Although certain institutions in the international economic architecture are making progress in addressing climate change, their efforts are insufficiently coordinated and in many cases lack scale.
Some of the most prominent multilateral institutions are beginning to address the financial liquidity, global development and macroeconomic policy implications and impacts of climate change. Progress, however, remains uneven. Even where institutional responses on climate issues are more advanced, approaches have remained fragmented.
Delays in recognizing the importance of climate change mean that many institutions now face the reality of having to implement very large operational and financial changes in a short period. The carbon emissions budget – the total volume of emissions that can be released before the UNFCCC’s 1.5°C temperature rise target is surpassed – will be exhausted in less than eight years. Responding to this threat necessitates a rapid, system-wide and globally coordinated approach within almost every part of the world economy.
This chapter will review the climate activities of the core institutions of the international economic architecture, offering a snapshot of their ongoing efforts to address climate change within the macroeconomic space. The analysis covers the World Bank Group, the IMF, the FSB, the G20, the G7, the NGFS, the Coalition of Finance Ministers for Climate Action, and the WTO.
The World Bank
Of the major MDBs, the World Bank Group was one of the first to acknowledge the importance of climate change within the field of development aid. The bank plays a vital role as a lender and catalyst for private investments in developing countries. It is the largest MDB funder of climate investments, having delivered around $109 billion in climate finance between 2016 and 2021.
In 2021, the World Bank released its Climate Change Action Plan (CCAP), which proposed a substantial increase in climate financing to developing countries. This included a commitment to increase the share of financing for climate efforts to 35 per cent of total financing delivered by the World Bank, up from an average of 26 per cent over the previous five years. The CCAP also includes Country Climate and Development Reports (CCDRs), intended to help countries prioritize climate action through national investment strategies. In a joint report with its sister organization, the International Finance Corporation (IFC), the World Bank has additionally sought to identify barriers to private investment in climate change adaptation and establish ‘blueprints for action’ for further climate investment. More recently, the World Bank unveiled a new trust fund, Scaling Climate Action by Lowering Emissions (SCALE), which aims to mobilize additional climate finance for developing countries. Launched at the COP27 climate summit in late 2022, the trust fund seeks to provide grant payments on a results basis to client countries as a way to lower their GHG emissions.
On the debt front, the World Bank is in the early stages of creating a platform through which developing countries could seek funding for climate initiatives linked to debt relief. Advisers would be drawn from a wide range of organizations associated with economic governance, and would recommend systemic, climate-friendly economic solutions that could be implemented after any debt relief is agreed upon. In effect, the platform would seek to address the problem faced by developing countries which may be unable to afford investments in climate action because of their immediate debt servicing commitments. The bank is also developing a framework to connect debt relief plans with investments in what it terms ‘green, resilient and inclusive development’ (GRID). The framework would offer countries conditional debt relief support, on top of increased concessional loans, to finance GRID-related initiatives.
While these efforts are commendable, the World Bank has been repeatedly criticized for doing too little to tackle GHG emissions. Its outgoing president, David Malpass, created controversy last year when he claimed he was ‘not a scientist’, after a reporter had asked him whether the burning of fossil fuels had contributed to global warming. His views have recently shifted, and he has spoken openly about the severe impacts of climate change on humanity and economic development. Nevertheless, climate change experts, including former US vice-president Al Gore, have called for new leadership to provide a bolder strategic vision for the bank’s climate change adaptation and mitigation efforts. On 15 February 2023, Malpass announced he would step down later in the year.
Many critics of the World Bank’s recent climate strategy have argued that the CCAP’s 35 per cent target for climate financing is far too low, given the severity of present climate threats. The CCAP also does not mention a phasing out of fossil fuel financing, only that it would assess all investments in new gas infrastructure for consistency with the Paris Agreement. The World Bank has provided around $15 billion in direct financing to fossil fuel projects since 2015, while having simultaneously pledged to suspend funding for upstream oil and gas projects by 2019. Despite the bank’s pledge, financial support for fossil fuels continued to flow during 2021. A recent study by the International Institute for Sustainable Development (IISD) also found that the World Bank provided 12 per cent of all
G20- and MDB-related public financing for gas infrastructure development between 2017 and 2019. This raises questions around the bank’s definition of climate-related investments, as well as the effectiveness of its net zero transition plans, and whether the CCDRs will have any real impact on national investment decisions around climate-related projects.
Nevertheless, the CCAP may have significant implications for future ‘green’ infrastructure investments from the private sector. In 2008, through the IFC, the World Bank Group became the first global institution to issue a green bond. Since then, interest in the use of green bonds has increased among private and public investors alike, with billions of dollars raised for investments in climate-related projects. Just as the IFC’s issuance of green bonds has helped to establish the market for such instruments and attract new investors, there is now a similar hope that the CCAP’s enhanced focus on climate investments may lead the way in encouraging financial investors to engage with developing countries on climate change mitigation and adaptation.
The International Monetary Fund
The International Monetary Fund (IMF) has only recently begun to give serious consideration to climate change as a determinant of economic performance and risk to global financial stability. It has, however, caught up quickly. The IMF’s efforts to address climate change now fall into four categories: economic surveillance, standard-setting, development of new financial instruments, and policy advocacy.
The first category of activity involves the IMF identifying potential risks to member states and recommending policy adjustments to promote financial and economic stability. Through its Article IV process and Financial Sector Assessment Programs (FSAPs), the IMF advises its members on the macro-financial impacts of climate change. It stress-tests evaluations of physical and transition risks for member countries through FSAPs, and uses its bilateral surveillance mandate under Article IV to recommend policies around climate change adaptation. IMF programmes also include climate-related policy proposals for resolving member states’ balance-of-payment problems through fiscal adjustments, such as reforms of fuel and energy subsidies.
In the second category, standard-setting, the IMF has devised additional climate disclosure standards for implementation within the developing global system of climate information. Specifically, this has involved coordinating with the NGFS to create an analytical framework for climate risks. The aim of these additional standard-setting initiatives is to use the reporting of financial data to assess the exposure that a central bank or private company may have to climate-related financial risks. These efforts are essential to unlocking trillions of dollars in green financing, as well as to mobilizing additional investments in climate resiliency.
The third area of the IMF’s climate work is the development of new financial institutions and instruments to help low- and middle-income countries deal with climate-related development challenges. A new $40 billion Resilience and Sustainability Trust (RST) aims to support long-term structural policy reforms around sustainability, digitalization and economic resilience in developing countries. It can be expected to play an important role in ramping up investments in climate change adaptation and renewable energy. The RST was established in 2022, following the IMF’s $650 billion allocation of Special Drawing Rights (SDRs) in 2021 as part of the global response to the pandemic economic shock. Only $21 billion of the total allocation, however, was directed to low-income countries. The purpose of the RST is to recycle SDRs issued in this allocation from countries that do not need them to low- and middle-income countries that do. Recipients would need to meet various macroeconomic conditions. The repurposed SDRs have the potential to provide affordable, long-term financing to low-income countries, boosting their balance-of-payments resilience.
The fourth area of activity is policy advocacy, which has been a major component of the IMF’s recent focus on climate change. In addition to programmes providing advice on renewable fuel and energy subsidies, the IMF has advocated carbon pricing in member countries to improve energy efficiency and redirect innovation towards renewable energy technologies.