Correcting the World's Greatest Market Failure: Climate Change and the Multilateral Development Banks

Correcting the World’s Greatest Market Failure: Climate Change at the Multilateral Development Banks is a new analysis by the World Resources Institute that examines the challenges of mainstreaming climate change at the Multilateral Development Banks (MDBs).

In the lead up to the 2005 G8 Gleneagles Summit, WRI analysis found that climate change had been considered in less than 20 percent of the World Bank’s lending for the energy sector. Three years later, Correcting the World’s Greatest Market Failure: Climate Change at the Multilateral Development Banks, reviews the Country Strategies and project documentation for the energy sector portfolios of the World Bank Group, the Asia Development Bank, and the Inter-American Development Bank.

Operationally, opportunities to mitigate emissions and reduce climate risk are still not systematically incorporated into MDB strategies and project development. More than 60 percent of financing in the energy sector across these institutions does not consider climate change at all. The MDBs need to support transformative changes in key sectors to steer investment towards low carbon, environmentally sustainable development choices; this will be difficult to achieve when they remain invested in many “business as usual” projects and policies. To help correct the “world’s greatest market failure,” MDBs must do more to internalize the environmental and social costs of climate change into their decision-making including:

• Measure and manage the GHG emissions associated with investments in all relevant sectors.
• Work with developing country clients to identify low carbon approaches to development.
• Revise guidelines for country and sector strategies to explicitly integrate climate change considerations, particularly vulnerability to climate variability and change.
• Maintain high environmental and social standards to manage climate risk.
• Invest in the capacity of governments to practice good governance in order to respond to the realities of climate change.
• Significantly increase support for low carbon technologies, particularly in rapidly growing emerging economies.
• Build capacity and create new incentives for MDB staff to consider climate change in their interventions.