Standalone climate strategy and integration of climate in overarching strategy

Overarching strategy

At the 2021 Annual Meetings of the IsDB, the Board of Governors called for the revision and realignment of the Bank’s ten-year strategy in the face of a global polycrisis threatening to roll back progress on (and ultimately, achievement of) the Sustainable Development Goals (SDGs).

In response, the IsDB has undertaken and published a Strategic Realignment 2023-2025, setting out how the Bank will adapt its long-term strategic approach (adopted in 2014) in the short- to medium-term to be “fit-for-purpose” in tackling the evolving development priorities of its member countries. While this document clearly confirms the existence of a “current” ten-year strategy, such a document is not publicly available.

In setting out the rationale for the strategic realignment, the IsDB recognises the extreme climate risks facing member countries, and the potential negative impacts of these on growth prospects. While the strategy recognises that the growth prospects of commodity [export]-dependent member countries (including fuels) are highly dependent on medium- and long-term supply and demand for these commodities, it does not explicitly address this dynamic in the context of several member countries being among the largest global fossil fuel producers.

The strategic realignment sets out three core objectives:

1. Boosting recovery: focused on health systems and food security.
2. Tackling poverty and building resilience: focused on inclusive human capital development, and investing in core social services.
3. Driving green economic growth: notably explicitly recognised as “the core of the long-term developmental agenda of the Bank”.

Achieving these three objectives is in turn to involve an emphasis on two strategic pillars (deemed to draw on the Bank’s comparative advantage): (1) Develop green, resilient, and sustainable infrastructure; and (2) Support inclusive human capital development through projects that build capacity and resilience to fragility. The Bank also identifies four cross-cutting areas to be mainstreamed across its operations as “catalysts for amplifying development effectiveness”, which notably include “increasing project financing for climate change mitigation and adaptation”.[1] In this vein, the strategic realignment affirms the IsDB’s commitment to allocate 35% of its project financing towards climate change by 2025.

The document also reaffirms the IsDB’s commitment to align its operations with the objectives of the Paris Agreement, through facilitating a shift towards low greenhouse gas emissions, energy transition, and climate-resilient development in member countries.[2] This is said to include the IsDB supporting member countries to “demonstrate commitment to the implementation of their Nationally Determined Contributions NDCs” through supporting sustainable and green [post-pandemic] recovery, in the context of global development and climate objectives. Alongside COP21 and the Paris Agreement, there is also notably reference specific reference to supporting operations aligned with the outcomes of COP26 and the Glasgow Climate Pact.

The strategic realignment will be implemented through an “Integrated Work Programme” for the 2023-2025 period, complemented by a results-based management framework. However, neither of these aspects of the revitalised strategic approach have been made publicly available. The strategic realignment also makes no explicit reference to the principle of “do no harm” or commitment to “do good beyond do no harm”.

The IsDB has suggested it is in the process of drawing up a new strategy. This is likely to succeed the previous ten-year strategy, with the strategic realignment providing a short-term bridge for the intervening period (2023-2025). However, publicly available details regarding this process are sparse.

Standalone climate strategy

The IsDB has two core documents governing the Bank’s approach to climate change, the Climate Change Policy and Climate Change Action Plan 2020-2025.[3]

The Climate Change Policy (CCP), issued in 2019, recognises climate action as essential for achieving sustainable development and economic growth. Accordingly, climate mitigation and adaptation are critical to the core mission of the IsDB and to protect gains across all of the other SDGs. The CCP states that warming of at least 1.5°C is already locked-in, and targets stabilizing warming to 2°C or less through both policy support and investment. Accordingly, it commits the IsDB to support climate action among member countries that is “consistent with, and in support of, its core development mandate”.

To achieve the overarching goal of the CCP (“deepening sustainable development imperatives for a better and safer planet”), the document sets out four climate change policy pillars. Each is accompanied with an indicative overview of how it will feature in the Bank’s operational approach:

1. Mainstreaming climate action in the Bank’s operations. This includes the CCP influencing sector policies, country partnership strategies, project risk assessments, and other cross-cutting policies. Operationalising this at the country level includes a recognition that while high-level strategies (such as NDCs) will remain the departure point, the IsDB will support transforming such strategies and plans into investments and actions.
2. Promoting climate change resilience. Practically, the IsDB will support addressing climate risks and building resilience through targeted sectoral approaches, policy-level interventions, and tailored financial support.
3. Green growth and supporting the transition to a green economy. The IsDB notes that the contribution of fossil energy production to economic growth in certain member countries can influence investment decisions. Specifically, the Bank suggests that the contribution of carbon assets to local economies can present “trade-offs between short-term development needs and long-term climate change impacts”. As such, while noting that the energy transition can provide new opportunities for economic growth, the CCP explicitly rules out the establishment of an exclusion list in the context of fossil fuels.
4. Leveraging resources. The CCP recognises that meeting the dual investment needs of climate and development will require substantially scaled-up capital. Accordingly, the critical need to crowd-in additional private (and public) resources is recognized, and the Bank suggests it will pursue available options to catalyse and mobilise additional capital specifically for climate action.

On the basis of these four pillars, the CCP sets out three key conditions for successfully meeting the overarching goals:

1. A sustained and growing pipeline of climate-related investment opportunities
2. A sustained ability to mobilise additional resources and access concessions sources of funding
3. Increased demand from member countries for climate-related support

To operationalise the CCP, the Bank subsequently developed and published a Climate Change Action Plan (CCAP) 2020-2025. The CCAP sets out the concrete actions which the IsDB will pursue under each of the four CCP policy pillars. In doing so, it relates these to the two headline climate commitments of the Bank, namely for 35% of annual lending to be for climate by 2025, and to align IsDB operations with the objectives of the Paris Agreement.[4]

For the former climate finance commitment, the CCAP includes a dedicated annex detailing how this target was constructed. To do so, the IsDB considered both internal data from the Bank’s regional hubs regarding existing pipelines and financing projections, and the expected borrowing required to fund the climate change commitments in member countries’ NDCs. Using this data, a projected range of the Bank’s climate finance commitments by 2030 was calculated (27% – 36%). This suggests that the IsDB’s target of 35% by 2025 is at the ambitious end of the scale for what was deemed to be viable in the context of the Bank’s operations.

For the latter commitment on aligning with the objectives of the Paris Agreement, the CCAP outlines how each of the six Joint MDB building blocks correspond to the four policy pillars of its CCP. The Bank recognises Paris alignment as a dynamic process, and commits to continually reevaluating its performance in this regard on an ongoing basis. While the CCAP was published prior to the development of the Joint MDB methodological principles for Paris alignment, the CCAP preemptively confirms these will be applied across the IsDB portfolio. Since the CCAP was published, the Bank has developed a dedicated guidance note on applying the Joint MDB methodological principles (covering BB1 and BB2 of the Joint MDB building blocks) across the Bank’s operations. This has been accompanied by a series of further guidance notes to ensure Paris alignment at each specific stage of the project cycle (covering from the country planning phase to the post project evaluation phase). Separate approaches for BB3-BB6 have also been developed.

It is laudable that the IsDB has developed a comprehensive suite of tailored internal guidance for applying the Joint MDB Paris alignment framework to its own operations. However, best practice among peer institutions has been to make such guidance publicly available.[5] Moreover, the IsDB has notably yet to explicitly set out a timeline for 100% alignment of new non-sovereign operations, and other aspects of the Joint MDB building blocks. 

In terms of concrete outcomes, the CCAP outlines a series of constituent outcomes as part of the overarching goal of “enhanced climate change resilience and increased green economic growth in IsDB member countries”. However, these function predominantly as high-level indicators, as opposed to granular, time-bound, performance indicators according to which implementation progress can be regularly monitored and reported.

Neither the CCP or CCAP make explicit reference to the principle of “do no harm” or commitment to “do good beyond do no harm”.

The Bank is currently developing its Green and Sustainability Strategy (2026-2030), which is due to succeed the CCAP 2020-2025 as the IsDB’s institutional roadmap for aligning its operations with the Paris Agreement, Sustainable Development Goals, and Rio Conventions.[6]

The draft terms of reference (ToRs) for the Green and Sustainability Strategy include promising indications of increased ambition by the IsDB (such as explicit reference to pursue limiting warming to 1.5°C), extensive reference of the goals of the Paris Agreement, and clear evidence of the IsDB drawing on best practice strategic approaches (tailored to the IsDB’s operating context) among MDBs.[7]

The ToRs also allude to the inclusion of a clear implementation and monitoring framework with key performance indicators, enabling the Bank to track and report progress throughout the strategy’s term.

Recommendation(s): 

• As part of the forthcoming Green and Sustainability Strategy 2026-2030, the IsDB should:
  • Explicitly communicate a clear timeline for the full Paris Agreement alignment of all new approvals (e.g. including non-sovereign operations), as well as the Bank’s institutional alignment in line with the full set of Joint MDB building blocks.
  • Integrate an explicit commitment to “do good beyond do no harm”.
• Publishing full details of the Bank’s strategic approach is foundational to providing key stakeholders with transparency and confidence in the efficacy of the Bank’s approach. In this vein the IsDB should:
  • Make public the Bank’s internal guidance notes for ensuring Paris alignment across each of the six Joint MDB building blocks.
  • Make public the “Integrated Work Programme” and results management framework that it refers to as having been developed to accompany the Strategic Realignment 2023-2025.
  • Commit to publishing its new ten-year strategy when this has been developed, in view of the previous ten-year strategy not being publicly available.
  • Commit to undertaking a public consultation on the content of its new ten-year strategy, as is common practice among peer institutions when updating key institutional documentation.
• Fossil fuels are understandably a particularly complex issue for the IsDB, in view of the Bank’s member countries, region(s) of operation, and strictly country-driven approach. That being said, sustainable development cannot be sustainable without accounting for climate change. The Bank should consequently aim to move beyond its current language regarding the “trade-offs” between development needs and climate impacts, and aim to align with a more forward-looking narrative of climate and development outcomes as synergistic and intrinsically linked. In doing so, it should avoid explicitly ruling out establishing an exclusion list for fossil fuels, in view of the significant transition risks associated with certain types of fossil fuel financing across contexts.

[1] The other cross-cutting areas are: (1) supporting the development of Islamic finance; (2) supporting the development needs of women and youth; and (3) scaling up capacity development.

[2] Although the document does not make reference to a specific timeline for this commitment, the IsDB has since announced that all new sovereign operations are aligned with the Paris Agreement as of January 1^st 2024.

[3] Beyond the CCP and CCAP as the two core, public, climate strategy documents of the IsDB, discussions with the IsDB have revealed that the Bank has also developed an internal position paper on “Supporting Green, Resilience, Inclusive & Sustainable (GRIS) Development in IsDB’s Member Countries”.  This document (from 2021) sets out guidance for a GRIS development approach (particularly in the context of COVID-19 recovery) and notably includes reference to the IsDB facilitating a shift towards “low GHG emissions and climate-resilient development paths” in member countries and a broad operational focus on projects with the highest potential for climate finance.

[4] This document was published prior to the IsDB attaching this commitment to a specific timeline. The IsDB has since announced that all new sovereign operations are aligned with the Paris Agreement as of January 1^st 2024. However, no timeline for the alignment of non-sovereign operations, or other aspects of the Joint MDB building blocks, has been publicly communicated.

[5] Such as (but not only) the Inter-American Development Bank (IDB) and Asian Infrastructure Investment Bank (AIIB).

[6] Once the Green and Sustainability Strategy (2026-2030) has been finalised and formally adopted by the IsDB, E3G looks forward to reviewing and updating this metric on the basis of its content.

[7] Information received directly from the IsDB.