence produced, that the enterprise in question in its whole and not just a climate-related part of it is aligned with the goals of the Paris Agreement.

The bank reaching an average 35% of total financing for climate change over five years, all of it 100% aligned with Paris, and CCDRs with all client countries completed, would be a major achievement.

Moreover, according to Connors: “If we're able to show some meaningful World Bank role in systems transitions, a meaningful role in a ‘just transition’ – as in a socially just and politically just future for those countries undertaking the transition, then that’s ultimately how we would measure success.”

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