The World Bank Is Failing on Climate Change

The World Bank, the world’s largest international development organization, has long faced criticism for a host of perceived shortcomings, including imposing coercive conditions on its loans to developing countries, instituting insufficient environmental safeguards in its projects, and failing to properly consult civil society in the countries where it operates. Lately, however, it has also come under fire for not mobilizing the necessary funds to help developing countries tackle climate change. In February, U.S. Treasury Secretary Janet Yellen called for “the evolution of the World Bank” in response to global challenges such as climate change. The Maldives environment minister, meanwhile, was especially blunt when he insisted last year that “the World Bank needs a fundamental shift” to fight climate change. And a senior UN official memorably accused the bank in 2021 of “fiddling while the developing world burns.” The World Bank, in the view of its critics, needs fixing, and fast. 

Climate change already imperils communities around the world, especially in lower-income developing countries. As such, the fight against climate change can and should become the World Bank’s new reason for being. Although many leaders, including some in the Biden administration, agree in principle with this reorientation, making climate change the World Bank’s new, overarching priority will entail difficult tradeoffs that few policymakers have begun to grapple with. Facing uncertainty in their own economies, the United States and its allies are unlikely to cough up the large sums needed for the World Bank to expand lending to help developing countries adapt to a changing climate and transition away from fossil fuels. Moreover, growing geopolitical tensions between the bank’s largest shareholders—the United States and China—threaten to undermine the organization’s traditional way of doing business, which relies largely on funding big infrastructure projects that Washington and Beijing are increasingly competing to finance directly.

As the geopolitical environment in which the World Bank operates grows more hostile, the organization must make major changes both in terms of its investments and institutional orientation. It must slash lending for traditional infrastructure projects such as roads and bridges in favor of more lending for climate finance and move away from its existing country- and project-based model toward a more regional approach that turns economies and energy systems away from fossil fuels. As the World Bank welcomes a new president and prepares to unveil a new strategic direction this fall, it has a golden opportunity to renew its mission and keep up with today’s major challenges. And few challenges are greater and more urgent than protecting the world’s poorest and most vulnerable communities from the ravages of climate change.

CAUGHT IN THE MIDDLE

The World Bank is best known for its central role in international development as the largest source of multilateral public finance for the developing world. The geopolitics that have governed the bank since its inception are key to understanding the challenges it faces now. The World Bank functions as much as an arena for diplomatic and geopolitical maneuvering as one for traditional financial activities such as making loans and charging interest. The organization is governed by 189 member countries, includes subentities dedicated to the resolution of disputes over investment, and has a breathtakingly broad official mission to end extreme poverty and promote shared prosperity. The World Bank’s unique role in international development arose from the need to forge an entirely new sort of institution to guide the world out of the destruction of World War II. Although the bank was initially tasked with restoring a shattered Europe, it would eventually expand its mandate to ending poverty worldwide.

For much of its history, the World Bank’s unique role in international development positioned it to act as a bridge between geopolitical rivals. Although the Soviet Union never formally joined the World Bank, Barber Conable, the bank’s American president, encouraged Moscow to do so at the height of the Cold War, in 1986. China, meanwhile, joined in 1980, soon after it had embarked on its program of liberalizing market reforms under the Chinese leader Deng Xiaoping.

The bank no longer serves that role. To be sure, China and Russia are the bank’s fourth- and eighth-largest shareholders, respectively. But far from affirming the bank’s status as a strong global institution, their membership is now creating thorny challenges for the organization’s leadership.

In the case of Russia, the invasion of Ukraine in February 2022 led the World Bank to suspend all activities in both Russia and Belarus, a close Russian ally. Growing friction between China and the West on a number of issues, including trade, has led to even greater headaches for the institution. The 2016 creation of the Asian Infrastructure Investment Bank, a multilateral international development organization spearheaded by China, is widely viewed as a challenge to the Western-dominated World Bank (even though the two organizations enjoy strong working ties).

Since then, the World Bank has faced mounting criticism over its lending to China, as intensifying competition between Washington and Beijing has prompted some U.S. policymakers to question what the United States stands to gain from indirectly lending to its largest economic rival. Even though the World Bank has taken measures in response to this criticism, including raising interest rates for loans to China, U.S. political leaders continue to slam the World Bank for lending to China at all, despite the fact that these loans, many of which are for infrastructure projects, often benefit the bank’s overall balance sheet. Meanwhile, the United States has expanded its own foreign investment to counter China’s vast infrastructure investment program known as the Belt and Road Initiative, particularly when it comes to support for the construction of roads and ports. The net effect of this intensifying competition between Washington on one side and Moscow and Beijing on the other has been the politicization of international development—especially investment in infrastructure, which has historically been the World Bank’s bread and butter. It is increasingly difficult for the bank to fund large infrastructure projects without becoming embroiled in geopolitical rivalry, nor can it compete with massive infrastructure loans subsidized by governments motivated by geopolitical objectives.

SPENDING SMARTER

Even as geopolitics threaten to upend the World Bank’s traditional way of doing business, the urgent demand for climate finance presents the institution with an opportunity to transcend the competition of major powers and reframe its role in the twenty-first century. Developing countries are desperate for investment in clean energy infrastructure and climate resilience projects. That need for so-called climate finance is already reshaping the field of international development, including the creation of dedicated entities such as the Green Climate Fund that aim to help developing countries counter climate change. But existing funds cannot account for the current scale of climate finance needs, which experts estimate could hit $500 billion annually by 2050—a sum that dwarfs the $31.7 billion the bank raised for climate purposes in 2022.

The World Bank has another, even more fundamental reason to focus on climate change: the warming planet poses a real threat to all of the bank’s other development priorities, such as ending extreme poverty and achieving universal literacy. The World Bank itself has estimated that climate change could push at least 130 million more people into poverty within a decade. Meanwhile, a growing body of research indicates that climate change degrades outcomes in nearly every aspect of human well-being, including health, education, and crime. Sustainable development will not be possible without tackling climate change.  

To be sure, the World Bank has taken promising steps toward mobilizing climate finance. Already the largest source of climate finance for developing countries, the bank has pledged to significantly increase the share of lending devoted to climate initiatives; in 2021, it committed to allocating 35 percent of average annual lending over a five-year period to climate-change-related projects and investments, the first time it had committed to a specific target. Yet that is still far too little. For one thing, the bank’s existing climate commitments are less ambitious than those of other multilateral development banks. Its Asian and European counterparts, the Beijing-backed Asian Infrastructure Investment Bank and the European Investment Bank, have each committed to devoting 50 percent of lending to climate finance—meaning that the World Bank is committing a significantly smaller fraction of its resources to fighting climate change than its competitors. For another, these targets can overstate the bank’s actual investment in tackling climate change, since some projects can be inaccurately counted as climate-related endeavors even when their primary purpose is to serve other development goals.

If the World Bank is serious about meeting its development goals, it cannot do so without first tackling climate change.

In response to recent criticism that its existing commitments are insufficient, the World Bank has stated that it is prepared to increase climate financing—if it gets more money to do so. At a biannual meeting this past April, the World Bank’s shareholders expressed support for boosting total lending, including for climate finance. Yet privately, bank officials caution that large increases in climate lending could endanger the bank’s coveted AAA credit rating, as it would entail taking on new risks. Moreover, World Bank officials have said, doing more to boost climate efforts will require additional infusions of capital from wealthier countries. But the World Bank should not simply do more with more: it must do fewer things better, and that means focusing first and foremost on climate change.

In concrete terms, this means that the bank’s lending for climate finance should be greatly increased as a proportion of its overall activity—it should be closer to 90 percent. To ensure that funds are going directly toward climate-related efforts, projects must strictly focus on measures aimed at curbing the use of fossil fuels, preventing emissions from deforestation and land use change, and protecting poor and vulnerable communities from the effects of the changing climate. Indeed, the bulk of the bank’s climate finance projects should be devoted to helping countries adapt to the accelerating effects of the warming planet. The World Bank should continue to have the flexibility to commit resources to causes not directly related to climate change, including preparing for future pandemics and investing in especially crucial development projects such as expanding literacy. It should also invest in solutions to climate-related environmental challenges such as biodiversity loss and chemical pollution. But nonclimate investments should be the exception rather than the norm. This will mean making painful choices about lending priorities.

The first and most obvious area in which to cut lending is to traditional infrastructure projects such as roads. Although such infrastructure projects contribute to the World Bank’s balance sheet and are often highly desired among developing countries, the truth is that these projects often contribute to climate change rather than fight it—and countries have many, often cheaper, alternatives for financing large infrastructure projects. Many public administration projects in social, judicial, and other policy areas, which have accounted for the single greatest portion of bank lending in recent years, would also need to be significantly reduced, if not eliminated outright. This reorientation would reflect radical changes to how the World Bank does business. But if the bank is serious about meeting its array of development goals, it cannot do so without first tackling climate change. Fortunately, history provides a useful model for this sort of comprehensive reform. 

CRISIS MEETS OPPORTUNITY

The bank has undergone a wholesale reinvention once before, under the leadership of Robert McNamara, who resigned from his position as U.S. Secretary of Defense in 1968 to assume the bank’s presidency. In the midst of the Vietnam War, McNamara transformed the bank from a small, staid organization focused on postwar reconstruction in Europe into the world’s leading institution for international development. It was under McNamara that the World Bank first embraced the mission of ending poverty and became a major force in global capital markets. The McNamara model of fundamental transformation and repositioning of the bank’s mission offers a road map for the reform of the World Bank to meet the challenges of climate change.

The first step is to formally make fighting climate change the crux of the bank’s mission. This will entail strengthening its partnership with the Green Climate Fund and other bodies dedicated to raising climate finance. The two serve distinct but complementary functions; the GCF aims primarily to mobilize private sector financing, and the World Bank plays a key role in providing public climate financing. The second step is to devise rigorous protocols to measure and classify investments that are directly related to fighting climate change, particularly ones that aim to reduce greenhouse gas emissions and help vulnerable communities adapt to the effects of climate change. The third step is to maximize the amount of funding that can be channeled to climate finance by seeking additional resources from governments and by redeploying the bank’s existing capital, which studies suggest can be done without endangering the bank’s credit rating.  

As it embarks on this fundamental transformation, the World Bank should seize the opportunity to likewise reassess other aspects of its existing operating model. The bank’s current approach is based largely on developing site-specific projects, such as interventions to improve health care in a specific region, through dialogue with member countries. This model is meant to position the bank to be responsive to each country’s needs, but it has also often resulted in a piecemeal approach to development—which runs counter to the broader institutional change required to decarbonize economies. As the bank gears up to tackle climate change, it should consider replacing country-specific lending programs with regional ones and moving from project-based interventions to transformational, sector-wide lending. This approach would identify the most important and far-reaching investments in entire regions rather than individual countries and would aim to transform entire industries, energy systems, and community infrastructure, rather than build individual structures or fund site-specific interventions.

U.S. leadership will be critical in undertaking these reforms. Although the World Bank has always operated as a multilateral institution, the United States, as the bank’s largest shareholder, retains decisive influence in how it operates. In concert with its partners and allies, who make up most of the bank’s other large shareholders, Washington can help reorient the World Bank toward the fight against climate change—and there is no time to waste.