Aligning Policy-Based Finance with the Paris Agreement

The world is paying close attention to the multilateral development banks' (MDBs') potential for financing global climate action. MDBs have committed to aligning their financing with the Paris Agreement, and an explicit approach towards Paris-alignment of policy-based finance has been long expected from them. This working paper explains why this is important and what such an approach would entail.

Policy-based operations provide budgetary support in exchange for policy reforms. In a time of deep concern over debt, they are a lifeline to countries facing budget crunches. And for the four MDBs that provide it, policy-based finance comprised 38% of their new commitments from 2015 to 2020. But right now, the MDBs have not shared a joint approach for aligning policy-based operations with Paris, leaving the door open for reforms that actually undermine, rather than support, the push for Paris. Since the Paris Agreement hinges on policy reforms, a great opportunity is thereby missed.

In this working paper with the World Resources Institute and tthe NewClimate Institute we describe how MDBs, governments, and shareholders can seize this opportunity. To be considered aligned, PBOs must promote long-term macro-fiscal stability and a just transition to climate neutrality by 2050 - like this, they can support the agendas of sustainable development and climate action at the same time.