As climate change drives a growing cascade of extreme weather events, from hurricanes and floods to heat waves, droughts, and wildfires, countries worldwide are grappling with how to adapt to an increasingly volatile climate. Preparing for these challenges and reinforcing infrastructure will demand hundreds of billions of dollars, while addressing the root cause of climate change—the burning of fossil fuels—will require transitioning to renewable energy sources like wind and solar.
Central to this effort is “climate finance,” a term that encompasses funding aimed at both adaptation to climate impacts and the reduction of carbon emissions. Financing related to climate change holds particular importance for developing countries, which often lack the resources and access to credit available to wealthier nations. Major players in this financing landscape are international mega-banks, called multilateral development banks (MDBs), with the World Bank being the largest among them. These institutions are at the heart of climate finance, funneling taxpayer-funded resources into climate initiatives across the globe.
With the annual United Nations climate conference (COP) set to begin in Azerbaijan, leaders are expected to discuss ambitious new financial targets. The world needs to raise trillions in climate financing if it hopes to limit global warming to 1.5 degrees Celsius above pre-industrial levels. Currently, the planet is already around 1.3 degrees Celsius warmer, raising the stakes for urgent and adequate financial support.
In 2009, world leaders established an annual target of $100 billion in climate finance for developing nations, a goal that was met only recently in 2022. Yet, according to the Climate Policy Initiative, the current climate finance total falls far short of the necessary investment, as the world needs roughly five times the current annual amount to mitigate the most severe impacts of climate change.
Tim Hirschel-Burns, an expert from Boston University’s Global Development Policy Center, stresses that the new climate finance target must be robust enough to “catalyze the actions that fill the significant climate finance gap developing countries face, which is much bigger than $100 billion.” To stay on track, the new goal must not only aim higher but also include mechanisms to hold institutions and governments accountable for their pledges.
According to Dharshan Wignarajah, director at the Climate Policy Initiative’s London office, “The question is not ‘are we going to transition?’ but ‘how quickly can we engineer the transition?’” Financing plays a central role in how quickly that transition can happen. With discussions increasingly centered around financial solutions, COP meetings have evolved from scientific debates to more practical ones about who will pay for climate solutions.
For developing countries, multilateral banks are essential to financing climate-related projects. In wealthier countries, commercial banks and private companies fund the majority of green initiatives. In the United States and Canada, for example, private institutions financed over half of the climate projects in 2022, but in sub-Saharan Africa, they accounted for only 7%.
This reliance on MDBs is largely due to the high interest rates private lenders impose on developing nations, which typically lack strong credit ratings. As Hirschel-Burns explains, if a country like Kenya seeks loans from private lenders, it may face interest rates as high as 10% due to its credit status. By contrast, MDBs like the International Development Association (IDA), an arm of the World Bank, have top-tier credit ratings and can offer much lower rates to developing countries. The World Bank and similar institutions can borrow at low rates themselves, then lend to developing nations at rates far below what these countries would face in the private sector.
Although MDBs have pledged to reduce carbon emissions and invest in renewable energy, they often pursue broader development goals, such as poverty reduction and increased energy access, that sometimes conflict with climate targets. In pursuit of these goals, MDBs have historically financed fossil fuel projects, an approach criticized by environmental groups who say it locks developing countries into high-carbon pathways.
Data analyzed shows that multilateral banks continue to rank among the largest funders of fossil fuel projects. Between 2018 and 2022, for example, the World Bank funneled $2.7 billion into what is described as “fossil fuel prolonging finance.” Some investments aim to increase efficiency at coal plants, reducing their greenhouse gas emissions without eliminating the source entirely. In India, the World Bank’s International Bank for Reconstruction and Development provided $105 million for rehabilitating coal plants, intending to make them more efficient and reduce emissions without fully transitioning to renewables.
Jane Burston, CEO of the Clean Air Fund, criticizes this approach, emphasizing that development assistance should aim to help countries bypass fossil fuel dependence entirely. “It’s baffling why development assistance is being given to something that continues to make people unhealthy as well as harms the planet,” she said.
Vietnam presents a case study of the mixed approach MDBs take toward climate finance. Although Vietnam’s power generation heavily relies on coal, the country is rapidly expanding its wind energy capacity, now ranked seventh globally for planned wind power. The Asian Development Bank (ADB), which provided significant coal financing in Vietnam until 2017, has recently shifted its focus. Since then, ADB has committed $60 million in loans for wind energy in Vietnam, while pledging to steer clear of new coal-related projects under its updated climate policies. Between 2019 and 2030, ADB aims to finance $100 billion in climate-friendly projects, marking a considerable shift toward renewables.
Nonetheless, environmental activists argue that even selective support for fossil fuels can be counterproductive. Bronwen Tucker from Oil Change International says MDBs cannot truly function as “climate bankers” while they continue funding fossil fuel projects. Rich nations must take the lead by providing financial support that allows less developed countries to fully embrace renewable energies.
The financing gap for climate adaptation and mitigation in developing countries remains vast. In many cases, MDBs have prioritized lending over providing direct grants, even though loans add to the already significant debt burdens of developing nations. This is particularly concerning given that many countries face severe climate impacts but lack resources to rebuild or adapt without incurring further debt.
According to Bronwen Tucker, “The MDBs can’t be climate bankers if they are still fossil bankers. Relying on banks that are locking in fossil fuels and the worst-ever debt crisis is not working.” She advocates for rich countries to step in with grants and donations to fill the financing gap, preventing climate crises that could have devastating impacts on lives and ecosystems.
For the upcoming COP meeting in Azerbaijan, stakeholders are calling for a renewed commitment to climate finance, pushing for a target that could mobilize trillions in investments over the coming decades. They also emphasize that any new targets must be coupled with measures that ensure compliance, transparency, and accountability. Hirschel-Burns advocates for a more comprehensive climate finance framework that can help developing nations close the gap between financial needs and available resources.
As part of this new framework, advocates are calling for MDBs to reevaluate their policies to ensure all funding aligns with global climate goals, particularly the commitment to limit warming to 1.5 degrees Celsius. Many stakeholders are urging COP leaders to build on the success of the 2022 $100 billion target by setting a more ambitious goal that fully meets the needs of vulnerable countries.
