How multilateral development banks can bridge the climate financing gap
Policymakers, investors and politicians face the significant challenge of financing the investments necessary to keep global temperatures within the Paris Agreement’s target of limiting the rise to below 2°C. This challenge is particularly acute for developing countries, which must simultaneously generate jobs for their burgeoning youth populations, manage increasing debt burdens and secure affordable capital in an environment marked by high interest rates and currency risks. This task is further complicated by the lingering impacts of the Covid-19 pandemic, the escalating consequences of climate change and the global economic disruptions stemming from conflicts such as those in Ukraine and the Middle East.
Globally, economies have been severely affected by these crises, with external financing needs for developing countries estimated to have surged by $700 billion annually due to the pandemic alone. This is in addition to the $2.5 trillion per year required to support the Sustainable Development Goals and the $100 billion committed to climate finance. The need for unprecedented investment is clear if we are to improve livelihoods, mitigate and adapt to climate risks, and prepare for a sustainable future beyond the mid-21st century.
Focus on Africa
Africa currently receives only 4% of global climate finance, despite being one of the regions most vulnerable to the impacts of climate change. The continent faces steep challenges in securing investment for critical areas such as low-carbon energy grids, transformed transport and logistics networks, carbon absorption and trading alternatives, and sustainable manufacturing practices. Without substantial investment in these sectors, achieving the dual goals of job creation and climate stabilisation will remain out of reach.
Africa’s youth population is expected to grow by 42% by 2050, making it imperative to create millions of jobs annually. However, the continent’s share of global foreign direct investment remains low, and public debt in sub-Saharan Africa has surged to 64% of gross domestic product in 2024, exacerbating the difficulty of financing essential infrastructure and climate initiatives. The need for targeted climate finance that addresses these unique challenges is more urgent than ever.
Proven track record
Multilateral development banks play a critical role in providing affordable, flexible and rapid financing to support economic recovery and meet ongoing development needs. Their track record in responding to crises – whether climate-related disasters or the Covid-19 pandemic – positions them well to drive investment in sustainable development. MDBs have demonstrated the capability to focus on long-term development issues and mobilise the necessary resources to address these challenges over extended periods. By leveraging shareholders’ capital contributions through private sector bond markets, they can provide significant financing with efficiency and scale.
Central to the role of MDBs in climate finance is their unique and powerful financial model. MDBs raise most of their resources by issuing bonds on international capital markets, which they then lend for development projects at below-market rates. These projects – often related to climate action such as renewable energy, low-carbon transport or green infrastructure – typically generate limited financial returns. However, due to the strong repayment track record of borrowing countries, MDBs maintain excellent financial performance, supported by conservative capital leverage and the backing of shareholder countries.
MDBs have issued more than $1.5 trillion in bonds over the past decade, significantly contributing to global development finance. The International Bank for Reconstruction and Development, the World Bank’s main lending arm, has raised over $800 billion in capital since its inception. Despite the challenges posed by recent global crises, MDBs have continued to offer financing on favourable terms, helping developing countries navigate economic recovery and climate adaptation.
Could MDBs do more?
Although MDBs have performed well historically, the growing scale and complexity of climate challenges necessitate a rethinking of their role. The depth and variety of climate-resilient pathways have stretched their capital adequacy, prompting calls for MDBs to expand their impact. This expansion could involve innovating their financial models to mobilise more private sector investment and streamline business
procedures to reduce barriers for borrowers. MDBs could enhance their efforts by collaborating more closely with other stakeholders and developing countries to build a robust pipeline of investable climate projects.
The potential for private sector investment in climate-related projects is vast, yet significant gaps remain.
To bridge these gaps, MDBs must explore strategies to enhance their capacity to attract and manage private financing. Initiatives such as the World Bank’s International Development Association going to
market, the M300 initiative, and the Asian Infrastructure Investment Bank’s nature-based infrastructure solutions exemplify the innovative approaches needed to meet the growing demand for climate finance.
MDBs must continue evolving, by leveraging their financial models to catalyse greater private sector participation in climate finance. In doing so, they can play a pivotal role in addressing the global climate crisis and ensuring the world remains on a path towards sustainable development.
