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The World Bank Eyes an Overhaul Amid the Climate Crisis

Development and climate action must be pursued in tandem.

Published on October 26, 2023

The annual meetings of the World Bank and International Monetary Fund (IMF) are typically staid affairs. Not so this year in Marrakech, Morocco, thanks to Ajay Banga, the World Bank’s new president. The former CEO of Mastercard is in a determined hurry to overhaul the world’s leading multilateral development agency to cope with the existential climate crisis. Under his leadership, the World Bank has adopted a new vision: “to create a world free of poverty on a livable planet.” His task is to rally a divided and distracted international community behind this new vision and mobilize the massive public and private resources needed to realize it.

The October 9–16 meetings of these major international financial institutions (IFIs) occurred amid growing demand for reforming the global financial architecture so that it reflects the shifting distribution of economic power and promotes global equity. Both UN Secretary-General Antonio Guterres and IMF Managing Director Kristalina Georgieva have called for “a new Bretton Woods moment.” Yet the most urgent priority is to leverage the international financial system to address the global environmental emergency, as the world is badly off track in meeting its 2015 Paris Climate Agreement commitments and the Sustainable Development Goals (SDGs).

Since assuming his position in June, Banga has become an evangelist for a controversial yet indisputable thesis: the goals of climate action and poverty alleviation are inextricably linked. To illustrate this claim, Banga often invokes India, his birth country. When the monsoons fail, as they increasingly do, drought ensues, and farmers become destitute. Unable to sell crops from their fields or milk from their cows, they pull their daughters out of school, reducing their families’ prospects. As the example illuminates, climate change exacerbates poverty. The IFIs must refocus much of their development assistance toward fighting climate change and its impacts.

Avoiding False Choices—and North-South Divisions

The argument that development cooperation must prioritize climate mitigation efforts grates on many advocates for developing countries. They worry that the donor community’s burgeoning focus on climate action will come at the expense of country-led programs, which focus on priorities identified by borrower nations. Many middle- and low-income countries already face competing policy challenges. Nearly half are either in debt distress (19 percent) or on its doorstep (29 percent), in part due to the effects of the coronavirus pandemic, the war in Ukraine, and high interest rates.

Accordingly, these countries lack the monetary flexibility and fiscal space to grapple with climate change while advancing other development priorities. For example, debt service on the African continent now exceeds what experts say its countries need to invest in climate resilience, and the interest rates on borrowing are on average eight times higher than the burdens European countries must shoulder.

Borrower countries believe the wealthy world is responsible for ensuring that they need not choose between climate action and reducing poverty. In the run-up to the Marrakech meetings, Kenyan President William Ruto and several other African leaders emphasized this point in a New York Timesop-ed titled, “If You Want Our Countries to Address Climate Change, First Pause Our Debts.”

Developing countries chafe at being asked to respond to a global climate crisis they did little to create but whose impacts are falling disproportionately on their citizens. Banga acknowledges this harsh reality: “The Global South’s frustration is understandable. In many ways they are paying the price for the prosperity of others.” Yet he insists, correctly, that “we cannot endure another period of emissions heavy growth.” Climate change poses an existential threat to all of humanity, notably the world’s poor. To cite one figure, some 1 billion children—nearly half of the world’s 2.2 billion kids—live in countries at “extremely high risk” of climate impacts, says the United Nations Children’s Fund.

The world needs to spend well over $100 trillion on the clean energy transition between now and 2050, according to the International Energy Agency. That is comparable to the world’s annual GDP (and about 4 percent of global GDP per year through midcentury). Much of this will need to be spent in the developing world, and poorer countries lack the resources to accomplish this task alone. A grand bargain arrangement is necessary, whereby the wealthy world invests massively in a new form of development that helps individual countries accelerate their clean energy transition and preserves a habitable planet. The World Bank’s leadership and own institutional reforms are crucial in facilitating this shift.

A Better Bank: The Evolution Roadmap for Reform

Central to the World Bank’s reform effort is its Evolution Roadmap, which the institution’s shareholders are slated to approve at the IFIs’ spring meetings. It outlines a new mandate and operational model for the institution, as well as a strategy for resource mobilization. The document’s point of departure is that the fortunes of developing countries are increasingly shaped by transnational forces beyond their immediate control, including shocks related to climate change, pandemics, and war.

The roadmap recommits the World Bank to its long-standing “twin goals” of alleviating poverty and advancing shared prosperity, but it adds a new dimension: an explicit pledge to help provide global public goods in eight domains that span climate action, pandemic preparedness, spillovers from conflict-affected states, and other challenges.

Realizing this new vision will require massive financing for development, and it must begin by squeezing more out of the bank’s existing resources. The World Bank estimates that total spending to address the challenges of climate, pandemics, and conflict alone in the target countries—those that utilize the International Bank for Reconstruction and Development (IBRD) and International Development Association (IDA)—through 2030 will cost approximately $2.4 trillion per year. Over the past four years, the World Bank has already increased its total spending on climate action from $14 billion to $38 billion. In addition, its diagnostic reports share its technical advice with client governments.

To further utilize existing resources, the World Bank has begun to implement recommendations from the G20  to greatly expand its lending capacity while preserving its AAA rating in financial markets. These steps include assuming more risk, including by adjusting the World Bank’s equity to loan ratio, and persuading donors to use their enhanced IMF Special Drawing Rights for climate and development purposes. According to Banga, these steps could allow the World Bank to mobilize another $150 billion over ten years.

A Bigger Bank

Doing more with existing resources is not enough, however. Banga continues to emphasize the need for “a bigger Bank.” To boost the institution’s firepower, he is working with shareholders to increase the capitalization of its IBRD, which provides loans to middle-income countries on commercial terms. He also wants to ensure that the next replenishment of the World Bank’s concessional window, known as IDA21, is the largest in the IDA’s history.

The World Bank will also launch a set of Global Challenge Programs—internationally coordinated, country-level programs that will provide both IDA and IBRD countries with grants and concessional financing for “replicable” and “scalable” interventions that address climate change and other global public goods. The World Bank is similarly enhancing its crisis response toolkit and capabilities to build greater resilience and permit clients to access prompt contingency support funds when disasters strike, as well as to insure themselves against catastrophic events. In parallel, it is expanding its partnership and collaboration with other organizations, particularly regional multilateral development banks, to create a truly integrated system that enables knowledge-sharing and coordinated country plans.

Simultaneously, the World Bank is seeking to unlock the potential of the private sector to advance climate-friendly development. The scale of global assets currently under management is a staggering $120 trillion, dwarfing the roughly $200 billion of annual official development assistance. Yet only a fraction of the capital managed by institutional investors is deployed in developing and emerging markets. It is up to the IFIs and national governments to “crowd in” these private-sector resources, including by derisking investments and making them attractive.

The World Bank envisions doing so in several ways. One is by expanding its use of blended financing and risk guarantees. Another is by persuading the often-conservative rating agencies of the creditworthiness of many developing countries—in part by sharing access to its Global Emerging Markets Risk Database Consortium. Banga has also established a Private Sector Investment Lab, led by fifteen CEOs, to discuss additional ways to overcome barriers that political instability, regulatory uncertainty, and foreign exchange risk pose to investment. Lastly, the World Bank is working with client governments and firms to promote more credible voluntary carbon markets to unlock private finance for climate action in developing countries. In Marrakech, Banga announced that his organization is ramping up its investment in forest carbon sequestration projects at the country level and will become a certification body to ensure that projects deliver real and intended impacts.

The World Bank also is calling on both donor and developing country governments to begin dismantling environmentally destructive subsidies, the costs of which exceed $7 trillion per year, or roughly 8 percent of global GDP. This figure includes $1.25 trillion spent on direct subsidies for fossil fuels, agriculture, and fisheries, and another $6 trillion in damages for the indirect societal and environmental costs associated with despoiling the Earth’s environment. These financial resources could be redirected and invested in climate- and nature-friendly development.

The Road Ahead

Achieving these ambitions will not be easy. Among the biggest uncertainties is whether shareholders will ultimately approve the envisioned money for IBRD and IDA. U.S. President Joe Biden’s administration, for instance, requested $2.25 billion in supplemental appropriations for the World Bank (including $1.25 billion for the Global Challenge Programs), but the fate of such funding is uncertain, especially as congressional Republicans are divided over support for Ukraine. World Bank officials have been encouraged by G20 statements in favor of an ambitious IDA21, but politicians will need to be able to sell this to their citizens. Donors may also balk at ramping up funding for both IBRD and IDA. More generally, achieving the World Bank’s objectives will depend on alleviating the deepening debt crises in developing and emerging economies. This is an arena where the World Bank has a seat at the table, but the major decisions will be made by the IMF and the Paris Club of creditors.

Finally, the World Bank will need to reassure client governments that the new energy and resources it devotes to global public goods will not come at the expense of their own priorities. The Evolution Roadmap insists that the World Bank will sustain its country-driven model, but many developing country officials and civil society actors in Marrakech were skeptical. Tensions and trade-offs between climate versus education and health will be inevitable, especially without greater financing.

The Marrakech meetings underscored the imperative of bringing global economic governance into greater balance with ecological imperatives by embracing new, green approaches to global development that can command support from rich and poor countries alike. As Financial Times columnist and editor Martin Wolf observed, a “massive” and “frightening” chasm has opened up between today’s planetary crisis and the antiquated institutions of international cooperation we have inherited. In defiance of all rationality, he continued, humanity seems prepared to commit collective suicide, simply because it cannot figure out how to harness the world’s extraordinary wealth to accelerate clean development in the “Global South.” We cannot afford North-South acrimony if we wish to survive the climate emergency, agreed the IMF managing director, Georgieva. “We need to move from a culture of pointing fingers to the culture of holding hands. We are all in this together.”

Carnegie does not take institutional positions on public policy issues; the views represented herein are those of the author(s) and do not necessarily reflect the views of Carnegie, its staff, or its trustees.