Promotion of green finance

Explanation

Greening the system

The WBG is spearheading a variety of initiatives to green the global financial system, notably through its work on green taxonomies, including through its release of a general guide in 2020 on how to develop them. This guide serves as a reference for financial regulators and advisors in emerging markets, offering insights into existing examples and providing a framework for designing taxonomies tailored to specific national circumstances. Furthermore, the Bank Group has provided direct technical assistance to countries, such as Colombia, for the development of national green taxonomies. The WBG also informs the work of the EU-led International Platform on Sustainable Finance as an observer organisation.

In 2019 the WBG and International Monetary Fund (IMF) co-produced a diagnostic tool for evaluating the implementation of the G20 Operation Guidelines for Sustainable Financing. The Bank Group then assisted G20 countries in their self-assessments, providing policy recommendations based on the results. In 2021, the WBG published “Toolkits for Policymakers to Green the Financial System” aimed at supporting government officials, authorities, central banks and financial supervisors/regulators in aligning the financial system with the Paris Agreement and the SDGs.  It further assisted governing bodies with the development of green finance development strategies, such as Jordan’s Green Finance Strategy 2023–2028.

Through the International Finance Corporation (IFC), the WBG hosts the Sustainable Banking Network (SBN) – a voluntary network where financial regulators and banking associations from emerging markets can commit to advancing sustainability within their financial sectors, in line with international best practices. IFC and the SBN, collectively, are observers to the Network for Greening the Financial System (NGFS), a coalition of central banks on this topic. Additionally, IFC has launched the Green Banking Academy, a knowledge and capacity building initiative offering partner banks the tools needed to drive transformative change through their actions. The Academy curriculum covers strategy alignment and framework development, offers advice for greening banking products and services, and promotes understanding of environmental and climate risks and natural resource efficiency.

Furthermore, the Bank published a guide to assist public debt managers in improving their engagement with investors on ESG issues. Leveraging the WB Treasury’s expertise, this publication offers practical steps for sovereign issuers to engage with investors to support low-carbon transitions, complementing the Bank’s 2020 report on sovereign debt managers.

Innovative financial instruments

As part of its Evolution Roadmap processes, the WBG has established new programs to enhance and prioritise sustainable development finance, particularly for cross-border, global public goods. This led to the 2024 announcement of the Global Solutions Accelerator Platform (GSAP), an instrument aimed at funnelling new, additional finance toward, and incentivising borrower demand for, “global challenges” investment, to include climate change mitigation and adaptation. The framework is supported by a portfolio guarantee program, which manages and mitigates credit risk across a portfolio of assets, and a hybrid capital mechanism with both debt and equity characteristics, which can have a multiplier effect on bank financing. By leveraging these innovative financial mechanisms, the GSAP differs from conventional paid-in donor structures, maximising the impact of donor contributions. The Livable Planet Fund (LFP), made up of donor grants, will blend finance with the above programs to create concessional terms for recipient countries.

The WBG is also increasing its private capital facilitation efforts to scale up much needed finance for clean infrastructure development in emerging markets and developing economies (EMDEs). One key effort is the Managed Co-Lending Portfolio Program (MCPP), which attracts institutional investors to invest alongside IFC in EMDE infrastructure projects. The program allows participants to allocate their investments across several projects, thereby reducing the risk of investing in any single country or product. Simultaneously, it provides direct lending to IFC’s borrowers in developing countries through institutional capital and credit insurance. The partnership enables IFC to benefit from the insurance capacity of the private sector, while insurers profit from IFC’s expertise in loan origination and credit risk management in emerging markets. In 2023, IFC mobilised USD 3.5 billion under the MCPP, bringing the total to USD 16 billion mobilised since 2013.

MIGA is also leading on the deployment of innovative financial instruments, including by housing the WBG Guarantee Platform. This expanded one-stop-shop for all WBG guarantee business enables clients to access a simplified offer of all guarantee options to ensure the best selection. The Bank Group is also working on developing new instruments, such as investor hybrid capital, which can leverage additional lending.

Other examples of recently launched innovative financial instruments by the WBG include:

• Emission Reduction-Linked Bond: This bond model aims to support climate mitigation projects by channelling private sector finance into development projects, with investors incentivised by the guaranteed receipt of carbon credits to be generated by the project. An initial USD 50 million issuance has enabled the channelling of capital market investments for the distribution of water purifiers in Vietnam.
• Climate Resilient Debt Clauses (CRDCs): The WBG is part of the group of MDBs that announced at COP28 they would be offering climate-resilient debt clauses (CRDCs) going forward. The WBG now offers CRDCs in new loan agreements with sovereign-guaranteed and municipal clients of lower-middle-income countries, which will enable the deferral of principal payments in the event of natural disasters linked to climate change.
• World Bank Catastrophe Bond and risk transfer instruments: To bolster resilience to natural disasters, the WB has pioneered a risk transfer model with its WB Catastrophe Bond. These catastrophe risk-transfer transactions on international markets provide governments, such as Chile’s or Mexico’s, financial resilience as part of a broader disaster risk preparedness and financial responsibility government strategy. As of March 2023, the WB had provided over USD 6 billion in insurance coverage through risk transfer transactions.
• Wildlife Conservation Bond: In 2022, the WBG introduced its first ever bond for wildlife conservation through IBRD. It is a 5-year USD 150 million bond aimed at protecting black rhinos in South Africa. The funds received by the two national parks benefitting from the bond will be used to enhance staffing, equipment, and facilities to better protect the rhinos’ population. Investors will receive a “conservation success payment at maturity” that will be linked to the growth of the rhino population, rather than the usual coupon payments on the bond.

Finally, the WBG has expressed interest in developing further innovative financial instruments. This notably includes synthetic securitisation via an “originate-to-distribute model” at IFC to help with private capital mobilisation, as noted by WBG President Ajay Banga at COP28. This would enable further investment in climate projects through its Warehouse Enabled Securitization Program (WESP).

Green bonds

The WBG is a pioneer in the promotion of green bonds. Back in 2008, the WBG published the Development and Climate Change Strategic Framework that included the issuance of its first green bonds, shortly after the European Investment Bank (EIB) issued the first bond of this type. Specifically, the WBG issues sustainable bonds through its Sustainable Developments Bonds (SDB) program. SDBs support the financing of a combination of green and social projects, in alignment with the Sustainability Bond Guidelines.  While the WBG provides examples of projects eligible for financing under the program, a definitive eligibility list has not been made publicly accessible. The WBG has positioned itself as the largest issuer in the market, having distributed over USD 290 billion since 2008, including USD 43 billion raised for SDBs in 2023. While the WBG Impact Report provides aggregate numbers for the allocation of bond proceeds, including lists of projects financed by sector, the share of climate components in bond allocation is not disclosed. It is therefore difficult to establish the true share of climate finance among the SDB disbursements.

Green Bonds, a subset of the SDB program, specifically support projects that promote the transition to low-carbon and climate-resilient growth and are aligned with the Green Bond Principles. Once again, while the WBG provides examples of projects eligible for financing under the program in its Green Bond Process Implementation Guidelines, it has not made its definitive eligibility list publicly accessible, though it affirms its eligibility criteria were independently reviewed in 2015 by the Center for International Climate and Environment Research at the University of Oslo (CICERO). From 2008 to 2023, the WBG has disbursed USD 16.3 billion from green bonds across over 100 projects, including USD 955 million in FY23 alone.

The private sector lending arm of the WBG, IFC, has contributed significantly to the mainstreaming of green bonds. In 2013, it achieved the milestone of becoming the first institution to issue a USD 1 billion global benchmark green bond. Through its IFC Green Bond Framework, it has issued a cumulative total of over USD 13.9 billion across 207 bonds issuances in 21 currencies as of the end of FY24. In a joint effort to unlock green finance, IFC and Amundi, Europe’s largest listed asset manager, created the largest green bond fund dedicated to emerging economies, called the Amundi Planet Emerging Green One. This fund was closed at USD 1.42 billion in 2018 and is expected to deploy USD 2 billion into emerging markets during its 7-year lifespan, while also aiming to “significantly increase the scale and pace of climate finance in emerging markets by crowding in capital from investors and creating new markets”.

In recent years, the WBG has supported numerous countries in the development and implementation of sovereign green bonds. In 2018, IFC released guidelines for sovereign states considering green bond issuance incorporating lessons learned from Fiji’s Sovereign Green Bond, i.e. the first emerging market to issue a sovereign green bond. The guidelines provide detailed steps from preparation to issuance to post-issuance reporting. In addition, IFC partnered with HSBC to launch the first green bond fund focused on “real economy” issuers in emerging markets – called the Real Economy Green Investment Opportunity, which targets non-financial borrowers – an untapped market. In 2022, the WBG also supported Colombia in issuing the first sovereign green bond to be issued in local currency in Latin America.

While these initiatives are laudable, there may have been projects that have been financed under these mechanisms that are concerning in terms of Paris alignment¹ and human rights concerns.²

Recommendations

• The WBG should work to better connect its green finance initiatives with its policy development efforts, such as the Country Climate and Development Reports (CCDRs). Through aligning its work on mobilising green finance with the climate and development policies it supports, as well as the research and analysis it conducts, the WBG could increase the impact of its green finance offering by more directly linking it to practical policy goals.
• The WBG should follow through on its plan to implement synthetic securitisation schemes to crowd in private finance for climate projects, as pioneered by the African Development Bank (AfDB) in its “Room2Run” deal. This includes IFC’s proposed Warehouse Enabled Securitization Program that has yet to come online.
• The WBG should disclose the share of climate components in its SDB issuances’ use of proceeds as part of its allocation and impact reporting. This would be in line with best practice among MDBs, with EIB already doing so for its Climate Awareness Bond and Sustainability Awareness Bond reporting, and the European Bank for Reconstruction and Development (EBRD) through its Green Bond and Social Bond Impact Reporting.
• While the Green Bond Process Implementation Guidelines present “examples of eligible mitigation projects”, this does not constitute a full indication of the conditions for determining eligibility for green bond funding. The WBG should therefore publicly disclose an exhaustive, definitive list of activities eligible for financing through Green Bonds.
• The Bank Group should continue to grow MIGA’s climate-related risk insurance operations, beyond the proposed guarantee goal of USD 20 billion. Given the potential for guarantees to play a much bigger role in mobilising climate finance at scale this could include consideration of capital injection options including external capital and transfer of internal WBG (e.g. IBRD) resources.
• As many countries implement green finance policy frameworks rooted in national plans, there is an opportunity for the Bank Group to make greater use of its upstream policy work to mobilise green finance at scale by accelerating the development of these frameworks at national level. This, for instance, could include increased work to translate national plans into tools like taxonomies, and would help client countries pre-empt and respond to the requirements and opportunities of private sector transition planning.

¹ The MCPP has supported gas projects such as the Sankofa Gas Project and the Basrah Natural Gas Liquids facility project. The World Bank’s Green Bonds and Sustainable Development Bonds have supported gas projects.

² Projects funded by the MCPP and implementing entities for the MCPP have ongoing CAO complaints. See the CAO Reports in relation to IFC’s investment in Daehan Wind Power Company and IFC’s investment in TPBank and VPBank.