How to Foot the Bill on Urgent Climate Action

The World Bank’s annual meetings this week could have important implications for the climate crisis and help change the course of global warming. Multilateral development banks can make or break the renewable energy transition, and governments are their stakeholders. It is time for these governments to take action and make sure the banks are ready to move forward with the process.

To prevent climate chaos from causing enormous human suffering and decimating the global economy, we must bend the emissions curve down now. It’s no secret what must happen next. The share of renewables in the global energy mix must increase exponentially and the use of fossil fuels must fall to zero in the coming decades. Emissions must stop rising immediately and fall by 45% over the next eight years. Developing countries must meet the increasing demand for cheap energy with renewable energy and adapt to the catastrophic effects of the climate crisis.

In all of this, multilateral development banks, including the World Bank, are key drivers and sources of funding. The global economy is not short of liquidity, but it is either sitting on the sidelines or investing in fossil fuels and carbon pollution. Multilateral development banks can help direct this liquidity to where it is needed.

We need to triple current investments in renewable energy and meet the adaptation needs of developing countries, which will increase to about $300 billion a year by 2030.

The climate and development mandates of international financial institutions – the World Bank and other development banks – clearly require them to act. But their current business models are painfully risk-averse.

Financing renewable energy projects in developing countries can be up to seven times more expensive than in North America or Europe – largely because financiers charge high premiums to cover the perceived risk.

Fossil fuel projects involve many risks: price volatility; liquidity and operational risks; and legal risks related to their central role in the climate crisis. However, these risks are well known and known, and there are standard methods to manage them. There is no equivalent common understanding or risk management strategy for renewable energy, especially in emerging markets.

Multilateral development banks are the only institutions that can break this cycle. It’s time for its shareholders – led by the governments of developed economies – to demand an overhaul.

Changing banks’ risk approach does not require legislation or even parliamentary approval. It simply requires decisive action.

I therefore call on these state shareholders to act on five areas.

First, increase the scope of renewable energy financing. Urge bank managers to set ambitious volume targets for investments in renewable energy infrastructure. This should include flexible power grids and storage capacities for renewable energies. Countries should also be supported in creating incentives and regulatory regimes for renewable energy. This would send a strong signal that could be used by developing countries to negotiate with private donors.

Second, you increase risk tolerance. State shareholders must instruct the management of multilateral development banks to adjust their capital policies, adequacy policies and rules so that they can increase lending and take appropriate risks. Their own projects are limited – but by acting as first-loss investors and risk-takers, these banks can leverage a huge boost in private funding. They should also consider lowering risk ratings and increasing risk tolerance levels on their private weapons, which would free up vast amounts of capital.

Third, phase out fossil fuel financing. State shareholders should urge all multilateral development banks to publish their plans to phase out direct and indirect support for fossil fuels ahead of next month’s COP27 climate summit in Egypt. At the same time, banks should convert their investment portfolios to renewable energies. The private arms of the banks must also pull their weight.

Fourth, to significantly increase the quality and quantity of funding for climate change adaptation. State shareholders should tell multilateral development bank managers to put adaptation, resilience and vulnerability at the heart of what they do. All their investments should be climate-proof. They should also urge banks to allocate 50% of climate finance to adaptation.

Fifth, reform their incentive structures. Management and staff of multilateral development banks must be held accountable for fulfilling their climate and sustainability mandates. Banks that move the furthest and fastest should be the first to recapitalize.

Taken together, these five steps could solve the problem of actual and perceived risks in renewable energy financing in developing countries and steer more support for adaptation and resilience. Where public money leads, private investors will follow.

If governments act now as shareholders in the multilateral development banks, they could kick-start a virtuous cycle of renewable energy investment and change the trajectory of our catastrophically warming planet.

This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.

Antonio Guterres is the Secretary-General of the United Nations.

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