One of the basic tenets of responsible accounting and finance is transparency. But according to a new report from Oxfam, the World Bank, one of the principal engines for climate finance globally, is not meeting transparency expectations.
Clouds forming over a climate finance giant
Oxfam found a concerning lack of transparency in the World Bank’s climate finance reporting processes. The anti-poverty nonprofit found that at least $17.2 billion in climate financing claims for Bank-funded projects could not be independently verified, and in fact could be off by as much as $7 billion — or 40 percent of the bank’s total 2020 investments. That number could be either over- or under-accounted for.
The Bank has countered that with its use of accepted joint multilateral bank development (MDB) methodology, some of this apparent discrepancy may be related to the fact that some projects are not strictly climate-related, but rather have climate co-benefits. For example, if the Bank is funding the building of a school, the school could be built using climate-resilient building codes or with distributed generation. Further, the Bank states that some of its projects may not appear to be climate finance projects on their face — such as poverty alleviation initiatives — but they feed into building climate resilience through their very nature.
But accounting has to be more robust, as the Oxfam report points out, even with these caveats. According to a 2020 joint report, eight MDBs — including the World Bank Group — committed $66 billion for climate finance in 2020, up from $61.6 billion. The very nature of MDB financing requires additional accountability measures. The repayment of these debts by developing countries can be a considerable burden, and therefore the recipients need to be guaranteed that funds are being allocated to increase climate mitigation and improve adaptation and resilience. Also, private investors often need to match investment funds and should have confidence in the risk management profiles of their portfolios.
Solutions lie in tighter disclosure requirements
Oxfam offered recommendations for improving transparency in the World’s Bank climate finance accounting. As a first step, they recommend disclosing detailed finance assessments, including evidence and justifications of projects in order for third-party verifiers to check their claims. Incremental costs as co-benefits to non-climate projects must also be accounted for and verifiable. The report also recommends standardizing reporting and creating a public database to track climate finance projects. Independent verifiers must also be able to understand the internal methodology for all calculations and assessments.
The report further recommends amendments to the joint methodology — the same methodology that the World Bank has used as a potential reason for limited transparency. While the World Bank is a big player in the MDB space, it is not the only one. If all MDBs use the same methodology, they are all likely facing transparency shortfalls. Oxfam recommends amendments such as instituting a climate finance tracking system, including clear distinctions between financing for projects related to emergency assistance, adaptation, and loss and damage finance and for tracking intersectional climate finance projects, such as ones that includes framing like gender and inequality.
Why climate finance absolutely matters
In addition to MDB climate financing, the private sector is increasing its investment in climate solutions. Tackling climate change has become an expensive problem because of how long it has taken for countries and companies to take it seriously. The $100 billion of annual investment promised to developing countries by 2020 did not materialize. According to a 2021 Organization for Economic Cooperation and Development (OECD) report, released ahead of that year’s climate negotiations, that money will likely not materialize until 2023.
The passage of the Inflation Reduction Act will enable $27 billion of climate finance investment in the U.S., and other countries and companies continue to announce climate finance investments globally. With increased money flowing — necessarily — toward climate solutions, accountability and transparency must be front and center because despite the big numbers, it is not nearly enough.
The Intergovernmental Panel on Climate Change (IPCC) estimates $2.4 trillion is needed for climate finance projects by 2035. Confidence that money invested is being spent for what it claims is the key to leveraging more financing. Climate change is not a problem that can be solved just by throwing money at it. But at the very least, investors and the public need to know that financing is being used in the most strategic and accountable ways possible.
Image credit: Artiom Vallat via Unsplash