The role of the World Bank in climate finance

20 November 2009 | Inside the institutions

The World Bank currently plays four different roles in the distribution of finance to developing countries for mitigation and adaptation to climate change. In addition, its overall lending portfolio can have significant environmental impacts.

Firstly, the World Bank can serve as trustee for a climate trust fund, as it does currently for the UN’s Adaptation Fund (AF). The AF board acts under the authority and guidance of the parties to the Kyoto Protocol. The World Bank holds the money and manages and disburses the funds according to the rules prescribed by the board, to which, as trustee, it is accountable.

Secondly, the World Bank can serve as a secretariat for a trust fund, as it does for the climate investment funds (CIFs, see Update 66). The legal documents which established the governance and policies of the CIFs gave certain powers to the Bank in its role as secretariat, enabling it to make recommendations on the scope and objectives of the programmes to be established, programme criteria and priorities for funding. In addition, any Bank projects funded by the CIFs are subject to the Bank’s own operational policies. The committees which govern the CIFs have an equal balance of representatives from donor countries and recipient countries with two additional non-voting representatives, one from the World Bank and one from another multilateral development bank.

The two major climate investment funds at the World Bank are the Strategic Climate Fund (SCF) and the Clean Technology Fund (CTF). The SCF encompasses three dedicated programmes: the Pilot Program for Climate Resilience (PPCR), the Forest Investment Program (FIP), and the Program for Scaling-Up Renewable Energy in Low Income Countries (SREP).

Thirdly, the Bank can serve as an implementing agency of UN funds. The Bank’s middle income lending arm, the International Bank for Reconstruction and Development (IBRD), is one of three implementing agencies of the Global Environment Facility (GEF), along with the UN Development Programme (UNDP) and the UN Environment Programme (UNEP). The GEF is currently the only designated operating entity for UN Framework Convention on Climate Change (UNFCCC) funds. From the inception of the GEF in March 2001 until the end of fiscal year 2008 it had disbursed a total of $2.3 billion, distributing $280 million in fiscal year 2008. Because the amounts of money are relatively small the Bank tends to include a GEF component in its portfolio projects, which can be a small, environmentally friendly component in a bigger energy project. The Bank then subjects this money to its own operating procedures and policies, as well as those of the GEF.

Fourthly, the World Bank Group provides direct financing for adaptation and mitigation projects. An example of an adaptation project is funding warning systems for climate related natural disasters. An example of a mitigation project is retrofitting a coal-fired power plant so that it emits less greenhouse gases. This financing can come in the form of market-value IBRD loans, highly subsidised International Development Association (IDA) loans to low-income governments, or private sector finance through the International Finance Corporation (IFC). The World Bank executive board holds the sole authority for these financing decisions.

In addition to these four roles, other Bank activities can have significant climate impacts. For example, energy sector lending amounted to more than $8 billion in 2009 (see Update 56). The Bank does not currently measure the greenhouse gas emissions of its overall portfolio, but independent assessments produce very high estimates (see Update 62). The Bank is now developing a methodology for estimating a project’s associated greenhouse gas emissions (see Update 67).

In addition to direct loans, the Bank has an influence in leveraging additional finance for energy and other projects it invests in. For example, the Multilateral Investment Guarantee Agency (MIGA), another World Bank arm, insures private investments in developing countries.