Fossil fuel exclusion policies

Explanation

Coal  

According to the Joint MDBs’ 2023 List of Activities Considered Universally Aligned with the Paris Agreement’s Mitigation Goals or Not Aligned with the Mitigation Goals (published as part of the Joint MDB Methodological Principles for Assessment of Paris Agreement Alignment), the “mining of thermal coal” and “electricity generation from coal” are considered universally unaligned with the Paris Agreement’s mitigation goals. In applying the joint MDB Paris alignment methodology, the WBG is therefore committed to no longer financing these activities. This exclusion covers both direct lending operations and intermediated financing, reducing the prospect for coal financing across the WBG’s operations.

However, the WBG’s own documentation does not completely align with the joint MDB approach in explicitly excluding these activities. The 2013 Energy Sector Direction Paper states greenfield coal projects are financed “only in rare circumstances” where meeting the countries’ basic energy needs would otherwise be impossible. To determine whether this is the case, criteria (published in 2010) for screening coal projects are applied. This involves an analysis of alternatives, verification of the development impact of the project, and a check as to whether energy sources could be optimised through energy efficiency measures. Despite these positive measures, the criteria notably do not include reference to the pertinent risk of carbon lock-in and/or stranded assets. Nevertheless, in practice, no coal project has been directly supported by any arm of the WBG since 2016.¹

IFC issued a 2023 update to its 2020 Green Equity Approach (GEA), committing it to stop financing coal projects through intermediary lenders (applied to both existing and new clients). This update added to the existing exclusion for direct investments already contained within the GEA.  

However, both the updated GEA and the Energy Sector Direction Paper fall short of a complete exclusion of coal facilities in practice (as has also been pointed out by other external stakeholders such as Recourse). The definition of coal-related projects in the GEA “excludes captive coal-fired power plants used for industrial applications such as mining, smelters, cement or chemical industries, etc.” Similarly, the Energy Sector Direction Paper states that the WB will continue to finance coal “used for heat, captive power, and chemical needs”. As these activities are not covered by the restrictions under the List of Activities Considered Universally Aligned with the Paris Agreement’s Mitigation Goals or Not Aligned with the Mitigation Goals, the WBG currently has no exclusion in place for captive coal projects. In practice, this has been reflected in the indirect financing of captive coal facilities by IFC in Indonesia.²

Since 1995, the WBG has invested over USD 3 billion to support countries transitioning away from coal. In cases where coal mines or thermal power plants are proposed for closure, the Bank Group has identified three focus areas for supporting a just transition: (1) governance; (2) people and communities; and (3) the repurposing of former mining land and other assets. The WBG has also provided technical support for phasing out coal as part of Just Energy Transition Partnerships (JETPs), such as Indonesia where it participates in the Technical, Just Transition, and Policy Working Groups. Despite these efforts, the WBG has not implemented a formal coal retirement mechanism (such as the ADB’s Energy Transition Mechanism).

Oil and gas 

The WBG continues to consider natural gas as a transition fuel and a lower-emissions alternative to coal. In 2017 the WBG announced that it would no longer finance upstream oil or gas projects after 2019. As part of this announcement, the Bank Group stated it would consider exceptions to this rule in the poorest countries, where there is a clear benefit to energy access, and the project “fits within countries’ Paris Agreement commitments”. The exclusion also does not extend to technical assistance support.

In line with this announcement, the CCAP 2021–2025 reiterates natural gas investments (implied to mean upstream through downstream) “may be considered [Paris] aligned in countries where there are urgent energy demands and no short-term renewable alternatives to reliably serve such demand”. New investments in gas infrastructure are also to be assessed against national development strategies (including NDCs and LTSs) and carbon lock-in risk. Natural gas is considered particularly important to “improve power system flexibility and district heating systems” where the alternative is coal.

The Energy and Extractives Sector Note on Applying the World Bank Group Paris Alignment confirms gas transportation infrastructure (midstream) and oil and gas projects for power generation (downstream) are not automatically considered unaligned (and could therefore be eligible for financing). There is no specific reference to midstream oil interventions, suggesting this similarly would not automatically be considered unaligned. Nonetheless, such projects are required to undergo a least-cost decarbonisation modelling of the grid as a necessary (but not sufficient) condition for alignment.³

IFC’s exclusion list has not been updated since 2007 and makes no mention of oil or gas. However, specifically for trade financing, IFC has stated separately that only midstream oil and gas operations in countries where energy security depends on it are permitted (excluding upstream operations from financing). Moreover, in the case of microfinance projects financed by financial intermediaries, “production, trade, storage, or transport” of chemicals including “gasoline, kerosene and other petroleum products” will not be financed, effectively excluding upstream and midstream oil.

Overall, there is no explicit WBG-wide commitment regarding a timeline or forward plan for phasing out oil and gas financing. As a result, the WBG misses the opportunity to send a strong signal (to both peer institutions and borrowers) regarding its support for accelerating the just energy transition in line with a credible pathway for securing a “livable planet”. The WBG remains one of the main financers of oil and gas projects across the MDBs (particularly of natural gas projects). In absolute terms, it is the largest contributor among MDBs to oil and gas financing, having averaged USD 1.2 billion annually over 2020–2022.

Supply side energy efficiency 

According to the Climate Change Action Plan 2021–2025, the WBG will support supply side energy efficiency projects, including for power generation and transmission and distribution loss reductions. However, there is little clarity on how this will be implemented with regard to fossil fuel energy. There is no evidence of supply side energy efficiency exclusions to guard against fossil fuel lock-in through inadvertent extension of the lifetime of fossil fuel assets, nor explicit emissions performance standards relating to fossil fuels.

Recommendations:

• The WBG’s Energy Sector Direction Paper should be updated to reflect the Joint MDB Methodological Principles for Assessment of Paris Agreement Alignment, explicitly excluding all financial support for coal activities. This ban should also apply to captive coal units for industrial use, which IFC’s GEA should be amended to explicitly exclude as well.
• The WBG should implement a coal retirement mechanism. If well executed, such an initiative could support with mitigating financial risks associated with stranded assets, while also promoting economic stability and a just transition for communities dependent on coal. The Asian Development Bank’s (ADB’s) Energy Transition Mechanism is a leading example in this regard, and the WBG could consider collaborating with ADB (as well as other MDBs) in extending the availability of this mechanism.  
• The WBG should seek to systematically prioritise promoting renewable energy projects whenever feasible. The “least-cost decarbonisation” risk assessment under the Energy and Extractives Sector Note on Applying the World Bank Group Paris Alignment Assessment Methods already includes valuable consideration of feasible lower-GHG emissions alternatives, whether the operation could prevent or slow down the transition to lower-carbon alternatives, and the operation’s economic viability in the face of the energy transition. However, the WBG should consider enhancing this to include: 
• Explicit analysis of lock-in risks and stranded assets. This should include an assessment of the risk of the economic return of the operation being impacted by: (1) carbon tariffs that could negatively impact the competitiveness of exports, e.g. the EU’s Carbon Border Adjustment Mechanism; or (2) any national carbon pricing scheme which would have a negative influence on production costs.
• A commitment to support with tackling any barriers identified to the deployment of clean alternatives. In case the chosen technology is not the lowest GHG option, the WBG should develop procedures for supporting countries to tackle the policy, regulatory, market, and/or technological barriers identified to enable the deployment of low-carbon technologies. Such an approach would mirror the best practice “climate transition gap” approach of the IDB’s Paris Alignment Implementation Approach.
• As a standard-setting institution among MDBs, the WBG should act as a model for supporting the global energy transition by more clearly anchoring its approach to fossil fuel financing in a pathway for complete phase-out. This should involve formalising the de facto exclusion of upstream oil and gas investments within the Bank Group’s core strategic documentation and exclusion lists. In view of the IEA’s net zero roadmap finding that “no new long-lead time upstream oil and gas projects are needed” for a 1.5 °C pathway, this is a necessary step for the Bank Group to align with the goals of the Paris Agreement. The WBG should also develop a forward pathway for phasing out mid- and downstream investments from its energy portfolio that is sensitive to the just transition needs of its member countries, and compatible with a 1.5 °C pathway.⁴

¹ IBRD and IFC have not supported any coal project since 2014.

² Notably,an internal inquiry was opened in 2024 for this project over an alleged lack of due diligence and appropriate supervision by IFC regarding environmental and social impacts.

³ The least-cost decarbonisation modelling of the grid involves optimising power system expansion by minimising costs (including carbon prices) while adhering to greenhouse gas (GHG) emission limits that are consistent with a Paris aligned long-term decarbonisation pathway appropriate for the country’s power sector. This can be done either on an annual basis or cumulatively until emissions approach zero and allows for both system-wide and individual plant analyses.

⁴ A leading example among the institutions assessed by E3G’s Matrix in this regard is the Dutch Entrepreneurial Development Bank (FMO). FMO has derived a 1.5 °C emissions reduction pathway for its energy portfolio on the basis of its client base and committed to a net zero portfolio target and timeline for fully phasing out fossil fuel financing on this basis.