The World Bank and other multilateral development banks recently have begun reconsidering their self-imposed restrictions on financing fossil fuel projects. This change is being prompted in part by the new U.S. administration and is also supported by developing country experts. 

Yet, the reality remains that fossil fuel emissions, and specifically the climate change they induce, can severely undermine multilateral development bank projects and overall developing country growth prospects. 

Most emissions, however, come from richer big economies, not poorer developing ones. Given the negative effects of these emissions, multilateral development banks need to push richer economies away from fossil fuels, even as they consider softening restrictions on lending for fossil fuel projects in poorer countries.

Last decade, multilateral development banks began restricting funding for fossil fuel projects due to concerns about emissions, but also under pressure from the U.S., European and other key stakeholders.

For example, the World Bank announced in 2017 it would largely stop funding gas drilling and extracting projects. Other multilateral development banks followed suit.

Many have noted the economic benefits being denied to poor countries by these restrictions, such as export revenues and power plants fueled by domestic gas reserves. Sub-Saharan Africa and South America have contributed little to historical global emissions — 2 percent and 3 percent, respectively, a trend projected to continue.

As the International Energy Agency consistently highlights in its climate scenarios, the emissions reduction needed to avoid dangerous levels of climate change must come, unsurprisingly, from the world’s biggest economies. This includes China, with 33 percent of carbon dioxide emissions in 2022, followed by the U.S. with 13 percent, the European Union taken as a block, Russia and then Japan. Together, these countries generate 60 percent of the global total. India is also a large emitter, but its level is driven more by a massive population than wealth.

These emissions, and specifically the climate change they drive, present two significant risks for multilateral development banks. First, they undermine the development benefits sought by multilateral development bank projects. Second, they create financial risks for these banks by potentially weakening the capacity of developing country borrowers to repay their loans. 

The massive 2022 flooding in Pakistan illustrates the potentially devastating economic impact of climate change, as the country suffered over $30 billion in losses — nearly 10 percent of its GDP. This degree of devastation is not feasible to plan for or adapt to. It needs to be avoided.

Unfortunately, various factors stunt a proper appreciation of climate change’s potential destructive impact. First, there is the inability to see the future. Looking back or even to the present does not provide a full sense of the future potential destructive impact of climate change.

Second, climate change’s impact grows over time, producing more destruction in a more distant future. Its small impact on today’s stock market contrasts significantly with its potentially large-scale economic damage 15 to 20 years from now as climate change worsens. 

That longer period is particularly relevant to multilateral development banks, whose projects often take years to mature, and whose corresponding loans extend beyond 15 years. 

Third, this sense of uncertainty is being exploited by climate minimizers to play down the long-term perils of emissions relative to the shorter-term benefits of fossil fuel projects.

As a result, multilateral development banks are caught in a tricky dynamic: responding to pressures from key shareholders — notably the U.S. — to loosen restrictions on financing for fossil fuels while working to limit greenhouse gas emissions that negatively affect development.

Earlier this year, the World Bank’s president proposed an “all of the above” shift in approach, with more natural gas development projects, as well as nuclear power and other alternatives. Although this proposal was welcomed by some, the World Bank’s board in June deferred a decision on natural gas, even as it approved nuclear power. 

The writing is on the wall as the U.S. pushes multilateral development banks to fund more fossil fuel projects. This debate will continue, including at the upcoming World Bank Annual Meetings next month.

In order to reduce the risks climate change poses for multilateral development banks, these organizations should launch an initiative to encourage the largest greenhouse gas violators to reduce their emissions. 

Although these countries aren’t susceptible to influence by multilateral development bank lending policies, they are all leading shareholders and active on multilateral development bank boards. This involvement provides an avenue for multilateral development banks to engage with these countries.

The initiative for change could be built around analytic work, convenings and outreach regarding the negative development impact of wealthy country emissions. It could even be launched at October’s annual meetings.

Is that likely in today’s political environment? No, but that doesn’t mean it doesn’t make sense. 

Philippe Benoit is managing director at Global Infrastructure Advisory Services 2050. He previously worked as division chief at the World Bank and the International Energy Agency, as a director at SG Investment Bank and as senior adjunct research scholar at Columbia University-SIPA’s Center on Global Energy Policy.