Multilateral Development Banks (MDBs) are vital players in the climate finance ecosystem. They provide direct financing for climate mitigation and adaptation activities and help mobilize private sector investment in climate solutions.
Earlier this month, the MDBs released their annual Joint Report on Climate Finance, covering their activities in 2017. Just as we did last year, we reviewed the report and found several encouraging trends, some disappointing results, and many opportunities for increased ambition.
It is worth emphasizing that the Joint Report provides a snapshot in time. This can be skewed from one year to another by idiosyncratic factors, such as lumpy project pipelines or approval of particularly large loans. We therefore focused on trends emerging over time and across banks, since such trends can provide valuable information about where the MDBs are headed.
Climate finance commitments hit a record high. Commitments totaled $35.2 billion in 2017, the highest since the annual reports were launched in 2011. All six banks increased their climate finance commitments in 2017, adding up to a 28 percent increase over 2016. The African Development Bank (AfDB) posted the largest percentage increase, more than doubling its climate finance in 2016-17, after a 50 percent drop in 2015-16. The World Bank increased its climate finance by $1.7 billion, the largest absolute increase.
Each of the six MDBs grew their climate finance faster than their overall operations, a critical improvement over 2015-16. This is important because the MDBs' 2020 targets for climate finance are mostly expressed as a percentage shares of overall funding, so climate finance must grow at a faster rate than the total to achieve their targets. As the second graph below shows, some MDBs set higher targets than others, a recognition of bank-specific factors like member-country characteristics, the types of activities they finance, and the baseline from which they started counting. The European Investment Bank (EIB) has already surpassed its 35 percent target for developing country climate finance, while the AfDB more than tripled the percentage of climate finance as a share of overall commitments in 2017.
- In 2017, the Islamic Development Bank (IsDB) joined the other MDBs in reporting, applying the common methodology to track climate finance in energy, water and sanitation, transport, and agriculture. Its climate finance in these sectors was roughly $644 million or 22 percent of all funding in these sectors. Starting in 2018, the IsDB plans to apply the MDB climate finance tracking methodology to its entire project portfolio, a positive sign that it is taking its climate finance responsibilities seriously.
- Funding to help communities adapt to the impacts of climate change totaled $7.35 billion, or 21 percent of all MDB climate finance in 2017. While mitigation finance increased by 31 percent over 2016 levels, adaptation finance increased at a slower rate of 18 percent, meaning the overall share of adaptation finance is decreasing. At the Asian Development Bank (ADB) and EIB, adaptation finance fell in real terms.
Mobilization of private investment remains a challenge. The MDBs' co-financing ratio, a measure of how much, on average, each dollar of MDB financing mobilized funding from other sources, including the private sector, increased slightly from $1.38 in 2016 to $1.47 in 2017. However, this still remains below the MDBs' 2015 ratio of $2.22. Given the importance of mobilizing private investment in climate solutions, this needs attention.
Small Island Developing States (SIDS) and Least Developed Countries (LDCs) received just $3.7 billion, or 10.5 percent, of MDB climate finance. This is striking given that they are among the countries most vulnerable to climate change and account for around 17 percent of all developing countries by population. Thus, MDBs must do more to ensure concessional climate support is getting to those who need it most.
Transparency remains an issue. The Joint Report publishes each Bank's numbers in aggregate, but only the World Bank and ADB publish lists of projects that they count towards their climate finance numbers. The joint tracking methodology requires MDBs to count only the climate-specific share of a project's financing, but none explain how this is calculated. Without the underlying data, it is impossible for external observers to scrutinize the accuracy with which MDBs account their climate finance.
Aligning their broader portfolios. While tracking climate-specific finance is important, understanding the extent to which MDBs' overall portfolios support or hinder climate action is even more important. MDBs provided $35 billion in climate finance in 2017, while their financing for other activities was triple this amount, $105 billion. Combating climate change requires making sure all finance flows are compatible with climate objectives; indeed, this is one of the three overarching goals of the Paris Agreement (Article 2.1c). Last year, our colleagues published a working paper looking at the Paris-alignment of some of the MDBs, which found that the majority of their energy investments could be aligned, but only under certain conditions. The World Bank has shown leadership on this issue by pledging to cease funding for upstream oil and gas after 2019, and other MDBs might consider doing similar.
The International Monetary Fund – World Bank Group annual meetings will take place in Bali, Indonesia this October. The last time these meetings took place outside Washington was in 2015, when they were in Lima, Peru, and the MDBs unveiled their 2020 climate finance pledges, which provided a much-needed boost to international climate negotiations ahead of the Paris climate summit. 2018 is a similarly important year for climate action; at the COP 24 UN climate negotiations in December, countries must agree on the implementing rules for the Paris Agreement and step up the ambition of their national climate plans.
Finance will be key for this, and MDBs can play a vital role in helping countries to enhance their nationally determined contributions (NDCs). Bali will be an important opportunity for the MDBs to again show leadership by unveiling new commitments to build momentum for ambitious climate outcomes at COP24.