By COP26 development banks must go beyond climate finance to align with Paris
Today, all eyes are on the forthcoming 2021-2025 Climate Action Plan of the World Bank Group as a proxy for what the development finance community’s ambition for COP26 in Glasgow.The Climate Action Plans of Development Banks up until 2020 have been structured around climate finance commitments focusing on increasing their support for climate-specific activities. However, following up on their commitments to “Align with the Paris Agreement”, these institutions need to develop post 2020 strategies and actions plans, which go a step further to meet the level of ambition of the Paris Agreement objectives. The 2021-2025 Climate Action Plan of the World Bank is expected to set the tone for other development banks’ strategies and action plans currently being developed in the run up to COP26. Will it build on and go beyond the traditional climate finance considerations? Alice Pauthier from I4CE comments on the outline of the World Bank upcoming strategy.
Development Banks can build on their existing efforts around climate finance to rapidly ensure the consistency of all their activities with the Paris goals
The Group of Multilateral Development Banks (MDBs) and members of the International Development Finance Club (IDFC) – as well as a number of other public and private financial institutions – have put much effort into “climate finance” – or support for transactions with direct mitigation and adaptation co-benefits. Over the past year MDBs and development banks have announced increased climate finance targets post 2020 and the World Bank confirms this trend in its upcoming 2021-2025 Climate Action Plan, with a commitment to increase the percentage of the Group financing with climate co-benefits to 35 percent. Climate finance represents a major contribution in reaching the Paris goals and should continue to be an investment priority as part of Paris Alignment approaches. To support this, IDFC and the MDBs can build on their experience in tracking and reporting on their support for mitigation and adaptation based on the Common Principles for Climate Finance Tracking. These efforts provide a strong basis for climate finance – and the forthcoming update to the Principles is hoped to provide further guidance for the internal alignment process.
However, when developing Paris-aligned strategies development banks must look beyond the “climate finance” in their portfolios; they must also ensure that all activities do not hinder the achievement of climate objectives. The first key requirements for Paris alignment is that all new projects, clients and counterparties are already or making credible efforts to be consistent with Paris-aligned national and international socio-economic pathways. The World Bank Action Plan starts to address this aspect with the objective to align all new operations by July 1, 2023 at the development bank level and by July 1, 2025 at the group level. This should be a key priority as it is something new for internal teams and will require the use of additional alignment assessments at the project level – as well as at the counterparty, country and sector levels. The Operationalization Framework on Aligning with the Paris Agreement developed by NewClimate Institute and I4CE for IDFC provides an overview of the tools and approaches already available to do it. Further work is however needed to improve these methodologies and tools and mainstream their use in the financial institutions’ community. The development of dedicated country climate and development diagnostic by the World Bank, as announced in the Action Plan would represent a major step forward for such assessments. Moving forward, actively working whenever possible to support the alignment of existing assets within their portfolios and long-term counterparties should also be a priority.
To maximize the contribution to climate goals by public finance, development banks need to focus on maximizing their impact
As seen in I4CE’s Alignment Bulls Eye, aligned financial institutions should seek to as a minimum do no harm, and as much as possible support Paris consistent climate co-benefits and foster transformative outcomes.
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Given their limited resources, development banks should focus on the catalytic role they can play to achieve climate goals and aim to be “transformative” whenever possible (1). A 2020 World Bank report noted that “even if all financing from the multilateral development banks (MDBs) was devoted to decarbonization and resilience, it would still meet less than four percent of finance needs for full climate transformation”. Public institutions must therefore prioritize activities with ‘transformative outcomes’ that reduce the barriers to and support the mobilization of public finance towards large-scale and structural changes needed for the transition of economic, social and natural systems.
In practice this will require as a first step that institutions not only look at their inputs and volume of funding allocated, but also at the impact of finance. MDBs and IDFC members are working on the development of tools and methodologies to assess the outcomes and impact of their projects, especially for adaptation, which is more context-specific than mitigation and requires different assessment methodologies. Moving forward development banks should aim to assess and prioritize activities – beyond project finance – based on the additional impact they can have as a public institution to foster transformative outcomes and impact. In this regard, the second priority of the World Bank Climate Action Plan to prioritize resources for impact is a major signal sent to the development finance community. However this is only a start; while the tools and actions in the draft outline of the WBG Action Plan place the emphasis on impact over volume, further significant changes in line with the World Bank’s own 2020 report will be needed to be truly transformative.
(1) Transformative climate finance is defined by the World Bank as climate finance with « positive spillover effects beyond project boundaries to address systemic barriers to green development and induce additional financial flows even after public finance is exhausted. » Source