The Good, the Bad and the Urgent: MDB Climate Finance in 2022

For the past seven years, we have analyzed MDBs’ Joint Reports on Climate Finance and highlighted key takeaways behind the headlines. See past editions here: 2016, 2017, 2018, 2019, 2020 and 2021).

Multilateral development banks (MDBs) are major providers of public climate finance. This funding helps countries reduce their greenhouse gas emissions and adapt to the impacts of climate change.

Every year since 2012 MDBs have published a Joint Report on Climate Finance detailing the scale and composition of their climate finance for the previous year. This year’s report (covering 2022) notes an increase in the volume of climate finance. This is welcome news, given calls from COP27 in 2022 for the MDBs to scale up their climate activities.

However, the report’s usefulness is impacted by a late publishing date, changes in methodology and a limited scope. It would benefit from more details about how financing results in improving climate outcomes in countries.

Furthermore, the quality of MDBs’ climate finance reporting has deteriorated, even as the reports have become a lot longer. A data dump is not high-quality reporting. Simple statistics, which used to be included, such as each MDB’s total financing (not simply their climate financing), have been omitted for the last two years.

Here’s a look at the good, the bad and the urgent findings from MDBs’ 2022 Joint Report on Climate Finance. Before getting into the details, here is the historical trend of MDBs’ financing for developing countries by institution:

The Good:

1) Climate finance to developing countries hit a record high for the second consecutive year.

Climate finance from MDBs to developing countries rose from $53.1 billion in 2021 to $66.1 billion in 2022 — a 24% uptick that marks a record nominal high for the second year in a row. Every MDB but Asian Infrastructure Investment Bank (AIIB) hit a new record high for the year in terms of total volume of climate finance. Except for European Bank for Reconstruction and Development (EBRD), each MDB also achieved the highest share of climate finance to developing countries out of their total operations.

Climate finance from MDBs to low- and middle-income economies under the World Bank definition also increased by 20%, from $50.7 billion in 2021 to $60.7 billion in 2022.

However, the rise in inflation makes it challenging to assess whether these record highs apply in real value terms. Consumer prices in emerging market and developing economies grew by 9.8% in 2022 and 5.9% in 2021. Inflation rates have slowed down in 2023, but these countries will still experience a significant price increase of around 8.5%.

2) Adaptation finance increased in volume, and as an overall share of climate finance.

The Paris Agreement calls for a balance between mitigation and adaptation. As climate risks persistently outpace adaptation finance to developing countries, MDBs must accelerate their support for resilience.

MDBs took a step in that direction last year: Total MDB adaptation finance for low- and middle-income countries grew by 29% ($5.1 billion) from 2021 to $22.7 billion in 2022, and from 34% of overall climate finance to 37%. (In comparison, MDB mitigation finance to low- and middle-income countries was $38 billion in 2022, an increase of $3.5 billion or 10% from the previous year.)

The World Bank provides the most overall climate finance to low- and middle-income countries in absolute terms and it also leads in adaptation financing, providing $13.6 billion in 2022, a 19% ($2.2 billion) increase on 2021. Out of total climate finance from the World Bank, 43% supported adaptation in 2022. However, other MDBs are providing a greater share of their climate finance for adaptation.

For example, the African Development Bank (AfDB) provided 62% ($2.3 billion) of their total climate finance in 2022 for adaptation, increasing its overall finance for adaptation by 47% ($0.7 billion) from 2021. The Islamic Development Bank (IsDB) provided 54% ($0.6 billion) of its climate finance to adaptation in 2022, a 127% ($0.3 billion) increase from the amount it reported in 2021.

3) All major MDBs are now fully reporting under the joint climate finance tracking methodology.

The New Development Bank (NDB) started reporting certain climate finance figures in the 2020 joint report but, in an important step toward transparency, reported its full climate finance for 2022. The Council of Europe Development Bank (CEB) provided certain figures for 2021 and is also fully reporting figures for 2022.

NDB set its first climate finance target last year, but CEB has yet to announce such a goal. It’s thus unclear what benchmark the CEB’s enhanced transparency in climate finance reporting should be measured against.

The Bad:

1) MDBs need to review and increase the ambition of their climate finance targets.

In late 2019, MDBs set a collective goal to reach $50 billion in climate finance for low- and middle-income economies by 2025. MDBs hit this target as of 2021 — four years ahead of schedule — and surpassed it by over 20% in 2022.

While it is good that MDBs are comfortably sustaining this increase, it also suggests a potential lack of ambition. Current discussions on MDB reform present an opportune moment for these institutions to strategize together — and hopefully increase their collective ambition.

Individually, the picture is similar: some MDBs already met their post-2020 target for climate finance last year. The majority are now on track to meet, or have already met, these targets in 2022.

For example, Asian Development Bank (ADB) is on a comfortable trajectory toward their interim target of $35 billion in climate finance for 2019 through 2024. While the bank also has a longer-term cumulative target of $80 billion for 2019 through 2030, it would only need to maintain the $7.1 billion in climate finance it committed to developing countries in 2022 (the same amount pledged pre-pandemic in 2019) every year through 2030 to achieve this objective. ADB communicated an aspiration to raise its long-term goal to $100 billion last year, but this should also be reviewed in light of the recent approval for the bank to undertake capital management reforms that will unlock $100 billion in new funding capacity over the next decade. In short, it — and other MDBs — can do more.

MDBs' climate finance targets

Notes: Figures in “On Track?” column are for developing countries. Source: 2021 and 2022 Joint Reports on Multilateral Development Banks’ Climate Finance; calculations by NRDC and WRI.

2) Private co-finance is not increasing rapidly.

MDBs are under pressure from their government shareholders to mobilize more private finance and have made this a central aim of their work.  The World Bank Group recently reiterated the need to strengthen partnerships to fulfil its new mission, which includes addressing global challenges together with the private sector.

But so far, the joint report has shown that this is not happening on a large enough scale. In 2022, for every dollar of climate finance MDBs provided, they mobilized $0.28 in private finance, an increase of just three cents from last year.

Most MDBs are far more effective at mobilizing other sources of public finance than they are private finance. Inter-American Development Bank Group (IDBG), EIB and EBRD are the only MDBs to mobilize more private than public co-financing. MDBs need to better engage the private sector to shift away from climate-harmful activities and toward clean, resilient investments. But there is substantial debate about how the MDBs can best achieve these goals.

Private sector actors frequently highlight that guarantees — where MDBs agree to repay a loan if the borrower becomes unable — are particularly useful for making their investments viable because the guarantees lower risk and thus debt costs, yet MDBs’ use of guarantees was just 3% of their total climate finance in 2022.

3) A profound lack of transparency for fossil fuel financing

Most MDBs pledged to align their activities with the international Paris Agreement on climate change. There is broad expert consensus that new coal, oil and gas development is incompatible with the agreement’s target to limit warming to 1.5 degrees C (2.7 degrees F). MDBs try to justify continued fossil fuel financing as necessary for development and energy access. Yet, they don’t report on their fossil fuel finance as they do their climate finance. If fossil fuel financing is justifiable, if the benefits are so strong, shouldn’t MDBs report it clearly?

Oil Change International (OCI) analysis found that MDBs collectively provided $4.6 billion in financing for fossil fuel projects in 2021 (comprehensive 2022 data is not yet available). According to OCI, none of MDBs’ 2021 fossil fuel finance targeted energy access. MDBs’ direct project financing for fossil fuels has been falling in recent years, but their indirect fossil fuel financing (such as policy-based lending, trade finance and intermediated finance) continues to be substantial — and even less transparent. For example, the World Bank’s private sector arm, the International Finance Corporation (IFC), is estimated to have greenlit $3.7 billion in trade finance for oil and gas in 2022. This is just an estimate because 70% of IFC’s trade finance is approved in secrecy. Not even the World Bank’s own government shareholders — many of which (both developed and developing) are calling for an end to international public finance for fossil fuels — are notified of the companies involved. This is questionable conduct for a publicly owned institution.

Even if MDBs stop short of ending all fossil fuel financing, the very least they can do is transparently report fossil finance side by side with their climate finance to give a sense of their net climate finance and progress toward aligning with the Paris Agreement. This must include reporting for indirect financing in a transparent way.

The Urgent:

1) MDBs should support debt sustainability by softening loan terms for climate finance.

While debt can play a role in enabling countries’ development, at a certain level — known as “debt distress” — a country is not able to repay its creditors in a given period. Right now, a worrying 53% of low-income countries are in, or at risk of, debt distress. Given this context, MDBs should further soften the terms – also known as “concessionality” — of their climate finance to prevent at-risk countries from falling into compounding climate and economic crises.

The joint report does not specify how concessional climate finance from MDBs is, but the range runs from pure grants to loans with costs that are close to, or at, market rate. Between 2019 and 2022, debt-related instruments (which include guarantees, investment loans, lines of credit and policy-based financing which is overwhelmingly provided through loans) averaged 84% of total climate finance from MDBs to low- and middle-income economies. And figures from the Organization for Economic Cooperation and Development (OECD) for 2016 through 2020 show that over 90% of MDBs’ climate finance was raised through debt, and three-quarters was not concessional (though under OECD and MDB definitions of concessionality, even “non-concessional” loans can have more preferential terms than market borrowing).

It is promising to note that grants from MDBs to low- and middle-income economies grew from 8% of total climate finance at $4.3 billion in 2021, to 10% of the total at $6.1 billion in 2022. However, debt-related instruments also grew by $8 billion (19%) from 2021, reaching a record high $49.9 billion in 2022.

2) MDBs need to increase the share and amount of climate finance to most vulnerable countries.

Recently, leaders from least developed countries requested MDBs scale up their finance for sustainable development in their nations. Despite being recognized as some of the most vulnerable countries to the effects of climate change, from 2015 through 2022 climate finance from MDBs to small island states and least developed economies accounted for 19% of their total climate finance.

MDBs’ share of support to least developed countries and small island states decreased in 2021, but roughly bounced back in 2022 to 2020 levels. While this increase is positive, it fails to scale at the needed pace for these countries.

3) Reporting on the quality of climate finance.

Climate finance should be contributing to country goals and global goals, in a way that transforms the trajectories of countries towards low-carbon and resilient economies, the benefits of which are shared by all. To get a full picture of the quality of climate finance flowing to countries, much more detail and information are needed than those currently provided in the joint report.

There is a tendency to define ‘quality of climate finance’ by focusing on the volumes of finance committed, disbursed or targeted, and the type of finance instruments used. But quality is a multi-layered notion, which cannot solely be measured in terms of dollar inputs or by types of instruments. Quality of climate finance would ideally include analysis of outcomes from spending, such as total emissions reduced or number of people with increased resilience. Individual banks’ corporate scorecards include many more indicators that could be incorporated into the joint climate finance report, such as installed solar capacity or increase in percentage of electricity provided by renewable sources.