World Bank’s Evolution Roadmap Fails to Include Biggest Transformation of All: Ending Financing of Fossil Fuels
SUMMARY: The World Bank Group is one of the most well-known multilateral development banks aimed at bolstering global sustainable development. In recent years, it has been widely scrutinized for its lack of appetite to tackle global challenges – namely, climate change. As a result, the bank is proposing a series of reforms in the Evolution Roadmap to improve its operations and financial capacity, and strengthen its mission and values.
Back in the Headlines
The World Bank Group (WBG) came into the headlines in February, when David Malpass announced he would leave his position as president nearly a year before his tenure was supposed to end. He was condemned by environmentalists last year over his refusal to confirm the scientific consensus that climate change is fueled by the burning of fossil fuels at an event. The question of who might replace him was answered days later, when President Biden selected Ajay Banga, a dual citizen of the US and India who spent most of his career in the private sector. The swift announcement received mixed reactions. U.S. Special Envoy on Climate Change John Kerry praised Banga as the “right choice” and added “[he] has proven his ability as a manager of large institutions and understands investment and the mobilization of capital to power the green transition.” In contrast, some environmental groups, such as Oil Change International, highlight his lack of experience in the public sector and see him as a “planet-wrecking CEO for World Bank President.” His presidency is all but certain; for decades, the US has gotten to select a president for the WBG in exchange for supporting an European candidate as managing director for its sister organization, the International Monetary Fund. It is unclear how a change in leadership may affect upcoming reforms.
The WBG is a multilateral development bank composed of five international organizations: International Bank for Reconstruction and Development (IBRD), International Development Association (IDA), International Finance Corporation (IFC), Multilateral Investment Guarantee Agency (MIGA), and the International Centre for Settlement of Investment Disputes (ICSID). Each has their own responsibility, but collectively they work towards the twin missions to reduce poverty and increase shared prosperity. The WBG garners funds from 189 member countries and private-sector institutions, using that capital to provide loans, grants, and other resources. The US is its largest shareholder, followed by Japan and China.
World Bank Still Leads in Fossil Fuel Financing
US$15 billion. That is how much the WBG has directly invested in fossil fuel projects and policies between 2016 and 2021. It is highly likely that that already egregious amount is underestimated because of the money poured into these efforts indirectly, through intermediaries like commercial banks. In comparison to other multilateral development banks, the WBG provided the most fossil fuel financing annually on average between 2019 and 2021. Although the group revised policies to halt support for coal and upstream oil and gas projects, there are ample loopholes that it exploits; subjective phrases like “rare circumstances” and “exceptional circumstances” allow the bank to invest in these projects as long as there are no good alternatives to meeting energy needs. A narrow focus on upstream oil and gas projects, such as exploring, drilling and operating wells, means that transportation and conversion into fuels and other products are still funded. The juxtaposition between the bank’s ambition for renewable energy and fossil fuels is one of the reasons why shareholders rallied to demand change. Calls for reform were echoed at COP27 in Sharm El Sheik, Egypt, where government officials and environmentalists reprimanded the WBG and IMF for their portfolios.
As a response to the outcry over its murky portfolio, the bank’s board and shareholders have agreed to create jointly an Evolution Roadmap. The roadmap will propose strategies the bank can undertake to advance their vision and mission, and improve their operating and financial model. At the World Bank Spring Meetings this month, the status of the roadmap will be presented to the Development Committee. Based on the feedback received and other consultative processes, a paper will be prepared for discussion at the October Annual Meetings for endorsement. An initial draft was released in mid-December 2022 to elaborate on the elements of the roadmap, which is subject to ongoing consultations with stakeholders.
Climate change and other cross-border risks will challenge the bank to develop new regional approaches for mitigation.
Proposed Reforms Focus on Accessibility
Currently, developing countries have little incentive to leverage the WBG’s resources to invest in global public goods such as decarbonization or pandemic preparedness measures. Mitigating greenhouse gasses are considered of lesser importance compared with poverty reduction. The bank proposes exploring new ways to further concessional lending, which is below market-rate finance, to assist developing countries. Common ways to deliver this type of financing is through loans, grants, and equity investments. The roadmap questions the existing criteria of need, performance, and ability to pay, floating the idea of including vulnerability as part of the IBRD’s and the IDA’s eligibility framework. Climate change and other cross-border risks will challenge the bank to develop new regional approaches for mitigation.
Determining the feasibility of expanding and introducing financial tools will be paramount to the bank’s evolution. It is a tricky task because the WBG does not want to sacrifice its high credibility credit rating. An AAA rating, the highest possible, is one of the reasons why it can borrow money at lower rates and lend it for less. Along with climate change, it will also need to evaluate and select other key global challenges it will focus on – although these can be reprioritized over time. By focusing on where the WBG can contribute the most value, the bank can improve its capacity to lend and thus, manage long-term crises simultaneously. For a colossal shift to occur, there is an anticipated need for a capital increase for the IBRD, the IDA, and new funds, mobilization of private-sector money, and an increase in staffing.
Despite what is outlined in the draft update, the document exposes the bank’s inclination to hinder its own adaptation to current problems. Increasing accessibility and investments for sustainable energy transitions in developing countries are significant achievements, but a separate issue from the bank’s support for fossil fuel projects around the world. The World Bank Group announced that it is on track to align 100% of new operations with the Paris Agreement, with the exception of IFC and MIGA, beginning July 1, 2023; 85% of IFC and MIGA operations will be aligned until 2025. To do this, they have released alignment methods for financing instruments and will soon publish notes on how it can be applied in specific sectors.
The methodologies use countries’ Nationally-Determined Contributions (NDCs) as proxies to identify if the activity is Paris aligned; at this point, the NDCs do not reflect the appropriate ambition level to keep below the 1.5°C threshold. Additionally, the methodologies state that “relatively high GHG (greenhouse gas) emissions may be deemed Paris-aligned if there are no technically feasible and economically viable lower-emission alternatives in the specific country and sector context that can meet the same development objectives”. The obvious problem with this approach is that investing in fossil fuels is the antithesis of sustainable development. As more emissions pollute the atmosphere, climate change-fueled disasters become more frequent and catastrophic, meaning that they also become more expensive.
Developing countries that have historically emitted the least greenhouse gas emissions are the most climate-vulnerable. By 2030, developing countries will have an estimated US$290 billion to US$580 billion in loss and damages, and that is just what is quantifiable. Destruction of property and natural resources and climate-induced displacement strains the economy and social cohesion. In addition to repairing what was lost, these countries will also need to heavily invest in resilient infrastructure and other adaptation measures.
World Bank Needs to End Support for Fossil Fuels
The domino effect perpetuated by fossil fuel financing can push ecosystems to their tipping point. Direct drivers of biodiversity loss include land-use change, climate change, pollution, and invasive species. Land-use change has continuously been flagged as one of the leading causes. Clearing land for fossil fuel infrastructure, which is often expansive, can contribute to habitat loss. Ultimately, as species struggle to adapt to different environments, niches cannot be filled and the ecosystem collapses. Although climate change is not the most dominant driver for biodiversity loss right now, it is predicted to become so by 2070. It follows a similar path as land use change, except climate change disturbs ecosystems to the point where they lose resiliency.
Fossil fuel financing also poses a threat to human health; production and burning releases hazardous pollutants into the air and water, creating a threat to public health, particularly in low-income communities and communities of color, as it can elevate risks of respiratory illnesses, cardiovascular disease, cancer and numerous other conditions. The acceleration of climate change and biodiversity loss is linked to the spread of infectious diseases through higher vulnerability of the ecosystem and altered interactions between species. Both the climate change and biodiversity loss crises need to be managed concurrently. The World Economic Forum’s 2023 Global Risks Report listed “failure to mitigate climate change,” “failure of climate-change adaptation,” “natural disasters and extreme weather events,” and “biodiversity loss and ecosystem collapse” as the top four global risks over a 10-year period. As present and future risks interact, the negative impacts can culminate and be worse than any effect of those individual risks.
If the World Bank Group continues investing heavily in fossil fuel projects, our current global challenges may be a prelude for even more dangerous crises. The bank should leverage its prestige and financial power to follow through on its commitment for sustainable, inclusive economic development.
