Global climate change is no longer just a distant threat—it's reshaping our world as we know it. Alongside weather patterns altered by rising temperatures, countries are grappling with increasingly severe natural disasters, like hurricanes, floods, droughts, and wildfires. These events not only wreak havoc on communities but also require monumental financial resources for recovery and adaptation. To address the realities of this climate crisis, nations face the need for funding ranging from hundreds of billions to trillions of dollars.
The need for such financing is most pressing in developing countries, where the resources to combat climate change are often scarce. This financial gap is where climate finance, the funding dedicated to climate adaptation and mitigation efforts, steps in. Essentially, climate finance focuses on how to fund projects aimed at both confronting the causes of climate change and adapting to its effects. For many developing nations, accessing these funds is often more challenging than it is for wealthier countries.
Multilateral development banks play a pivotal role here, providing the necessary capital to developing countries. These banks are funded through taxpayer contributions from multiple countries, which enables them to serve as the largest and fastest-growing sources of climate finance. The World Bank stands out as the most significant of these entities, acting as the primary international financial institution aimed at combating climate change.
Multilateral banks have been instrumental in achieving progress toward climate finance targets. For example, during the 2022 global climate conference, countries successfully hit the goal of mobilizing $100 billion annually to help developing nations tackle climate change—a commitment made during earlier climate negotiations.
Yet, the challenges are far from over. The magnitude of climate finance necessary to truly make an impact is estimated to be five times greater than current efforts, according to the Climate Policy Initiative. To limit global warming to 1.5 degrees Celsius—a threshold recognized as critically important—nations need to significantly increase their commitments to climate financing. With global temperatures already close to 1.3 degrees Celsius above pre-industrial levels, this need for urgency is apparent.
Tim Hirschel-Burns, from Boston University’s Global Development Policy Center, emphasizes the importance of establishing ambitious financing goals: “The core of it is getting a goal...that fills the really significant climate finance gap.” There’s also growing pressure for transparency and accountability among donor nations and institutions to meet these new targets. Who pays and how much becomes increasingly central to the discussions surrounding climate finance.
Developing countries find themselves particularly dependent on multilateral banks for financing climate projects. Unlike wealthier nations such as the U.S. and Canada, where private corporations and banks provided the majority of funding for climate-friendly initiatives, sub-Saharan Africa primarily relies on these banks. This reliance largely stems from the challenge developing nations face when trying to secure low-interest loans from private sources. For example, if Kenya seeks loans from private lenders, it might face interest rates of around 10% due to its less favorable credit rating.
The multilateral banks, boasting more favorable credit ratings, can secure loans at lower interest rates. Institutions like the International Development Association (IDA), which is part of the World Bank, have extremely high credit ratings, allowing them to borrow money at advantageous rates. This ability translates to more manageable loans for developing nations than they could otherwise obtain on the market.
Even as multilateral banks support development initiatives, the complexity arises when it involves funding fossil fuel-powered projects. Over the years, these banks have poured billions of dollars not only toward clean energy initiatives but also toward fossil fuel projects, raising questions about their commitment to sustainability. Despite some improvements to their policies, which have led to fewer fossil fuel projects being funded, substantial investment continues to flow toward high-carbon initiatives.
According to the Clean Air Fund, multilateral banks have often supported projects around the world which are counterproductive to climate goals. They argue this approach locks nations onto fossil fuel-centric pathways rather than helping them leapfrog to cleaner alternatives. The Clean Air Fund's chief executive, Jane Burston, pointed out the incongruity of providing development assistance to projects detrimental to both health and environmental outcomes, calling it “baffling.”
Consider, for example, the substantial loans made toward rehabilitating coal plants. An arm of the World Bank, the International Bank for Reconstruction and Development, lent $105 million aimed at improving the efficiency of aging coal plants—yet critics argue it simply prolongs dependency on fossil fuel-generated energy.
Despite this, there is evidence of evolution among some of these banks. The World Bank announced it delivered over $42 billion for climate finance during its most recent fiscal year, marking a 10% increase from the previous year. Notably, they proclaimed their commitment to channeling nearly half of their lending toward climate finance going forward. With winds of change increasingly sweeping through global finance institutions, these commitments could mark a significant turning point.
Similarly, the Asian Development Bank is adjusting its strategies entirely—aiming to end support for coal projects and transition toward renewable energy sources. With significant investments heading toward clean energy initiatives, like wind projects, there is hope for future alignment with global climate goals.
Moving forward, the alignment of financial systems with the ambitious goals set forth by the Paris Agreement remains imperative. Despite having made broad commitments to shift focus toward sustainability, many of these banks still leave doorways open for fossil fuel financing, which has the potential to undermine global climate efforts. Bronwen Tucker from Oil Change International critiques this, indicating the danger of these loopholes within institutional commitment to combating climate change.
Global leaders are set to address these pressing issues at the forthcoming U.N. climate conference, emphasizing the need for substantial financial commitments and accountability, as developing nations call for equitable support to mitigate the crippling impacts of climate change.
