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Public development banks invest around USD 2.7 trillion annually, more than 10 percent of the total annual amount invested by all public and private actors. Civil society organizations criticize that far too much of this money still flows into climate-damaging activities, and that development banks and many of their main shareholders are not doing enough to help countries fight climate change.
In 2015, 2017, and 2018, various multilateral development banks (MDBs) pledged to support the goals of the Paris Agreement and to align their investments accordingly. This entails consistency with limiting global warming to 1.5°C, with increasing resilience to the physical impacts of climate change, and with a socially just transition to resilient and decarbonised economies and societies. Since then, MDBs have made important steps towards this goal, for example publishing a joint methodology for Paris alignment. Qualitative improvements and effective implementation are however vitally important to ensure that MDBs can use their investments to support the urgently needed transformation as quickly and as effectively as possible. Many national development banks are also making efforts to make their investments climate-compatible, with widely varying approaches and progress.
In addition, there are calls for fundamental reforms of the international financial system, including the International Monetary Fund (IMF) and the MDBs, to free financial flows for climate change mitigation, adaptation, and loss and damage at the necessary scale and with respective impact.
The work of Germanwatch on development banks and climate
Germanwatch has been supporting MDBs since 2017 in their efforts to align their investments with the Paris Climate Agreement, together with the NewClimate Institute, the World Resources Institute, and (since January 2023) E3G. We have produced several working papers with recommendations for what the multilateral development banks should consider when designing their frameworks for Paris compatibility.
The international climate finance architecture is a complex landscape in which multilateral development banks (MDBs) play a prominent role. In addition to bilateral climate finance flows, donor countries provide international climate finance directly to MDBs, as well as to multilateral climate funds such as the Green Climate Fund (GCF), Global Environmental Facility (GEF), Adaptation Fund (AF) and Climate Investment Funds (CIF), which MDBs also tap into for project finance.
In March 2023 the IDB Group published its “Paris Alignment Implementation Approach: Principles, Methodology, and Technical Guidance” (PAIA). The document is based on the joint MDB framework and lays out how the IDB plans to adapt the framework to its own institutional procedures. This blog post provides an overview on what are promising, concerning and unclear elements in the IDB Group’s general Paris alignment methodology.
Following the release of their ‘Instrument Methods’ for Paris alignment, the World Bank Group published accompanying sector notes for Energy and Extractives; Agriculture and Food; Transport; Environment, Natural Resources and Blue Economy; Water; as well as Urban, Resilience, Disaster Risk Management, and Land. The notes detail the approach to assess whether different types of projects in these sectors are aligned with the Paris Agreement. The World Bank Group will update the notes, and will publish six more for additional sectors. In this blog we look at whether the approaches in the notes are sufficient to avoid financial flows that conflict with the Paris Agreement.
Article 2.1c of the Paris Agreement stipulates the goal to align financial flows with climate goals. In 2017, the Multilateral Development Banks (MDBs) committed to supporting these efforts by aligning their financial flows with the Paris Agreement, i.e.
Policy Briefs und Statements:
Update on the Paris Alignment of MDBs:
Myth Buster Series: Alignment of Development Finance with the Paris Agreement (2022)
Supporters of Germanwatch in this sector (excerpt):