As weather-related disasters become increasingly common due to climate change, nations are finding it essential to adapt to this new reality. Preparing for hurricanes, floods, heat waves, droughts, and wildfires requires investments totaling in the hundreds of billions of dollars. Additionally, addressing the primary cause of climate change, which stems from the combustion of fossil fuels like coal and oil, necessitates a shift towards renewable energy sources such as wind and solar. This transition is estimated to cost trillions of dollars.
Climate finance refers to the funding required for projects aimed at both adapting to and combating climate change. This term encompasses a variety of meanings but ultimately focuses on the financial resources needed for these initiatives. The issue of climate finance is particularly pressing for developing nations, which often lack the financial resources and access to credit available to wealthier nations. In this context, international multilateral development banks, which are financed through taxpayer contributions from various countries, emerge as a crucial source of climate funding for these regions. The most prominent of these institutions is the World Bank, which plays a pivotal role in shaping how inadequate countries can respond to climate challenges.
In 2022, thanks in part to these banks, the international community achieved a target set in 2009 to provide $100 billion annually to developing countries for climate-related issues. As global leaders convene for the annual U.N. climate conference in Azerbaijan, discussions will center around mechanisms to secure trillions of dollars in climate finance for future years. According to estimates from the nonprofit Climate Policy Initiative, the world currently needs five times its annual climate financing to limit temperature rise to 1.5 degrees Celsius above pre-industrial levels, a threshold that is already perilously close, with temperatures currently averaging 1.3 degrees Celsius higher.
In light of this urgency, experts like Tim Hirschel-Burns from Boston University’s Global Development Policy Center emphasize the necessity for more ambitious goals. He articulates the crucial need for a framework that encourages actions to bridge the significant climate finance gap that developing nations face— a gap that far surpasses the existing $100 billion commitment.
As the global dialogue on climate action evolves, it has shifted focus from whether a transition to clean energy will happen to the pace of that transition, according to Dharshan Wignarajah, director of the Climate Policy Initiative’s London office. Wignarajah’s involvement in previous climate negotiations underscores the increasing importance of financing in these discussions, as the pressing question now is not just about initiating a transition but doing so expediently.
Developing countries are significantly more reliant on the support of multilateral development banks for funding climate initiatives compared to richer nations. For instance, over half of the climate-friendly projects in the U.S. and Canada were financed by commercial banks and corporations in 2022, while in sub-Saharan Africa, private lenders accounted for only a fraction of that— a mere 7%. This disparity can largely be attributed to the higher interest rates imposed by private lenders on loans to developing nations, making it difficult for them to secure affordable financing.
Banks like the International Development Association, which is affiliated with the World Bank, enjoy higher credit ratings and therefore can lend to countries like Kenya at lower interest rates, unlike private lenders whose rates can soar to around 10% due to the country’s limited creditworthiness.
While the multilateral banks aim to support the development of health, environmental sustainability, and poverty alleviation, some of their initiatives have inadvertently contributed to climate challenges. Historically, these banks allocated significant funds for fossil fuel projects, although recent years have seen a shift in this trend. Despite the decline in such investments, global spending on fossil fuels rose to $1.1 trillion in 2024, with multilateral banks being identified as substantial backers of projects that extend the reliance on fossil fuels.
Experts like Jane Burston, CEO of the Clean Air Fund, argue that development assistance should empower countries to leapfrog onto renewable energy pathways, avoiding harmful fossil fuel dependency. Such contrasting actions include a $105 million loan from the World Bank’s International Bank for Reconstruction and Development to rehabilitate coal plants in India, which, despite some efficiency improvements, perpetuates the underlying issues of carbon pollution and health risks associated with coal.
Between 2018 and 2022, the World Bank reportedly provided $2.7 billion in financing that extended fossil fuel reliance, although its investment in renewables was approximately 32 times more than that for non-renewables during the same timeframe. A World Bank spokesperson emphasized their commitment to prioritizing renewable energy as the first choice for providing power access to the nearly 700 million people globally who remain without electricity.
With ongoing commitments to align with the 2015 Paris Agreement, these banks face scrutiny for still enabling fossil fuel projects under certain conditions. While they might justify this through low-risk evaluations, observers argue that such policies perpetuate a problematic relationship with fossil fuels. Calls have intensified for wealthy nations to contribute to climate finance significantly to support developing countries in avoiding further climate breakdown, especially as reliance on fossil fuel funding continues to pose risks to both global climate goals and socioeconomic stability.