This page is part of the E3G Public Bank Climate Tracker Matrix, our tool to help you assess the Paris alignment of public banks, MDBs and DFIs.
|Paris aligned||The Bank is promoting green finance in banks, local and national institutions, insurers and regulators with a number of potentially transformational initiatives|
The World Bank Group has been a pioneer in the issuance of green bonds and supporting the launch of sovereign green bonds in developing economies such as Fiji. The Bank launched the first labelled ‘green bond’ in 2008-09 together with the Swedish bank SEB, in response to specific demand from Scandinavian pension funds seeking to support climate-focused projects and promote financial innovation. Since then the market for green bonds has grown substantially, to US$255bn in 2019. Of this, the World Bank Group is responsible for over US$13bn spread across 158 individual bonds and 21 currencies. By mid-2019, the World Bank had committed US$17.5bn in mitigation and adaptation-based green bonds (75% and 25%, respectively). In the same year, the World Bank Green issued a ten-year Sustainable Development Bond, raising EUR 1.5 billion from institutional investors.
Other pioneering activities by the Bank include supporting the launch of the world’s first green Islamic bond in Malaysia in 2017. The Bank has also played a role in establishing transparency and reporting practices in the green bond market. Building on the experiences of MDBs, in early 2014 a group of banks initiated the development of a set of voluntary Green Bond Principles.
Greening the system
The rising interest in green taxonomies has driven the Bank’s new guide to green taxonomies, which provides a brief overview of current green taxonomies and sets a general framework. This guide was published for financial regulators and advisors seeking to green financial systems in their respective countries, in a way that is tailored to national circumstances. In terms of supporting local financial institutions on green banking, there are a number of examples of International Bank for Reconstruction and Development (IBRD) working with state owned banks to develop environmental credit lines, for instance in Ukraine and Russia. However, an independent review in 2006 found that the Bank was falling short in implementing its environmental safeguards on its lines of credit, with only one-fifth of the lines of credit mentioning improving the capacity of the public bank or other agencies to carry out environmental screening. An update on this issue is recommended.
The World Bank published their Transformative Climate Finance report in June 2020 exploring the future of “climate finance levers”, which are based in traditional levers such as project-based financing, sectoral strategies, trade policy and carbon markets. The Bank states that while climate finance has grown significantly throughout the last decade, they “will only be transformative if … climate action leverages substantially more funding from other sources”. Together with this, the World Bank Group’s 2019 Action Plan on Climate Change Adaptation and Resilience sets out potentially innovative instruments including resilience bonds, market-based insurance products and performance-for-results loans, all of which could help promote green finance more widely. These instruments do not appear to be utilised yet, but clarification from the Bank is welcome, and as such their status as innovative and transformational cannot yet be judged.
The Bank has published a guide to help public debt managers improve their engagement with investors on Environmental, Social, and Governance (ESG) topics. Titled “Engaging with Investors on Environmental, Social and Governance (ESG) Issues – A World Bank Guide for Sovereign Debt Managers,” it helps bridge the communication gap on ESG issues between sovereign issuers and investors. The guide outlines how sovereign debt investors use ESG information in their investment strategies, how debt managers are engaging with them, and how engagement can be improved. This guide complements World Bank’s “Riding the Wave: Navigating the ESG Landscape for Sovereign Debt Managers,” report which defines a framework that debt managers can use to design an appropriate strategy for undertaking ESG activities. This new guide leverages World Bank Treasury’s expertise to outline the practical steps sovereign issuers can take to engage with investors.
The International Finance Corporation, the World Bank’s private sector arm, is active in the promotion and scaling-up of green finance in the private sector; for more information, see IFC chapter on promotion of green finance.
Recommendation: We recommend the Bank prioritise operationalising their potentially innovative instruments, using them in particular to address climate resilience and lead in meaningful risk-taking.
|Innovative instrument case study Case Study: MultiCat Program — a catastrophe bond issuance platform Market failure addressed: building climate resilience – and where possible the ‘build back better’ approach – to allow countries to recover after disaster hits, such as strengthening infrastructure and reforms to the building codes. The World Bank Group has historically provided support to countries to manage and transfer risk onto capital markets. However, the Bank has been innovative in disaster risk management, as it has created a financial risk transfer mechanism to help countries increase their coverage against natural disasters. Risk transfer instruments are important when disaster hits. Underinsured countries can be hit harder when infrequent natural disasters strike*. In this case it falls to the national governments to bear the cost of rebuilding infrastructure. The Multicat program was initiated in 2009 to address this issue – the first time a platform was designed to help developing country governments access affordable insurance. The aim of the platform was “to achieve cost efficiency for its clients by offering investors the opportunity to diversify their portfolios with assets that are uncorrelated with other assets and by enlarging the traditional investor base for catastrophe bonds”. The program allows participants to be covered for different risks, from floods to earthquakes. Mexico was the first country to utilize this facility with a successful bond issuance; since then issuances have been replicated in other countries and risk pools have been created. The instrument has also evolved over time; in the latest issuance from Mexico for the first time the bond had two layers of insurance, improving the coverage amount and the trigger conditions**. However, it is worth mentioning that post-disaster risk management – although needed – will not address the underlying vulnerability. It is a tool to cover infrequent events but must be accompanied by a “build back better” strategy.
*International assistance can only cover 8% of direct losses in Latin American countries, according to the IDB **Whilst this latest issuance was for earthquake coverage and not climate-related disasters, this demonstrates the types of insurance instrument possible.