Road to Reform
Tangible progress could be seen on multilateral development banks’ reform and climate finance commitments at the World Bank and IMF’s Spring Meetings, according to E3G Senior Policy Advisor Laura Sabogal Reyes.
Ahead of the 80th anniversary of the Bretton Woods Agreement in July, the World Bank and International Monetary Fund’s Spring Meetings were an opportune time to showcase how far multilateral development banks (MDBs) have come on their transition journey.
At the time the institutions were created, the world was emerging from a period of intense global conflict. Many point to similar crises facing the world today, including the wars in Ukraine and the Middle East, as well as the impending climate emergency.
As such, there is a growing consensus that MDBs need to rethink their purpose, with the G20 New Delhi leaders’ declaration in September 2023 calling on the multilaterals to become “better, bigger and more effective”.
The World Bank has been in the vanguard of MDB transformation since its new president, Ajay Banga, took office just under a year ago, so the gathering in Washington was a suitable time to assess its progress. Foremost in many minds was the question of how the institution’s new mission, “to create a world free of poverty on a liveable planet”, is playing out in reality. Modifying the bank’s mission statement to incorporate sustainability objectives was an important achievement for Banga.
“It may not seem like a big deal [to add ‘on a liveable planet’], but it was a big deal,” Laura Sabogal Reyes, Senior Policy Advisor, Public Banks and Development at think tank E3G, told ESG Investor. “Now, we are entering the implementation phase.”
A critical component in rolling out the mission is the World Bank’s new corporate scorecard, Sabogal Reyes explained. Published on 9 April, the scorecard outlines how the World Bank’s projects will be evaluated and aligns with internal incentives. Notably, the new scorecard has reduced the number of key performance indicators (KPIs) from 150 to 22.
“These KPIs will ensure that the key priorities of the bank are mainstreamed, including topics relating to climate change, such as greenhouse gas emissions and social inequality,” said Sabogal Reyes. “Importantly, the World Bank needs to deploy a model where climate and development come together because the transition needs to be just and fair – otherwise it will not succeed.”
At the Spring Meetings, the World Bank launched a new lending platform aimed at incentivising middle-income countries (MICs) to use loans to support their net zero transition. Home to 75% of the world’s population, MICs are nations that have not yet reached full development status, but have large industries and are major engines of global growth. The bank’s goal is to help them prioritise projects that deliver global, as well as domestic, benefits.
Launched under the International Bank for Reconstruction and Development, the Global Solutions Accelerator Platform (GSAP) aims to funnel additional finance commitments earmarked for global challenge investments to MICs. “[The GSAP] creates a framework of incentives to ensure that the demand of those countries goes towards a just transition,” said Sabogal Reyes. “Importantly, the World Bank has created it to make sure that the transition actually happens.”
The platform has already attracted contributions from donors. For example, Japan and Belgium will provide US$1 billion and US$70 million respectively through the portfolio guarantee platform, a new financing tool that provides a shared approach to risk. The World Bank estimates that it could add US$70 billion over the next decade.
GSAP’s launch is timely, as countries are negotiating the replenishment of the International Development Association, a member of the World Bank that provides concessional loans and grants to poor nations, by year-end. Banga has asked for US$30 billion in pledges.
Working together
Another hot topic at the Spring Meetings was the next steps in MDB cooperation. “It’s great to see MDB collaboration is witnessing a breath of fresh air,” said Sabogal Reyes. “President Banga is working well with other MDBs, [as displayed during] his tour with Inter-American Development Bank (IDB) President Ilan Goldfajn around the Americas region last year.”
On 20 April, IDB President and Group of Heads of MDBs Chair Goldfajn hosted a retreat for nine other multilaterals to explore how they could work together. The group released a viewpoint that laid out coordinated action to accelerate progress toward the UN Sustainable Development Goals.
Suggestions included generating US$300-400 billion in additional lending, delivering the first common approach to measuring climate results on adaptation and mitigation, catalysing private-sector mobilisation, and supporting country-owned and country-led platforms to make it easier for them to work with the banks.
“Country platforms, nationally determined contributions and national transition plans (NTPs) are gaining momentum,” said Sabogal Reyes. “While there seems to be an interchangeable use of this terminology, it effectively means the banks are coming together in the context of a country and charting its transition trajectory.”
For example, MDBs can help a country with mapping and analytics and identify domestic needs in terms of policy reforms and technical assistance, Sabogal Reyes explained. MDBs can also coordinate on financing arrangements.
“This is exciting because we need to make sure that resources are available in a constrained fiscal environment and that they are used in the best way to support countries’ priorities,” she added. “It is a good way to connect development and climate.”
However, country platforms will need to be guided by NTPs. “This is something that the G20 is pushing for,” Sabogal Reyes continued. “The NTP outlines a country’s economic profile, its social needs and the distributional impact. Countries construct how they see their transition happening, which then informs how banks can support them.”
Washington recently hosted a G20 official side-event on country platforms and financial mechanisms. The topic was also discussed at the MDB retreat. “There is some momentum around ensuring that NTPs are country-led and answer development priorities while enabling climate action,” said Sabogal Reyes.
Callable capital
Boosting MDB financial capacity was also on the agenda at the Spring Meetings, following the G20 Independent Review of MDBs’ Capital Adequacy Frameworks (CAF).
On 12 April, the World Bank released a report on the procedures and governance of callable capital, which is a commitment from shareholders to step in with new funds under extreme circumstances. According to the World Bank, the information will help rating agencies better assess the value of callable capital to MDBs. Four days later, finance ministers of 15 countries issued a joint statement reaffirming their callable capital commitments.
The European Bank for Reconstruction and Development and the IDB have incorporated callable capital into their capital policy, while the World Bank has an internal income-based CAF that is based on callable capital.
“Collectively, MDBs are pulling their weight and making modifications to create additional lending headroom through CAF review recommendations,” said Sabogal Reyes. “This is important because trillions of dollars are needed to make the [net zero] transition happen, and we are nowhere near that.
“In the current constrained economic environment, it will be hard to get capital increases across the board, so balance sheet optimisation measures are very important.”
Credit rating agencies (CRAs) will also need to engage in the discussion, according to Sabogal Reyes.
“The MDBs’ main concern is losing their ‘Triple A’ rating, which will increase the cost of borrowing for countries that can’t afford it,” she added. “CRAs need to incorporate the specific characteristics of MDBs into their methodologies and cater to them. Conversely, many MDBs are rethinking their operating models to include CRAs in the discussion.”
The ecosystem
As the G20 pushes for binding and robust NTPs in the lead up to the NDC refresh in 2025, a perfect storm seems to be brewing to accelerate transition financing efforts.
All of this will need to be underpinned by investment plans. The deadline is driving a discussion between MDBs and the broader banking ecosystem around greater collaboration to support countries in mapping NTPs, policy reforms and technical assistance – as well as blending public and private finance to deliver the investment needed.
But not all things are equal when it comes to climate change financing, particularly in emerging markets (EMs).
According to a recent Sustainable Fitch report, “Amid weak global growth, high interest rates and geopolitical instability, issuance of green, social, sustainability and sustainability-linked bonds by EMs, a key source of financing for sustainability projects, has stagnated relative to developed markets. Concerns about high sovereign debt loads and narrowing fiscal space are likely to weigh on the scale of new EM borrowing through labelled instruments in the coming months.”
As such, there is a real need for public-private financing initiatives. But to crowd in more private finance, there needs to be a more granular understanding of each country’s transition path and where different players can take part.
“The mitigation segment can be taken up by the private sector in a large way, with true blended finance, whereas the private sector won’t get involved with loss and damage because there’s no business case,” Sabogal Rayes explained. “The private sector needs clarity around where it can intervene, as well as a clear signal from the government as to the direction of travel. This push around transition planning, investment plans, country platforms will help to get more capital flowing.”
She also stressed the need for the whole financial ecosystem to be involved in NTPs, particularly national development banks (NDBs), which have the mandate to implement countries’ climate commitments.
“MDBs working better together is a foundational part, but we need the NDBs to do the same, bringing in the broader banking ecosystem and providing the required tools. NDBs may have just joined the discussion but, similar to the MDBs, they will need to go on a transformation journey,” Sabogal Rayes added.
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