At a small rural farm about an hour’s drive from the Zambian capital city of Lusaka in late January, US Treasury secretary Janet Yellen stood before a gathering of farmers and told them she understood the destruction that global warming was causing.
“We know that over the past decade, storms, floods, and droughts in Africa have increased in severity and frequency,” Yellen told her audience in Chongwe. “Climate change is not just a future threat; it is already here.”
Her remarks stood in stark contrast with those made last year by another of America’s most senior economists: David Malpass, president of the World Bank. The multilateral lender, created with the twin goals of alleviating poverty and pursuing shared global prosperity, was increasingly being asked to help tackle the impacts of climate change too.
Yet, when asked at a September event if he believes in human-made global warming, the Trump appointee repeatedly dodged the question. “I’m not a scientist,” he said.
The comment sparked a furore and sharpened criticism of the World Bank for not taking the scale of the climate crisis seriously. Although Malpass later walked back the remark, Al Gore, former vice-president of the US, the bank’s largest shareholder, was among those calling on the Biden administration to fire him. “It’s ridiculous to have a climate denier at the head of the World Bank,” Gore said in a September interview.
The pressure on the World Bank chief only grew more intense from there. In mid-October, 10 countries — the G7 plus Australia, the Netherlands and Switzerland — submitted a paper to the World Bank urging it to “refresh its vision” and align itself with the goals of the Paris Agreement to reduce global greenhouse gas emissions.
A plan outlined by the bank early in January for how it would incorporate climate change, and other global issues such as pandemic preparedness, into its work was dismissed by major shareholders as being not ambitious enough.
Some blamed the clunky, bureaucratic machinery of the institution for tempering the political energy of the moment. The Biden administration’s Inflation Reduction Act, passed over the summer, had set the US on a path to a cleaner energy future, and was hailed as a milestone in the country’s approach to tackling climate change.
Then on Tuesday, a few weeks after Yellen’s return from Zambia, Malpass made a call to the US Treasury to say he would end his term in June, almost a year early.
Officials were caught on the back foot. Although frustrated with the slow pace of change at the bank, in closed-door meetings in Washington Yellen had argued that removing an official appointed by Biden’s predecessor would set a bad political precedent.
Yellen and many others view alleviating poverty and tackling climate change as a unified ambition, rather than distinct goals. Now, many of the World Bank’s member countries want climate to be at the centre of its mission, and not at the periphery.
Less wealthy nations have been pushing for better lending terms and other support to help them adapt to increasing temperatures, rising sea levels and more extreme weather events, and pay for the transition to clean energy systems.
“For us climate is development, climate is poverty — so the distinction is not that obvious,” says Ali Mohamed, climate adviser to Kenyan president William Ruto. “Climate change has affected every sphere of human development and livelihoods.”
Wealthy countries responsible for the bulk of historic pollution, meanwhile, are increasingly looking to the World Bank as a source of international climate finance on a scale they cannot provide, as they confront difficult questions about who should pay for the catastrophic impacts of hurricanes, floods and wildfires.
The scale of the task is formidable: $125tn of climate investment will be needed by 2050 if the world is to slash emissions and meet the Paris Agreement goals of limiting warming to well below 2C, according to research commissioned by the UN high-level climate action champions.
“If we really want this [climate] agenda to move, there is no other way other than to have the multilateral development banks [MDBs] expand considerably,” says Homi Kharas, a senior fellow in the Center for Sustainable Development, housed in the global economy and development programme at Brookings. Given its size and influence, he adds, “it all starts with the World Bank.”
The US traditionally appoints the World Bank president, and is now racing to draw up a shortlist of candidates with climate credentials who could refashion the bank while balancing the interests of its almost 200 member states.
Among many shareholders and climate-minded bank officials, a period of pessimism and turbulence is receding in favour of a new optimism that Malpass’s successor might mean the start of a new era.
“There’s a great hope that whoever comes next can meet the moment on climate change,” says one development official. “Malpass was really one of the last vestiges of the Trump administration.”
Yet for others, there are fears that a new climate-oriented mission might distract from the bank’s traditional development mandate.
The Bridgetown agenda
The seeds of the World Bank and its sister organisation the IMF were sown at the Bretton Woods conference in 1944, to help the world recover from the economic ravages of war and create a new monetary system.
Almost 80 years on, some say it’s time for a new global economic compact designed to tackle the existential threat of climate change. One of the leading voices is Mia Mottley, the prime minister of Barbados, who has called for “a new internationalism”, and argued that the Bretton Woods institutions “no longer serve the purpose in the 21st century that they served in the 20th century”.
Mottley, whose campaign has been called “the Bridgetown agenda”, has pushed for a greater use of concessional finance such as low-interest, long-term debt instruments to finance clean-energy development across the world, as well as climate-resilient infrastructure. Smaller nations must be able to tackle climate change without falling into unsustainable debt, she argues.
Mottley’s vision has attracted the public backing of French president Emmanuel Macron, who threw his weight behind her ambitious calls for reform during the COP27 UN climate summit in Egypt last year.
Other countries have called on MDBs to fund investments that benefit countries worldwide — and, in particular, to help rapidly growing middle-income countries shift their economies away from coal, the most polluting fossil fuel.
In response to these and other calls, the World Bank produced an “evolution road map” that explored what more it could do to tackle climate change and other globally important catastrophes.
In its paper, the bank suggested that in order for it to continue financing the world’s poorest countries, while also lending more to middle-income nations to help them achieve their climate goals, it would need an injection of cash from shareholders.
But the plea for more cash was universally criticised by the bank’s big donor shareholders, including the US, which have had their budgets squeezed by the pandemic, inflation and an energy crisis.
Joe Thwaites, an international climate finance advocate at non-profit the Natural Resources Defense Council, said the road map was “a distinct combination of navel gazing and finger pointing . . . Fundamentally, it doesn’t strike me as grasping the scale of the problem.”
A senior government official at the German ministry for economic co-operation and development agrees, saying: “I would not say that the bank hasn’t progressed. But the bank is not where the bank should be.”
The World Bank says discussions around the road map were “a shareholder-led process” and added that the bank would not comment on the views of its shareholders.
According to the bank, it increased its climate finance from $10.9bn to $31.7bn over the past seven years. Although the bank’s climate finance measured as a proportion of its overall lending has steadily increased, according to independent analysis by climate group NRDC, it still lags behind three other large MDBs, including the European Investment Bank and the African Development Bank.
Spending better
Rather than give it more money, G7 countries are pushing for the World Bank to look at how it could free up more cash from its balance sheets to supercharge climate spending.
One person close to discussions about how to reform the bank says G7 representatives are “concentrating on the idea that the World Bank needs to spend better before it gets more money”.
Under its current model, the World Bank has turned relatively modest sums into much bigger numbers, according to an independent review of MDBs commissioned by the G20 and published last year.
Between 1944 and June 2021, shareholder countries contributed $19.2bn capital in total to its main lending facility, the International Bank for Reconstruction and Development. With that capital, IBRD has issued more than $750bn in loans and $23bn in grants to the world’s poorest countries, as well as covering the costs of its global development data and research.
But the G20 report said that the MDBs could do more still if they took certain steps. With “very manageable changes to risk tolerance” they could boost their lending capacity by “several hundreds of billions of dollars over the medium term” while still maintaining their credit ratings.
The World Bank has for decades maintained that holding a triple A rating from all three major credit rating agencies is essential for its operations. Shareholders, too, benefit from the bank being able to access low-cost funding from bond markets, which is where the bulk of the bank’s funding comes from, and developing countries have warned against losing the rating.
But the report said the MDBs were possibly being more conservative than they needed to be to maintain a top triple-A credit rating. Shareholders ought to reconsider how much risk they wanted the institutions to take, it said, and consider allowing the banks to make changes such as adjusting the amount of capital they held against loans and how they treated their “callable capital”, or money they could summon from shareholders in the event of a financial emergency.
Avinash Persaud, climate adviser to Barbados leader Mottley, says the report highlighted that “if you need to get to a totally different type of scale of lending, you can’t do it using the old fashioned approach of paid-in capital”.
If the World Bank takes up the G20 reforms and can convince countries to increase capital, then even a modest injection would have a huge impact, says Lord Nicholas Stern, one of the institution’s former chief economists.
“What people don’t understand is how much value for money is in a capital increase,” says Stern, who is chair of the Grantham Research Institute at LSE. “For very modest sums, you could double the [World Bank’s] lending. It could have an enormous effect.”
Although the bank has publicly welcomed the G20’s recommendations, multiple shareholders told the Financial Times that the institution had not yet started exploring its most ambitious proposals. Two shareholders say there were concerns that the bank was “slow walking” the recommendations.
The cost of change
Not all countries, particularly those that primarily borrow from the World Bank, are comfortable with the institution taking on a greener hue.
Some large fossil fuel-reliant shareholders — including the petrostate Saudi Arabia plus Russia and India, along with major African and Latin American countries — are pushing back against the bank morphing into a “green bank”.
Others are worried that a focus on climate may come at the expense of money for development, or result in more money for middle-income nations and less for the very poorest.
Amar Bhattacharya, a senior fellow in the Center for Sustainable Development, says there was a perception among some developing countries that “the climate agenda is being imposed on them”.
“They see an element of luxury in the climate agenda that we are trying to push,” he says. “As one executive director said to me, ‘I don’t want the World Bank to stop doing what it’s doing in health and education.’”
A recent note by the G11 group of developing nations about potential World Bank reforms, seen by the FT, said that “promoting development is at the very reason for each World Bank Group institution’s existence”. It was important that they remained “focused on the purpose for which they were established”.
The note was signed by countries including Brazil, Pakistan, India, Indonesia, China, Saudi Arabia, Russia and more than two dozen African nations.
Faten Aggad, an adviser at the African Climate Foundation, says there were also concerns among some developing nations that rich countries were looking to “shift” their responsibilities for providing climate finance “to the multilateral development banks”.
Supporters of reform insist this is not an either/or proposition. “There’s no horse race between climate on the one hand and development and poverty on the other,” says Stern. “Sometimes it’s set up that way . . . I think that’s a very serious mistake. If we fail on one we fail on the other.”
Looking ahead
Malpass’s departure has cleared the way for the US to propose a president with the financial markets literacy to study how far the bank can comfortably adjust its business model and formalise its commitment to tackling climate change.
The US Treasury is drawing up a shortlist of potential successors that is expected to include Samantha Power, head of the US Agency for International Development, Rockefeller Foundation president Rajiv Shah and World Trade Organization director-general Ngozi Okonjo-Iweala.
The next major flashpoint is the bank’s spring meetings, to be held in Washington DC in April, where it will be under intense pressure from the US and others to outline more concrete plans for improving its response to climate change.
“There are crunch discussions and decisions coming in the spring meetings,” says Stern. The US has suggested that “easy wins” could be implementing some of the smaller points in the G20-commissioned report, such as slightly lowering the bank’s equity-to-loan ratio and using hybrid capital instruments. Malpass said last week that the bank’s shareholders were already considering proposals to lower the lender’s equity-to-loan ratio by one percentage point, in a move that could free up about $4bn.
Yellen has also urged the World Bank to engage in “stronger” mobilisation of private finance, and some shareholders want the reform effort to include new targets for the institution linked to how much private capital the bank leverages, rather than on how much money it lends.
Another G7 shareholder says more difficult conversations — around how the bank assessed the risk of its lending operations, for example — could now be accelerated.
“Shareholders feel a sense of resolve,” says Persaud, Mottley’s climate adviser. “We want to raise back the ambition that somehow went into retreat.”