Open Letter on 1.5°C pathway: Raising ambition in the Joint Multilateral Development Bank (MDB) Paris alignment framework
07 November 2022
To the Heads of the Multilateral Development Banks:
David Malpass, President, World Bank Group
Odile Renaud-Basso, President, European Bank of Reconstruction and Development
Masatsugu Asakawa, President, Asian Development Bank
Jin Liqun, President, Asian Infrastructure Investment Bank
Akinwumi Adesina, President, African Development Bank Group
Werner Hoyer, President, European Investment Bank
Reina Irene Mejía Chacón, Interim President, Interamerican Development Bank
Ahmed Mohamed Ali Al-Madani, President, Islamic Development Bank
Marcos Prado Troyjo, President, New Development Bank
Carlo Monticelli, President, Council of Europe Development Bank
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Climate Heads of the MDBs
Open Letter on 1.5°C pathway: Raising ambition in the Joint Multilateral Development Bank (MDB) Paris alignment framework
Climate breakdown has become a reality for every one of us, and the window to rapidly address it is closing fast. Tackling the climate emergency and keeping the average global temperature rise below 1.5°C requires fundamental shifts in the way financial flows from publicly backed and owned international financial institutions (IFIs) are channelled and managed.
In order to respond to this existential threat and inequality multiplier, the Multilateral Development Banks (MDBs) must be much more ambitious as they develop their joint Paris alignment framework that we hope will be made publicly available at COP27. There can be no more foot-dragging over this urgent process that started in 2017, and that was pledged in 2015 before the Paris COP. A lack of leadership and collaboration between MDBs has been exacerbated by World Bank President David Malpass, who personally sought to undermine a joint MDBs climate ambition statement in the run-up to COP26, as reported by the Financial Times. A year ago at COP26 in Glasgow, ten major MDBs published their COP26 statement updating progress towards their joint commitment to Paris alignment. But the 2021 statement provided limited new details, posed no limits on fossil fuel support, and left timelines unclear. The MDBs must use COP27 to set this process back on track.
However, early signs from this year are already concerning. The COP27 MDBs Joint Statement published on 6th November 2022 mentions the MDBs being on track to fulfil their Paris alignment commitments but has no mention of energy at all, let alone phasing out fossil fuels and provides few clues as to how commitments are being implemented.
The Glasgow Climate Pact calls on MDBs to “accelerate the alignment of their financing activities with the goals of the Paris Agreement,” and “increase the scale and effectiveness of climate finance from all sources globally, including grants” including by mobilising private finance (UNFCCC 2022). While developed countries must take the lead, the 1.5°C trajectory will require massive transition in the 2020s, leaving no room for new extraction of oil and gas in any country.
The MDBs’ definition of ‘Paris alignment’ needs to go further than to support implementation of countries’ Nationally Determined Contributions (NDCs). Most individual NDCs and current Long Term Strategies (LTSs) are not aligned with the 1.5°C aim of the Paris Agreement. The UNEP Gap Report 2022 found that current policies, even if implemented in full, imply heating of global average 2.4-2.6ºC by the end of the century, respectively for conditional and unconditional pledges. And many tipping points in the climate system are thought to be triggered below these temperatures.
There is no room for gas in a Paris aligned 1.5°C pathway
Fossil gas, including liquefied natural gas (LNG), must be ruled out by the MDBs as a “transition fuel” in coal dependent countries. New data shows that between 2019 and 2021, at least 61% of international MDB public finance for fossil fuels flowed to fossil gas projects. LNG is often imported fossil gas and produces significant methane and CO2 emissions as well as toxic air pollution. This energy model has created significant energy insecurity and price volatility as LNG is traded to the highest bidder, causing blackouts and contributing to food shortages for many of the worlds’ most precarious communities in the wake of price spikes this year.
This year’s World Energy Outlook from the International Energy Agency (IEA) reaffirms that a 1.5°C-aligned scenario requires a rapid phase-out of oil, gas, and coal. Specifically, to meet a 50% chance of limiting warming to 1.5ºC, the IEA scenario shows no new fossil fuel extraction or LNG projects after 2021 The IEA clearly states, “No one should imagine that Russia’s invasion can justify a wave of new oil and gas infrastructure in a world that wants to reach net zero emissions by 2050.”
In order for MDBs to align with the Paris Agreement actions they must:
- Exclude any kind of support, direct and indirect, and policy support, for gas, including LNG, across all levels of the institutions. The MDBs guidance notes for gas in their operations must specifically exclude the expansion of fossil gas and LNG and rapidly phase out existing gas capabilities as part of a 1.5°C pathway.
- Support a just transition away from fossil gas, oil and coal towards a low-carbon renewable energy model. This must include whole of economy support to consider decent jobs, economic alternatives, appropriate policy and finance and energy access for all. To avoid deepening inequalities, renewable energy projects must be implemented with strong human rights due diligence, free, prior and informed consent, and planning processes that are inclusive of and take leadership from local governments, workers, communities, civil society organisations (CSOs), and trade unions.
- Support strategies to scale up grant and concessional finance to kickstart the green transition in many countries is also needed - given the recent significant increases in commercial cost of capital in many developing countries - and debt cancellation is also necessary in some climate vulnerable countries, in order to give them the fiscal space to implement their climate plans.
- Rule out support for Carbon Capture, Utilisation and Storage (CCUS) that locks the world into prolonged fossil fuel dependence. Rather than replacing fossil fuels, carbon capture prolongs our dependence on them at a time when preventing catastrophic climate change requires rapidly phasing out fossil fuel use, and as an end-of-pipe technology, it does not address fugitive emissions at the production and transportation stages.
- Rule out high emitting technologies or fuels (including gas) that will hinder rapid decarbonisation trajectories beyond 2030, including infrastructure for fossil fuel production transport, terminals, power plants and downstream markets for households and business users.
The MDB’s Paris alignment methodology must be public and have specific, publicly verifiable and timebound sectoral and regional mitigation targets that apply to:
1. Direct Finance:
See: At a Crossroads: Assessing G20 and MDB International Energy Finance ahead of the Stop Funding Fossil Fuels Pledge Deadline
The MDBs’ Paris alignment process should start with all MDBs signing the Glasgow Public Finance Statement - the first international political commitment that not only addresses ending public finance for coal but also includes ending funding for oil and gas. In doing so they will join thirty-four countries and five institutions who signed the statement committing to:
- End new direct public support for the international unabated fossil fuel energy sector by the end of 2022, except in limited and clearly defined circumstances that are consistent with a 1.5°C warming limit and the goals of the Paris Agreement.
- Prioritise support fully towards the clean energy transition.
Meeting the Glasgow Statement with integrity means using definitions for “limited and clearly defined exceptions” and “unabated” that do not allow for fossil lock-in or high stranded asset risks, including barring any support for gas infrastructure or carbon capture and storage (CCS). Meanwhile, support for clean energy should “do no significant harm” to the goals of the Paris Agreement, local communities and local environments. To ensure that the energy transition does not amplify existing inequalities, all projects must be implemented with comprehensive human rights due diligence; community-led development principles; full free prior and informed consent, and debt-sustainable terms. This will also require MDBs to prioritize support for programmes for universal energy access and alternative renewable energy ownership models that generate community wealth.
2. Indirect Finance
To bring their investments into alignment with the Paris Agreement, it is imperative that MDBs address indirect financing to financial intermediary clients (FIs) with high exposure to fossil fuel value chains. Unlike in direct financing, IFIs rarely disclose information about what sub-projects are financed by their FIs, with some exceptions. Once an FI investment is approved, IFIs largely delegate the responsibility to assess and approve sub-projects to FIs.
In some cases, IFIs may require FI clients to submit sub-projects for approval: for example, the EBRD and the AIIB require high risk sub-projects to be referred back to the bank for scrutiny. But in many cases, FI lending transactions allow IFIs to ‘outsource’ the responsibility of ensuring sub-project compliance with environmental and social safeguards to FI clients.
Moreover, the MDBs have an important role to play in greening the financial system by providing clear guidance and closer supervision of financial intermediaries in preventing new fossil fuel investments. Such guidance can support these institutions to align their operations with Paris and to expand the reach of renewable energy investments by targeting new groups of clients and small scale projects.
This must be addressed by the MDB Climate Heads Working Group. A draft framework for aligning financial intermediary investments with Paris was published at COP26. Today, it is crucial that MDBs adapt this broad framework for their own contexts and publish their own tightened and more detailed methodologies. MDBs must also bring the implementation date forward from 2025 to 2023. Halfway through this critical decade, and 10 years after Paris, is too late to begin with intermediary alignment: we cannot afford to prolong this process.
3. Policy, technical assistance and development policy finance
See: Aligning Policy Based Finance with the Paris Agreement
The MDBs influence the energy landscape by signalling government priorities, adding research and advisory capacity, and in some cases, making lending conditional on recipients affecting energy-related policy reforms. As noted in a civil society submission to the World Bank’s 2021 Development Policy Financing (DPF)[1] retrospective, observers have long pointed out the problematic use of DPF lending to indirectly support fossil fuel expansion - or signalling key political support via linked policy reforms. This includes in Guyana, where WBG DPF and technical assistance have played a key role in the development of a massive new offshore oil development that is acutely misaligned with global climate goals. The Bank’s support for fossil gas as a ‘transition fuel’ via DPOs in - for example - Senegal, Jamaica and Indonesia is also a cause of grave concern, given that arguments around gas as an effective bridge fuel have been repeatedly debunked. A further example is in Vietnam the World Bank provided Technical Assistance on “Addressing the constraints of LNG investments in Vietnam” in March 2018-2019, which facilitated Vietnam’s strategy of importing LNG. This type of technical assistance that creates the framework for fossil fuel expansion needs to be brought to an end as part of Paris alignment.
Paris alignment of policy-based operations must systematically assess whether their policy actions and budget support, undermine or promote medium and long-term macro-fiscal stability and a just transition to climate neutrality by 2050. There is also a need for greater transparency in how MDBs account for climate finance within this instrument - including the need for timely public disclosure of which policy reforms are deemed to have climate co-benefits.
Urgent action is required on many fronts
As publicly funded and owned development banks, MDBs are accountable to the global public and therefore should be agents of transformative change to tackle the climate emergency, by scaling up financing for sustainable, renewable development; helping countries in pursuing equitable, low-carbon transitions, and ending all support for fossil fuels. The MDBs Paris alignment process is an opportunity to do just that.
For credibility and transparency, it is essential that the Paris Agreement alignment methodologies of the MDBs be made public and available for public consultation and scrutiny.
Signed: Members of the Big Shift Global Coalition
[1] NB: DPF is the World Bank’s version of policy-based financing.