How World Bank group can scale climate finance

Source: The post is based on the article “How World Bank group can scale climate finance” published in Business Standard on 29^th July 2023.

Syllabus: GS 3 – Environment

Relevance: measures needed by World Bank in scaling climate finance.

News: The World Bank has faced criticism for its insufficient efforts in addressing climate change. However, transforming the Bank into the world’s leading institution for climate-related initiatives presents challenges.

What are the challenges present?

The Bank’s governance is heavily influenced by the US and Europe, and the main shareholders are reluctant to offer significant new contributions to increase the Bank’s capital.

What measures can be taken by the Bank to tackle global carbon emission?

There is a need to focus on the largest emitters because the top 35 global emitters account for around 90% of yearly greenhouse gas emissions.

Hence, the World Bank needs to raise more capital from its current borrowers who are among the top global polluters, to address mitigation challenges.

However, this shift in focus could be seen as diverting from the Bank’s primary mission of poverty eradication.

How can the World Bank mobilize more capital for climate related activities as well as for poverty eradication?

The Bank needs increased contributions from Global North to the International Development Association (IDA) for providing adaptation finance to the poorest nations.

The Bank should simultaneously focus on supporting 20 of its current borrowing countries (excluding China and Russia), which are among the world’s top 35 emitters.

These countries require additional funding to facilitate their respective energy transitions.

However, one of the barriers to achieving the climate agenda with the bank is the International Bank for Reconstruction and Development’s (IBRD) rating-agency regulations on leverage levels.

Therefore, implementing a shift from loans to guarantees could have served the purpose; however, it has also been hindered by staff resistance.

Hence, IBRD may not be the best organization to scale up the Bank’s climate ambition. Two other agencies of the Bank are better suited for the task.

Which agencies are suited for the Bank’s climate agenda?

Multilateral Investment Guarantee Agency (MIGA): It makes much more economical use of shareholders’ capital compared to IBRD. For instance, it makes good use of shareholders’ money by underwriting $17 in guarantees for every $1 in equity.

It could stretch its capital even further by employing credit enhancement and partial guarantee products and being more open to risk.

Hence, the Bank should focus on increasing MIGA’s risk and expanding its capitalization instead of prioritizing IBRD to mobilize climate finance.

International Finance Corporation (IFC): It could raise third-party equity financing at scale without straining its own balance sheet by expanding its asset management business.

IFC Asset Management Company manages 13 funds with modest assets of only $10 billion. It has the potential to scale up this business to handle hundreds of billions of dollars.

IFC has the capability to raise third-party equity capital from global insurance companies, pension funds, and sovereign funds. It can efficiently manage a large pool of assets with modest contributions from its own balance sheet.

Thus, IFC should strive to become a leading equity fund manager and fund-of-funds manager, specifically for climate mitigation investments in emerging markets.