How to foot the bill on urgent climate action

This week's annual meetings of the World Bank could have important implications for the climate crisis and could help shift the trajectory of global warming. Multilateral development banks can make or break the transition to renewable energy, and governments are their shareholders. It's time for those governments to step up and make sure the banks are prepared to advance the process. 

To stop climate chaos from causing enormous human suffering and decimating the global economy, we must bend the emissions curve down, now. There is no mystery about what needs to happen next. The share of renewables in the global energy mix must increase exponentially, and the use of fossil fuels must decrease to zero in the coming decades. Emissions must stop rising immediately and fall by 45% in the next eight years. Developing countries need to meet rising demand for cheap energy with renewables and adapt to the catastrophic impact of the climate crisis.

In all this, multilateral development banks, including the World Bank, are essential drivers and sources of finance. The global economy doesn't lack liquidity, but it's either sitting on the sidelines or invested in fossil fuels and carbon pollution. Multilateral development banks can help shift that liquidity where it's needed.

We need to triple current investments in renewables and meet the adaptation needs of the developing world, which are set to increase to some $300 billion a year by 2030.

The climate and development mandates of International Financial Institutions — the World Bank and other development banks — clearly require them to act. But their current business models are painfully averse to risk.

Financing renewable energy projects in developing countries can cost up to seven times more than it does in North America or Europe — largely because financiers charge high premiums to cover perceived risk.

Fossil fuel projects involve many risks: price volatility; liquidity and operational risks; and legal risks connected with their central role in the climate crisis. But these risks are well-known and understood, and there are standard ways to manage them. There is no equivalent shared understanding or risk-management strategy for renewable energy, particularly in emerging markets. 

Multilateral development banks are the only institutions that can break this cycle. It's time for their shareholders — led by the governments of developed economies — to demand an overhaul.

Changing the banks' approach to risk doesn't require legislation, or even parliamentary approval. It simply requires decisive action. 

I therefore urge these government shareholders to act in five areas.

First, increase the scale of renewable energy finance. Tell the banks' managers to set ambitious volume targets for investment in renewable energy infrastructure. That should include flexible electricity grids and storage capacity to accommodate renewables. Countries should also be supported to put in place incentives and regulatory systems for renewables. This would send a powerful signal that could be leveraged by developing countries to negotiate with private financiers.

Second, increase tolerance for risk. Government shareholders must tell the management of multilateral development banks to adjust their capital guidelines, adequacy policies and rules to enable them to increase lending and take reasonable risks. Their own projects are limited — but by acting as first-loss investors and risk-takers, these banks can leverage huge increases in private finance. They should also consider lowering risk ratings and increasing the risk-tolerance thresholds of their private arms, which would unlock vast amounts of capital.

Third, phase out fossil fuel finance. Government shareholders should require all multilateral development banks to publish their plans to phase out direct and indirect support for fossil fuels before the COP27 climate summit in Egypt next month. At the same time, the banks should retrofit their investment portfolios toward renewables. The banks' private arms must also get on board.

Fourth, substantially increase the quality and quantity of finance for adapting to climate change. Government shareholders should tell the managers of multilateral development banks to put adaptation, resilience and vulnerability at the heart of their operations. All their investments should be climate-proof. They should also press the banks to allocate 50% of climate finance to adaptation.

Fifth, reform their incentive structures. Management and staff members of multilateral development banks must be held accountable for delivering on their climate and sustainable development mandates. Banks that move furthest and fastest should be first in line for recapitalization.

Taken together, these five steps could solve the issue of real and perceived risks around financing renewables in developing countries and direct more support toward adaptation and resilience. Where public money leads, private investors will follow.

If governments act now as shareholders of the multilateral development banks, they could kick-start a virtuous cycle of investment in renewable energy, changing the trajectory of our catastrophically warming planet.

Antonio Guterres is secretary-general of the United Nations

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.