Four ways development banks can turn climate finance into climate results
Yesterday, world leaders convened at #COP28 against perhaps the most challenging backdrop since the adoption of the Paris Agreement at COP21. COP28 is pivotal. Global temperatures are predicted to exceed 1.5 degrees above pre-industrial levels in the next five years, with potentially catastrophic impacts. To match the ambition set forth in the Paris Agreement, the structural transformation of economies and markets needs to be accelerated and investments in climate resilience and climate neutrality need to dramatically increase.
Multilateral Development Banks (MDBs) play a unique role in supporting the net zero agenda. Through their country-driven business models, they support public planning and investment at scale to deliver on Nationally Determined Contributions (NDCs) — countries’ national climate pledges under the Paris Agreement. They foster policy dialogue and provide knowledge and technical assistance to support reform in critical areas. Working in this space where the public and private sector meet, they help create an enabling environment for climate investment, which remains critical to delivering net zero transition.
The 2023 MDB vision statement set out at the Summit for a New Global Financing Pact in June, underscores the continued importance of MDBs’ role in driving transformation through evidence-based policy reform and calls upon them to work more closely together as a system in addressing climate change and just transition.
COP28 is an opportunity to identify how to enhance the delivery of this vision. Drawing on evidence from recent MOPAN assessments of eight Multilateral Development Banks, we’ve identified four areas where multilateral development banks can strengthen their support for net zero transition:
Leveraging knowledge to drive transformative policy reform
Beyond finance, Multilateral Development Banks (MDBs) are engines of diagnostics, analytics and operational knowledge, reflecting their ability to provide “development solutions.” Policy dialogue and capacity development delivered alongside knowledge is meant to contribute to an enabling environment for net zero transition.
However, actual uptake for policy transformation is often not captured. Outside of policy-based lending, MDBs are often unable to demonstrate how their knowledge products and policy dialogue contribute to results beyond the delivery of reports, downloads and client satisfaction.
There is also scope to clarify how policy dialogue and knowledge products are delivered in partnership – our review of MDB country strategies noted a frequent overlap among organisations working in the same countries, potentially straining partners’ absorptive capacity.
Going forward, such work could make greater use of programmatic approaches whereby a series of smaller, linked activities are implemented over time to support a larger outcome or objective, including policy reform. This approach, currently applied in the context of Just Energy Transition Partnerships, addresses the fact that the uptake and impact of knowledge products may take years to materialise.
New analytics such as the World Bank’s Country Climate and Development Report are demonstrating how knowledge products could serve as platforms for partnerships. These reports consolidate partner knowledge to identify mitigation and adaptation opportunities tailored to the country context. However, they could be better targeted to the most persistent challenges, including financing and issues such as agriculture, forestry, industry and adaptation.
Models such as the Public Expenditure and Financial Accountability Framework (PEFA) may provide a way forward. The PEFA approach, which assesses how institutional capacity development and dialogue has contributed to strengthening national Public Financial Management, could be adapted to reflect the policy and institutional environment for climate action while taking into consideration the unique context of each country.
This approach would help demonstrate how development partners have contributed to creating an enabling policy and institutional environment over time while encouraging them speak with one voice and coordinate their support. Given that these reports are publicly available, such a platform may also play a role in reinforcing political will.
Promoting an enabling environment for private sector climate action
Mobilising private climate finance is vital to address a growing finance gap. Multilateral Development Banks (MDBs) work across the public and private sectors to create an enabling investment environment. They also stimulate investment in challenging markets, supporting pipeline development and catalysation through market infrastructure development and financial sector development.
MDBs have sought to enhance synergies and coherence across their public and private sector activities; however, these efforts remain uneven across the different banks and face a number of challenges. Private sector experts often have limited involvement in country strategy development. The nature of their involvement is often not addressed by existing processes and guidelines. Furthermore, progress achieved for promoting private climate mobilisation within countries is often not tracked.
Even where formal tools are in place, as is the case with the World Bank, challenges lie in bridging different processes and incentives across public and private sector work. Processes underlying the selection and approval of investments of private and public sector operations are fundamentally different. Whereas public sector operations can have a longer-term view linked to national development plans, private sector staff need to work constantly to identify bankable opportunities and quickly convert them to committed investments. Furthermore, in the absence of organisational metrics and incentives, implementation of the World Bank’s “Cascade approach” has been ad hoc and personality-driven.
Promoting an institutional culture of collaboration needed to support an enabling investment environment remains a challenge. New platforms and instruments such as the Private Sector Investment Lab have been identified in the World Bank’s new mission and vision. But these initiatives may not realise their full potential in supporting an enabling environment for private climate action absent broader cultural changes.
Optimising the use of concessional finance
Concessional resources, including loans, grants and guarantees issued on more favourable terms than those offered by the market, are provided through trust funds and Financial Intermediary Funds (FIFs), including the Green Climate Fund, Climate Investment Funds, Green Environment Fund (GEF). The World Bank has played a role as trustee of several FIFs, but the World Bank and other MDBs serve as implementing entities alongside UN agencies, and Direct Access Entities, depending on the fund involved.
These funds enable Multilateral Development Banks (MDBs) and many other organisations to support net zero transition where it would otherwise not be financially or economically viable, as in the case of energy efficiency, sustainable agriculture and community resilience. FIFs enable the research, technology, innovation and pipeline development for the most difficult climate challenges and de-risk private investment.
These resources must be managed efficiently to address climate impacts and risks at scale. The newly created Loss and Damage Fund can potentially benefit from lessons in this regard.
Fragmentation among trust funds contributes to higher transaction costs and unpredictability. Despite some consolidation, there remain a plethora of active standalone and multi-donor trust funds – upwards of 50 – that address climate change across the different MDBs. Each has their own governance framework, delegation rules, timelines and application and reporting requirements while drawing upon resources from a small pool of donors. Some MDBs have updated trust fund policies or have sought to consolidate some of these funds but fragmentation remains an issue.
FIFs add another layer of complexity. On one hand, FIFs provide highly concessional finance to middle-income countries who would otherwise not be able to access it, enabling investment in climate transition and adaptation in tight fiscal environments. They also provide evidence, learning and good practices that are often not available elsewhere. They promote collaboration and competition among MDBs, particularly where funds are delivered through country programmes.
However, there are serious challenges for efficiency. It can take upwards of two years to approve a programme and another year to disburse, which is fundamentally inconsistent with a climate emergency. Complex processes reduce the appetite of MDBs to submit proposals. Furthermore, this issue limits the FIFs’ ability to engage the private sector and other sub-national entities and target funds to countries that are most vulnerable to climate impacts. Increasing the amount of financing from climate FIFs that go to Low Income Countries (LICs), Small Island Developing States (SIDS) and Least Developed Countries (LDCs) remains an important challenge.
The climate FIFs should work together to harmonise their requirements and identify risk-based processes that build upon these strengths. MDBs have consistently been shown to have robust operational processes and safeguards. This would include building upon MDBs’ financial frameworks by making better use of instruments that can help scale up funds through market engagement.
Moving from climate finance to climate results
Most Multilateral Development Banks (MDBs) are not able to report on the extent to which operations achieve expected climate results. Although integrated into accountability frameworks, most climate indicators are related to finance, outputs and reach, reflecting ex-ante projections only. Beyond this, there is a staggering diversity of indicators across the banks. ?
The emphasis on climate finance may have contributed to “re-labelling” existing approaches rather than driving transformation. Climate finance is fragmented across the portfolio, with some projects having very little connection to tangible climate outcomes. The focus on finance ex-ante has yielded a perverse incentive whereby actual monitoring of climate results has been de-emphasised and it remains uneven across organisations.
MDBs have tried to address this issue through introducing “core indicators” for projects; however, it will take time before these are mature enough for aggregation. Transformative impacts are also often not addressed at all in country results frameworks.
Moving toward climate results requires a cultural shift beyond new scorecard indicators. It requires a move toward an evaluative culture whereby climate outcomes and impacts are measured and scrutinised systematically at the operational, country and institutional levels. Many institutions currently lack evaluative evidence at country level to scrutinise their contribution to climate transition and transformative impacts. Where this evidence exists, it is often limited by the gaps in operational data identified above.
MDBs might consider applying good practices for selectivity from private sector operations. Systems such as IFC’s AIMM and IDB Invest’s DELTA are geared toward identifying private sector operations that are likely to yield development outcomes and contribute to market creation. They also support monitoring through robust results frameworks. Applying a similar model—targeting climate mitigation and adaptation across public and private operations—would create an important incentive to identify genuinely transformational climate operations and monitor their results.
COP28 is an opportunity for countries, MDBs and other partners to identify how MDB Reform can enhance delivery of the net zero transition. Their engagement should consider the above – driving policy reform through knowledge work, enabling private climate action, optimising concessional resources, and demonstrating climate results – to move beyond finance and create the incentives and culture to deliver climate results at this critical time.
MOPAN is a network of 23 member countries with a shared concern for promoting the effectiveness of the multilateral system. MOPAN assessments identify the extent to which multilateral organisations are positioned to deliver relevant, inclusive and sustainable development results efficiently, including for climate change.
MOPAN’s upcoming Lessons in Multilateral Effectiveness paper - to be released in March 2024 – will feature the results of our findings in the above four areas. It builds upon evidence from eight MOPAN assessments of Multilateral Development Banks including: the African Development Bank, the Asian Development Bank (forthcoming), the European Bank for Reconstruction and Development (forthcoming), the Inter-American Development Bank, IDB Invest, the International Financial Corporation (forthcoming), the International Fund for Agricultural Development (forthcoming), and World Bank (IDA / IBRD).
For more of MOPAN’s work on Multilateral Development Banks, visit mopanonline.org or contact [email protected].