Multilateral banks are crucial for financing the fight against global warming. Here’s how they work

As climate change leads to a seemingly endless stream of weather disasters around the world, countries are struggling to adapt to the new reality. Preparing to better withstand hurricanes, floods, heat waves, droughts and wildfires will require hundreds of billions of dollars.

And then there’s tackling the root cause of climate change – the burning of fossil fuels like coal, gasoline and oil – by switching to clean energies like wind and solar energy.

That will cost trillions of dollars.

Then comes the topic of climate finance, a general term that means different things to different people, but boils down to paying for projects to adapt to and combat climate change. Climate change financing is especially important for developing countries, which do not have the same resources or access to credit as rich countries.

International megabanks, funded by taxpayers’ money, are the largest and fastest growing source of climate finance for developing countries. Called multilateral development banks because they receive contributions from different countries; there are only a handful of these banks in the world, with the World Bank being the largest.

How these banks allocate resources are among the most important decisions made in defining how poorer countries can respond to climate change. They were a major reason why in 2022 the world met a goal that countries set in 2009 to provide developing countries with $100 billion annually to tackle climate change.

At the annual UN climate conference starting Monday in Azerbaijan, world leaders are expected to discuss how to generate trillions of dollars in climate finance in the coming years. The non-profit research group Climate Policy Initiative assesses the world’s needs about five times the current annual amount of climate financing to limit warming to 1.5 degrees Celsius since the late 19th century. Currently global average temperatures about 1.3 C (2.3 degrees F) higher.

A new goal must reach higher and hold institutions and governments accountable to their promises, said Tim Hirschel-Burns, an expert at Boston University’s Global Development Policy Center.

“At the heart of it is getting a target that is going to catalyze the actions that fill the really significant climate finance gap that developing countries face, which is much larger than $100 billion,” he said.

As the international community has come to accept the reality of climate change, the debate has shifted to where the money to finance the energy transition will come from, says Dharshan Wignarajah, director of the Climate Policy Initiative’s London office.

“The question is not ‘are we transitioning?’ but ‘how quickly can we transition?’” said Wignarajah, who helped lead climate talks, the so-called Conference of Parties, when Britain was in 2021 hosted. “That has made finance increasingly prominent in COP discussions, because ultimately it comes down to who pays.”

Developing countries are most dependent on multilateral banks

Developing countries are much more dependent on these banks for financing climate projects than industrialized countries.

According to the Climate Policy Initiative, commercial banks and companies in the US and Canada will have provided financing for more than half of climate-friendly projects by 2022. In sub-Saharan Africa, these private lenders accounted for only 7%.

This is because it is It is becoming more difficult for developing countries to get low interest rates.

“If you are from Kenya and want to borrow from private lenders, they may charge you 10% interest because your credit rating is not very good,” says Hirschel-Burns.

But the multilateral banks have better credit ratings than many countries. The International Development Association – a branch of the World Bank and the largest international aid provider to Kenya – for example has the highest possible rating from Moody’s Investor Servicewhile Kenya itself has a junk rating.

The banks borrow money with that better rating and then in turn lend money to developing countries, offering a more reasonable rate than governments could get if they borrowed directly from private lenders.

Some bank projects work against climate objectives

The development objectives of the multilateral banks are comprehensive. They strive to improve people’s health and the environment, expand access to energy and end poverty. Tackling energy access has led banks to provide billions of dollars for fossil fuel power plants, an AP analysis shows, although their policies have improved and fewer such projects have been financed in recent years.

Investments in fossil fuels continue to rise worldwide, reaching $1.1 trillion in 2024. said the International Energy Agency. And multilateral banks remain among the biggest funders of fossil fuel-extension projects, helping countries “get on a high-carbon trajectory.” This is evident from a report by the Clean Air Fundthat lobbies for the financing of projects to improve air quality.

“This is development aid we’re talking about, and it should help countries make a leap forward,” says Jane Burston, CEO of the Clean Air Fund, referring to the idea that developing countries could industrialize with renewable energies and skip development which is rich in developing countries. countries historically created with fossil fuels.

“It is baffling why development aid is given to something that continues to make people unhealthy and harm the planet,” she added.

Seemingly contradictory actions can be seen in a loan provided by a division of the World Bank, the International Bank for Reconstruction and Development. It lent $105 million to rehabilitate coal-fired power plants in India, with the last loans for the project going out in 2018, according to an Associated Press analysis of data from the Organization for Economic Co-operation and Development.

Coal causes carbon pollution, contributes to climate change and causes respiratory problems for people exposed to it. However, the improvements have made coal-fired power plants more efficient and reduced greenhouse gas emissions. according to project documents.

The Clean Air Fund report estimates that the World Bank provided $2.7 billion in “fossil fuel renewal financing” between 2018 and 2022. During that time, the bank also lent about 32 times as much money for renewables as for non-renewables in India, including $120 million for rooftop solar.

“Supporting renewable energy is always our first choice as we work to provide access to electricity to the nearly 700 million people who still cannot power their homes, schools, hospitals and businesses,” said a World Bank spokesperson in a statement.

The bank’s policy still supports “selective natural gas as a transition fuel” if research shows the project poses a low risk to the climate, the spokesperson said. The bank’s recent policy requires strict scrutiny of each project to ensure its investments reduce climate impacts.

The World Bank provided $42.6 billion in climate finance in its most recent fiscal year, a 10% increase from the previous year. And at the most recent COP, the bank pledged that almost half of its lending would soon go to climate finance.

About half of the energy generation comes from Vietnam fossil fuels, mainly coal energy. The Asian Development Bank has lent about $900 million in coal in Vietnam, and their fossil fuel spending in the country ended in 2017. The bank’s updated climate policy “will not support the mining, processing, storage and transportation of coal, nor any new coal sector , to support.” -fired power generation,” the bank said in a statement. The bank will invest $9.8 billion in climate finance in 2023 and wants to finance $100 billion in climate-friendly projects between 2019 and 2030.

The country’s largest energy growth sector is wind energy. The Global Energy Monitor ranks Vietnam seventh in the world in planned wind energy. And the Asian Development Bank has provided about $60 million in loans for wind energy in Vietnam between 2021 and 2022.

The banks have made broad commitments in recent years to adapt to this the historic Paris Agreement of 2015. But these promises leave open options to continue financing fossil fuels, says Bronwen Tucker, co-manager of global public finance at Oil Change International.

According to the green group’s supervision of the banks’ commitmentsall nine of the major banks monitored can finance gas projects in at least some cases. Rich countries must step in and match the trillions of dollars needed for climate action with donations to less developed countries “to prevent climate collapse and save lives,” Tucker said.

“The MDBs cannot be climate bankers if they are still fossil bankers,” she said. “Relying on banks tying up fossil fuels and having the worst debt crisis ever doesn’t work.”

___

The Associated Press’ climate and environmental reporting receives funding from several private foundations. AP is solely responsible for all content. Find APs standards for working with philanthropies, a list of supporters and funded coverage areas AP.org.