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 undertook and published a Strategic Realignment 2023-2025 Information Report, setting out how the Bank would adapt its then current 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. 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, in turn, involves 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 specific reference to supporting operations aligned with the outcomes of COP26 and the Glasgow Climate Pact.

With the strategic realignment providing a short-term bridge for the period 2023 –2025, this has since been followed by the IsDB publishing its full new 10-year Strategic Framework 2026-2035. Although this document refers to two accompanying consecutive five-year corporate strategies for each IsDB Group Member, these have not yet been made publicly available.

Coverage of climate change in the IsDB’s 10-year Strategic Framework 2026-2035 is less comprehensive than in the Strategic Realignment 2023-2025. However, “Sustainability and Climate Challenges” are clearly integrated as part of setting out the Bank’s approach to development. This involves a focus on circularity (including resource efficiency, local resilience, and transition from extractive to sustainable, regenerative growth models) and climate adaptation (to manage vulnerabilities while achieving transformative growth). Accordingly, “Design for Building Resilience” and “Environmental Stewardship” are two of the Bank’s five guiding principles for its development interventions.

While climate mitigation is not explicitly mentioned, in setting out the global context for the IsDB Group’s work, the strategy recognises that “transition policies challenge fossil-fuel-reliant economies and demand green financing, capacity-building, and renewable energy investments”. However, there is no further reference to the Bank’s role in supporting climate mitigation, or to the Paris Agreement (either in relation to the Bank’s own commitment for Paris alignment, or with regards to supporting the Nationally Determined Contributions (NDCs) of member countries).

Neither the strategic realignment nor the 10-year strategy make explicit reference to the principle of “do no harm” or a commitment to “do good beyond do no harm”.

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.

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 the other SDGs. The CCP states that warming of at least 1.5°C is already locked-in, and targets stabilising 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 by 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 recognised, 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 concessional 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.[3]

For the former climate finance commitment, the CCAP includes a dedicated annex detailing how this target was constructed. In doing 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 usefully 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 Assessment of Paris Agreement alignment, the CCAP preemptively confirms these will be applied across the IsDB portfolio. However, notably, the IsDB has 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”.

Recommendations: 

• 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. In doing so, the Bank should confirm whether it intends to rely exclusively on the Joint MDB methodological principles for assessing Paris Agreement alignment of new operations, or whether the Bank will also develop a tailor-made guide for applying the principles of the Joint MDB approach to its own operations, in line with best practice among peer institutions.[4]
• Climate mitigation and the Paris Agreement should be explicitly covered by the IsDB’s overarching strategic documentation, in view of their critical relevance for member countries’ growth, transition, and development trajectories, as well as the Bank’s own commitments in this area. Any future revisions to the 10-year Strategic Framework 2026-2035, as well as the accompanying five-year corporate strategies, should therefore seek to clearly integrate reference to these topics.
• 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 “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 the five-year corporate strategies for IsDB Group institutions that complement its 10-year Strategic Framework 2026-2035.
  • Commit to undertaking a public consultation on the content of its next five-year corporate 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 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 1 January  2024.

[3] 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 1 January  2024. However, no timeline for the alignment of non-sovereign operations, or other aspects of the Joint MDB building blocks, has been publicly communicated.

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