Climate risk, resilience and adaptation

Explanation

Quality and scope of project level climate risk management procedures

The WBG employs a comprehensive risk management process to ensure its projects adhere to environmental, social, and climate-related standards. This includes assessing and mitigating risks through the WB’s Environmental and Social Standards (ESS) and the IFC Sustainability Framework’s performance standards. As of June 2023, this is complemented (for all WB operations) by the WB’s Paris alignment methodologies for Development Policy Financing (DPF), Investment Project Financing (IPF, which includes intermediary lending), and Program-for-Results (PforR), which provide further climate risk screening requirements for WB operations. As for IFC and MIGA, all investments are further screened for climate risks through its “Climate Risk Portal”.

The World Bank Group’s ESS sets out the requirement for borrowers to conduct an Environmental and Social Assessment (ESA) for all project proposals. ESAs in turn include provisions for evaluating project exposure to physical climate risks. Based on the risks identified (and their rating) in the ESA, project developers are in turn required to employ a mitigation hierarchy to anticipate and avoid risks and impacts and reduce/minimise risks and impacts to “acceptable levels” (which are not defined further) should avoidance not be possible. If substantive residual impacts (a threshold which is similarly not defined further) remain, these must either be compensated financially or through offsets. The details of these compensatory procedures are not further specified, making it unclear what the scope is for “substantive” residual climate risks to remain, or whether projects can still be approved with the promise of future financial compensation or offsets. The suggestion that financial compensation or offsets – whose direct connection to specific instances of risk remains unclear – could effectively mitigate “substantive” physical climate risks raises important concerns.

To assist project developers with instituting its risk screening requirements, the WB has developed a set of Climate and Disaster Risk Screening Tools. This consists of a website providing a suite of self-paced risk-screening tools for use during the early stages of project design, making use of integrated country-specific data and online reference resources on climate-resilient development. Additional specific tools developed by the WB for this purpose include the Climate Change Knowledge Portal and ThinkHazard Tool. The knowledge portal helps ensure projects align with the climate risks identified in the Country Partnership Framework (CPF), while ThinkHazard provides users with an online disaster risk visualisation service. The intention is for these tools to subsequently inform ESA submissions. However, it is unclear whether the use of any of these tools is mandated, and consequently, to what extent this ideal is realised in practice.

Separately, as part of its Sustainability Framework, IFC has its own Policy and Performance Standards on Environmental and Social Sustainability. These eight performance standards establish requirements that clients must meet throughout a project’s life cycle. They are accompanied by a Guidance Note for implementation, which is updated periodically to reflect any changes to IFC’s implementation process and lessons learned.

Performance standard (PS) 1 sets out borrowers’ responsibility to implement an Environmental and Social Management System (ESMS), and is applied to all operations that “have environmental and social risks and impacts”. This must consist of an assessment to identify environmental and social risks and impacts, policies and procedures for management of such risks, stakeholder engagement, and a system for monitoring and review. While there is no indication that IFC will directly verify implementation of ESMSs, there is reference to requiring clients to retain external experts to ensure proper implementation for projects with “significant adverse impacts and risks”. This threshold is not generally defined in detail, though some information is provided regarding specific circumstances where it would be required.

Although this standard is primarily intended to address environmental and social risks, it also includes a requirement for borrowers to consider climate risks by integrating “risks associated with a changing climate and adaptation opportunities”. While the requirement to implement an Environmental and Social Management System (ESMS) applies to all projects, the “scope and level of effort” dedicated to this process reportedly depends on the type, scale and location of the project.

While PS 1 establishes the need for implementing an ESMS, PS 2 through 8 each focus on specific areas, setting out “objectives and requirements to avoid, minimize, and where residual impacts remain, to compensate/offset for risks and impacts”. Accordingly, while PS 1 is applied across all projects that have environmental and social risk and impacts, PS 2 through 8 are applied according to project circumstances.¹ Relevantly among these, PS 3 covers resource efficiency and pollution prevention, while PS 6 looks at biodiversity conservation and sustainable management of living natural resources. While these two standards include climate-relevant requirements (such as for consideration of lower-emissions alternatives to support GHG emissions mitigation), they remain primarily focused on other environmental risks, such as impacts on biodiversity and ecosystem services. Notably, PS 4 (which focuses on community health, safety, and security) includes specific acknowledgement of the vulnerability of communities already affected by climate change and consideration of potential intensification of impacts due to a project’s activities.

As of July 2023, the full application of the WB’s Paris alignment methodologies for Development Policy Financing (DPF), Investment Project Financing (IPF, which includes intermediary lending), and Program-for-Results (PforR) respectively also provide further climate risk screening requirements for WB operations.

With regard to the adaptation and resilience goals of the Paris Agreement, physical climate risks are assessed with reference to project components and country-specific data (including countries’ exposure and institutional capacity to respond to identified climate hazards). A project is considered “Paris aligned” in this regard if risks of adverse effects from climate hazards have been reduced to an “acceptable level”. It is unclear how an acceptable level is to be determined. If a project is expected to be “significantly impacted” by climate hazards, task teams are required to demonstrate that the project design “adequately reflects climate adaptation good practices”, reducing risk to an “acceptable level” considering the intended projects’ development objective. Throughout the methodology, the wording of the thresholds – reflecting subjective assessments without clear definitions – is concerning, as it allows significant scope for inconsistencies in application.

In line with the Paris Agreement’s mitigation goals, projects are evaluated on whether they may cause a “significant” increase in GHG emissions, though this threshold is not defined. If so, projects are expected to adopt best practices to reduce emissions, taking into account local context and institutional capacity. While this requirement represents a foundational step toward limiting emissions, the lack of a clear threshold and implementation details may lead to inconsistent application and limited impact, even in cases of “significant” emissions.

The mitigation assessment considers transition risk as a critical aspect of climate risk. Projects are evaluated on whether they are likely to create or reinforce “significant” (though undefined) barriers to a country’s transition to low-GHG emissions development. This assessment is based on alignment with key national transition documents, including NDCs and LTSs. For a project to be considered “Paris aligned”, it must demonstrate that it is “unlikely to cause carbon lock-in”. If it cannot, risk reduction measures must be implemented using relevant best practices. Provided the risk level is reduced to “low”, the project can then be deemed Paris aligned. This approach relies heavily on the quality and ambition of the underlying national plan and would benefit from clearer guidance and thresholds.

As for IFC and MIGA, all investments are screened for climate risks. According to the IFC 2023 TCFD submission, IFC assesses physical climate risks through its “Climate Risk Portal”: a platform for identifying and managing exposure and vulnerabilities of potential projects to physical climate risks. The platform includes a “geoviewer” for assessing risks based on project location, and a “Sectoral Climate Risk Screening Toolkit” to screen projects against granular sector and sub-sector guidance. Despite coverage in the 2023 TCFD submission, none of these materials could be found publicly available, and so further details are lacking regarding their content (in terms of benchmarks, risk ratings, and requirements).

In terms of transition risk, the TCFD submission makes reference to shadow carbon pricing being used as part of the economic analysis of projects. However, this is currently limited to the cement, chemicals and thermal power generation sectors.² Moreover, it is unclear whether this assessment is part of a more holistic consideration of transition risk within a given context – addressing risks like stranded assets and carbon lock-in – or if it is limited to evaluating the economic viability of individual projects while accounting for the social cost of carbon emissions. This distinction is particularly relevant in the interim period before the World Bank’s Paris alignment requirements are fully applied to both IFC and MIGA, scheduled for July 2025.

Adaptation finance and enhancing client climate resilience

The WBG publishing a dedicated Action Plan on Climate Change Adaptation and Resilience is a strong indication of the Bank Group’s recognition of climate adaptation and resilience as a critical area for support. Moreover, the WBG’s New Corporate Scorecard FY24–FY30 includes a dedicated indicator tracking the Bank Group’s interventions on enhancing client resilience to climate risks. This estimates the number of people (millions) directly and indirectly benefitting from improved climate risk management and resilience due to interventions and investments from the WBG.

In terms of strategic direction, the action plan outlines support for countries to shift to systematically managing and incorporating climate risks and opportunities across policy planning, investment design, and implementation. It calls for the integration of climate risks within each stage of project design, implementation, and performance monitoring and evaluation – clear recognition of the need to mainstream adaptation and resilience throughout the Bank Group’s operations. For identifying specific areas of intervention, the WBG’s overarching Climate Change Action Plan 2021–2025 also introduced Country Climate and Development Reports (CCDRs) which help to “identify potential mitigation, adaptation, and resilience-building actions to improve development outcomes”.

Practically, WBG adaptation and resilience finance totalled USD 12.73 billion in 2023, amounting to 32% of the Bank Group’s total annual climate finance. This gross level of adaptation finance is in line with the WBG’s target to commit an average of USD 10 billion a year in adaptation finance between 2021 and 2025. While this absolute figure is on par with previous years, it reflects a reduction in the proportion of total annual climate finance going towards adaptation. This previously stood at 42% in 2020 (USD 9.26 billion), 40.6% (USD 11.57 billion) in 2021 and 41.8% (USD 13.83 billion) in 2022.³ In terms of the separate arms of the WBG, IBRD and IDA have a target for parity between mitigation and adaptation finance. While this was previously achieved in 2020 (with 52% of total WB climate finance going towards adaptation), the latest figures (41.2% for 2023) reveal the WB to have fallen short of this target since.⁴ IFC and MIGA, which are not covered by the target due to the relative difficulty in increasing private sector adaptation and resilience investments, had very low (relative) levels of adaptation finance in 2023, at 2.0% and 3.9% respectively.

To deliver on its adaptation finance commitments, the WBG has aimed to diversify its financing instruments and concessional finance delivery. Illustratively, the WB has developed the MultiCat programme which helps countries issue catastrophe bonds and provides assistance for developing mechanisms such as weather derivatives. MIGA is also seeking to catalyse private sector adaptation finance levels by issuing insurance to reduce investment risk. For its part, IFC supports the private sector in enhancing climate resilience through the Climate Governance: Equipping Corporate Boards to Mitigate Climate Risks and Seize Climate Opportunities tip sheet. This guidance paper outlines best practices from peers, IFC’s climate governance approach, and steps to mainstream climate into operations. IFC has also established partnerships to support clients directly. One such example is a partnership with Bank One Ltd. in which IFC will provide technical assistance to better monitor its portfolio’s exposure to climate-related risks.  

The WBG has also shown recognition of the importance of strengthening the upstream pipeline of adaptation investment opportunities. In this vein, the Bank Group published a blueprint report in 2021 calling for the development of National Adaptation Investment Plans, derived from National Adaptation Plans, to outline and prioritise adaptation investment needs across sectors.

Recommendations:

• In view of calls by WBG shareholders for a more ambitious commitment to adaptation finance beyond current targets, the Bank Group should adopt an explicit and strengthened target for adaptation finance. Such a target should reflect differences in the nature of financing needs across thematic areas.⁵ Any adaptation target should be complementary to the Bank Group’s climate finance target and avoid creating perverse incentives for limiting mitigation financing.   
• This effort should be complemented by targeted support for increasing the pipeline of adaptation projects in line with the priorities identified by the Bank Group’s Country Climate and Development Reports (CCDRs), and ultimately by countries themselves in National Adaptation Plans.⁶ Such an approach would serve to operationalise the WBG’s recognition (as per the aforementioned 2021 report) that developing a robust upstream pipeline of adaptation investment opportunities is critical.
• The WBG’s Environmental and Social Standards (ESS) and Paris alignment documents often use vague, subjective definitions for key thresholds in physical and transition risk management procedures. Terms like “acceptable level”, “significant impact”, and “adequately reflects” imply measurable standards but allow inconsistent application. The WBG should define these thresholds more precisely to ensure consistent and robust implementation.
• The World Bank Group should publicly disclose its methodology for categorising and rating projects based on their exposure to physical climate risks as part of its Environmental and Social Assessment (ESA) procedures. Similarly, IFC’s Performance Standards and accompanying guidance note lack specificity regarding when a project’s Environmental and Social Management System (ESMS) requires heightened scrutiny. IFC should clarify this process. If not already in use, IFC might consider incorporating insights from the WBG’s Country Climate and Development Reports (CCDRs) to inform a taxonomy that triggers varying levels of scrutiny. This approach would facilitate adaptive ESMS requirements, incorporating context-specific climate, social, and environmental risks to guide the necessary levels of assessment and management practices.
• Since the climate risk requirements of the WBG’s Paris alignment methodology are only fully operational for both IFC and MIGA from July 2025, the existing climate risk procedures of these arms are particularly critical in the interim period. Consequently, IFC should publicise information regarding the “Climate Risk Portal” referred to in its TCFD submission. It should also consider reviewing the IFC Performance Standards document (which has not been updated since 2012) and the accompanying guidance note (which makes no reference to the Paris Agreement) to ensure these documents are fit for purpose specifically for safeguarding project alignment with the WBG’s climate commitments.
• As international risk reporting best practice evolves, the WBG should lead by example by implementing best practice standards such as those being developed by the International Sustainability Standards Board (ISSB), and adopt best practice approaches for transition planning. The WBG should more actively engage in international transition finance discussions to align terminology, standards, and processes across governments and the private sector.

¹ The applicability of PS 2–8 is determined during the identification of risks stage of the ESMS, and the scope of application for each PS is outlined in the IFC Performance Standards document (which notably has not been updated since 2012).

² See “Shadow carbon pricing” metric for further details.

³ It is worth noting that the WBG climate finance tagging process has come under scrutiny from civil society organisations in recent years, in particular as part of a prominent Oxfam report. Specifically in the case of adaptation finance, this report raised concerns regarding natural disaster recovery projects being incorrectly counted as adaptation/resilience, when they would be more aptly described as emergency assistance or loss and damage finance. Please see the “Non-fossil to fossil energy ratios and climate finance” and “Transparency of climate finance” metrics, for further analysis. 

⁴ Comparable WB-specific figures for 2021 and 2022 could not be found publicly available.

⁵ For example, private sector involvement is more advanced for many mitigation sectors, providing greater opportunities for blended finance and successful use of debt instruments. For adaptation, grant and concessional finance must be prioritised. 

⁶ See “Country level work” metric for further coverage of CCDRs, and how this process links to the burgeoning discussion on country platforms.