Amid the flurry of pledges and promises made by governments and banks at last year’s climate change summit in Scotland, the world’s multilateral development banks played a low-key role. Jacob Atkins looks at where those regional lenders with trade finance programmes are left after the summit, and how some are aligning with the Paris Agreement while others appear torn between development and climate action.
Multilateral development banks (MDBs) had a muted Glasgow summit.
Some institutions had been early movers on climate change, looking to trim emissions or boost green finance several years before decisive action on greenhouse gases – or the appearance of taking such action – became standard for most global financial institutions.
But in November last year, as governments and many commercial lenders vowed to bring their net greenhouse gas emissions down to zero over the next three to four decades, only a handful of MDBs stepped forward to make similar pledges.
Despite MDBs’ early progress, they have since fallen behind, according to Bronwen Tucker, global public finance co-manager at Oil Change International, which campaigns against financing for fossil fuels.
“In 2017, the MDBs were among the very first financial institutions to commit to Paris alignment,” she says, providing as examples the European Investment Bank (EIB) and World Bank. “Four years later MDBs are far behind, standing in the way of the Paris Agreement rather than aligning with it.”
In that 2017 promise, fleshed out a year later in a joint framework, nine MDBs pledged to bring their financing flows in line with the 2015 Paris Agreement, which aims to keep global temperature rises to 1.5 degrees Celsius above pre-industrial levels.
“You had this history of the MDBs being relatively fast out of the gate… they had a lot more momentum, and they made this joint Paris alignment process announcement,” Tucker tells GTR. “But as that commitment has aged, it’s clearly become a pretty lowest common denominator space, where they really can only agree on things that they’ve all already agreed on.”
Many MDBs have trade finance programmes aimed at boosting local development through increased exports. They are administered directly or, more commonly, through indirect financing, whereby the MDB provides credit lines to local financial institutions who in turn offer various trade finance products to corporates and small and medium enterprises.
Just two international development finance institutions with trade finance programmes signed the Cop26 summit’s marquee pledge to end public finance for fossil fuels by the end of 2022: the East African Development Bank (EADB) and the EIB.
Other institutions, such as the European Bank for Reconstruction and Development (EBRD) point out that while they do not have formal net-zero targets, they are following a Paris alignment strategy.
Between 2018 and 2020, MDBs provided at least US$6.3bn each year in preferential finance and grants for fossil fuel projects, according to Oil Change International’s data. But that doesn’t include money lent through financial intermediaries, the conduits via which trade support typically flows.
At Cop26, 10 MDBs – including the EBRD, African Development Bank and Islamic Development Bank – issued a statement explaining their progress towards meeting their 2017 Paris alignment promises.
The institutions said that total climate finance by MDBs was US$66bn in 2020 and that since 2011 they had provided support for “climate action” in low and middle-income countries to the tune of US$300bn.
Campaigners argued that the statement was short on detail, did not mention any exclusions of fossil fuels and fudged timelines.
Those advocating for the end of public finance for fossil fuels argue that the Glasgow summit should have been a watershed moment for MDBs, because so many of their shareholder governments announced more ambitious emissions reduction targets.
While processes differ, representatives of shareholder governments have direct input through a vote when MDBs are seeking to change their policies or support large projects or transactions.
Governments or institutions that signed the Glasgow pledge on ending public finance for fossil fuels comprise at least 67% of the voting power at the EBRD and 51% of the Inter-American Development Bank (IADB), according to an analysis by the Big Shift Coalition, which includes dozens of climate advocacy groups.
The stakes held by countries committed to ending public finance of fossil fuels may soon reach 50% of the shareholdings of other MDBs, such as those under the World Bank umbrella and the African Development Bank, if more countries make the pledge.
“Major borrowers and donors alike have agreed it is time for the big shift – out of fossil fuels and into renewable energy,” said Ladd Connell, environment director at Bank Information Center, a campaign organisation, shortly after the Cop26 summit.
“Some development banks, like the EADB and the EIB have rightly embraced this shift as fiduciarily prudent. Other MDBs, if they’re serious about aligning with the Paris Agreement and doing their duty to smart development, must step up now.”
EBRD shoots for Paris
One of the most active international development institutions on climate change has been the EBRD, whose financing activities focus on Eastern Europe, Central Asia and North Africa.
Created after the fall of the Soviet Union to help usher Eastern Europe out from behind the Iron Curtain and into the market economy, EU member states and institutions make up the majority of its shareholding. The bank says its trade finance programme supported €3.3bn of foreign trade in 2020 through its partner financial institutions.
In July last year the bank gave itself an end-of-2022 deadline to align all its activities with the Paris Agreement, after earlier promising to make at least half of its financing “green finance” by 2025. That doesn’t include an explicit net-zero objective, but Harry Boyd-Carpenter, the bank’s managing director for the green economy and climate action, tells GTR net zero is “implicit in a Paris alignment goal”.
A major plank of the bank’s new climate strategy for indirect financing – released in the form of a consultation in December last year – is a requirement that its partner banks “must be committed to working towards Paris alignment in their own institutions” from January 2023 and will aim for each to have a Paris alignment action plan in place within four years.
The EBRD will also place detailed requirements on the types of sub-lending that partner banks do with the credit lines that it grants them, including adhering to the bank’s exclusions on thermal coal mining and coal-fired power, and upstream oil and gas.
But aside from those exclusions, partner banks will still be free to sub-lend to any sectors, with the EBRD relying on the partners’ Paris alignment strategies.
“We cannot analyse every single sub loan that the bank will then extend,” says Maya Hennerkes, who leads the lender’s environmental, social and governance work with financial institutions, “so we will work with them to have a robust climate corporate governance in place, in addition to sound environmental and social management systems”.
Trade finance loans under that category are usually considered low-risk anyway, because, as Hennerkes tells GTR, “these tend to be very small loans in not really carbon-intensive industries at all”.
The lender says it will work closely with its partner banks, noting that many operate in countries where there is still very little regulatory scrutiny over financing for dirty sources of power.
“At present, the majority of [partner banks] in the EBRD regions are not subject to climate-related regulatory signals and see limited climate finance demand from borrowers, who often lack incentives or knowledge to access related opportunities,” the consultation notes.
The EBRD’s exclusions on oil and gas do not go as far as those announced by the EIB. While financing for coal and gas exploration and extraction is out, support for downstream processing is still theoretically available.
“Where there’s a clear and credible low carbon strategy that can be demonstrated and can be measured, and we could prove that there is a low risk of carbon lock-in, then we may [support gas],” says Hennerkes.
According to Boyd-Carpenter, those circumstances are likely to be “very rare”. He says the EBRD’s stance is essentially the same as the International Energy Agency’s position, published last year, that no new gas production should come online if the world is to slash emissions to net zero by 2050.
Such views on gas are not uniformly shared across the MDB landscape.
In February 2022, the African Export-Import Bank (Afreximbank) announced an equity investment of undisclosed value in Ecowgas, a liquefied natural gas (LNG) distribution infrastructure in West Africa.
Unlike in Western Europe or northern Asia, where natural gas contributes to a relatively stable and mixed energy supply, electricity shortages continue to plague some African countries, including the continent’s largest economy, Nigeria.
The unreliability leads to “high production costs, inefficient operations and reduced global competitiveness”, Afreximbank points out, and adds that greater use of LNG will “promote efforts to minimise CO2 emission by replacing environment-polluting fuels currently in use”.
In a trade policy brief published earlier this year, the bank says: “The wealth of oil and gas resources hold enormous potential for Africa’s development, and it is imperative that Africa retain the right to exploit and utilise these resources to support its development ambitions.”
It is also difficult to ascertain how some MDBs are approaching the energy transition or even the basics of their lending.
Some MDBs offering trade finance have little or no publicly available information about their policies on climate change, fossil fuels or sustainability generally.
GTR could not locate policies and explanations of what, if any, sustainability criteria are applied to trade finance applicants or issuing financial institutions for Afreximbank and the Islamic Trade Finance Corporation. Neither institution responded to questions about their approaches.
The IADB, which has a trade finance programme in its Latin American and Caribbean markets through a network of partner banks, also did not respond to written questions.
But ahead of the Glasgow summit, the IADB said it would align its policies with the Paris Agreement by 2023, a move it says will include “enhanced collaboration” on decarbonisation with its financial intermediaries. It says it has also provided over US$20bn in “climate finance” since 2015.
The Asian Development Bank (ADB) – whose trade finance transactions amount to US$47.5bn between 2009 and 2020 – does not have a specific emissions reduction target for its financing activities, but placed climate change finance at the centre of its Strategy 2030 vision.
The institution confirmed last year that it will no longer support most fossil fuel transactions, but that it may continue to support oil trading in order “to keep economies running in a few countries where there is little private sector support for such import risk”.
The International Finance Corporation (IFC), the financing arm of the World Bank, has a sustainability framework that applies to trade finance, although it has not been updated since 2012.
The IFC also operates a Climate Smart Trade programme, which works with issuing banks to offer better pricing or longer tenors for the financing of goods or projects deemed to have “clearly defined climate change benefits”.
A spokesperson for the IFC did not directly answer questions from GTR but says in a statement that it “has been working with partner financial institutions to help them identify and provide financing to suppliers of green equipment and materials, as well as sustainable commodities that support climate change mitigation and resilience activities”.
In the ADB’s energy policy, published in October, the bank said “coordination between MDBs” will produce “a shared approach to trade and supply chain financing in line with the Paris Agreement”.
It is understood the IFC is leading those discussions. A spokesperson for the organisation says only that “we will continue to engage with other multilateral development banks on an approach to trade finance” and the institution considered transactions involving oil trades “on a case-by-case basis”. The spokesperson did not respond to more detailed questions about the corporation’s net-zero targets or policies.