Green bank concept

Calling for an International Green Bank

By Hafez Ghanem, Senior Fellow at the Policy Center for the New South, Distinguished Fellow at the Paris School of Economics, Nonresident Fellow at the Brookings Institution, former Vice President of the World Bank [1]

Humanity is losing the climate battle, and existing international institutions are not delivering on essential environmental action points. We urgently need a new international institution whose sole mission is to develop, finance and support the implementation of green projects in the Global South.

The Financing Needs Are Huge

To meet current climate goals, countries of the Global South (excluding China) will need to allocate more than USD 1 trillion per year by 2025 and more than USD 2 trillion per year by 2030 to climate-related projects. This represents between 4% and 7% of their annual GDP[2]. Estimates of financing needs vary but they are all in the trillions, which is consistent with the findings of Songwe and Stern (2022).

As it stands, it is hard to see how low- and middle-income countries will be able to mobilise these kinds of funds for climate-related projects, given other pressing needs related to health, education, and infrastructure.

While several solutions to this shortfall have been proposed,  funding has not materialised for any of them. Two such solutions are the Bridgetown Initiative, which would create a USD 500 billion trust fund for financing mitigation projects in the Global South; and the Loss and Damage Fund, which is to be financed by countries of the North to compensate those in the South for the impacts of climate change. While both have received widespread political support, so far, no actual funding has been provided.

Could the Global North or the World Bank be the Solution?

In simple terms, it is unreasonable to expect the Global North to provide low- and middle-income countries USD 2 trillion every year to meet their climate finance needs. According to OECD data, total official development assistance currently amounts to less than USD 200 billion per year. This means that, even if OECD countries decide to stop all funding for general economic development and focus specifically on financing climate change activities, they would need to increase their funding by a factor of 10! 

Given the way the World Bank is structured, it cannot support the transition on its own either. Reaching the needed level of climate financing would require a substantial capital increase. This would be a huge burden on World Bank shareholders, who are all fiscally constrained sovereign states. Nor would the Bank be able to mobilise sufficient private-sector climate funding. Moreover, the governance structure of the Bank, which only includes sovereign states and does not provide sufficient voice to countries of the South, is not conducive to increasing climate financing.

How an International Green Bank Could Help

The situation demands a new institution whose only mission would be to combat climate change. This institution would be a repository of knowledge on the green and net zero transition. It would develop, finance and support the implementation of projects to mitigate and adapt to climate change.

Furthermore, it would be a place where all actors come together on an equal footing to advance climate action – from the private sector and civil society to donor and non-donor countries around the world. Unlike current international institutions, all partners would have a voice in the decision-making bodies of the institution.

The Green Bank would use five instruments to achieve these goals:

  1. knowledge products that help develop effective green projects, support advocacy, and provide policy advice;
  2. direct equity contributions to private companies investing in green projects;
  3. loans to private sector projects;
  4. guarantees against sovereign risk for green investments; and
  5. grants to buy down the interest on sovereign lending by multilateral development banks for adaptation projects.

With this in mind, the Green Bank will have a structure that is very different from existing institutions. 

Conditions for success

As the world already has a plethora of international organisations – with overlapping mandates, sprawling bureaucracies, creeping missions, and high costs – most observers are understandably wary of creating new ones.

So, before the international community puts its support behind the creation of such a Bank, the following questions should be asked:

  1. Are we in agreement over a narrowly defined mission statement?
  2. Do we have the support of the private sector?
  3. Will the private sector commit to contributing at least 50% of the Bank’s capital?
  4. Do we have widespread global political support, particularly from civil society organisations and environmental groups?
  5. Finally, do we have the support of governments in the Global South, along with their commitment to the Green Bank’s mission?

If the answer these five questions is “Yes”, the creation of an International Green Bank would indeed go a long way towards mitigating the impacts of climate change.

Today’s climate challenge must not turn into tomorrow’s nightmare – this is one step we can take together to ensure it does not.

[1] This blog is based on a longer paper recently published by the author, “The World Needs a Green Bank”.

[2] See Bhattacharya A, Dooley M, Kharas H, Taylor C (2022) Financing a big investment push in emerging markets and developing economies for sustainable, resilient and inclusive recovery and growth. London: Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science, and Washington, DC: Brookings Institution.