Explainer: Looking beyond the Bretton Woods Institutions (and MDBs) to Fund Globally Just Energy Transition

Claire O’Manique & Bronwen Tucker,

Claire O’Manique and Bronwen Tucker are part of the Global Public Finance team at Oil Change International, where they are working to get governments to stop funding fossils and use their money instead to support a fair and just fossil fuel phase-out. They both live in Canada.

 

As communities face rising inequality and rising temperatures, Global South-led and feminist people-powered movements have put global financial architecture reform on the agenda of world leaders. They are calling for a transformation of the existing system that has driven record debt crises, cost-of-living increases and a lack of funding available for urgent climate action. 

With public finance & global financial architecture front and centre this year, it is critical that we raise important questions not only about how to raise the public funds owed but alongside this, how these funds should be distributed to ensure feminist and just outcomes. 

However, there are some very different visions of what reforms are needed. Wealthy G7 and OECD governments who have a disproportionate say over global financial rule-making have been focusing the debate on relatively shallow World Bank Group and MDB reforms focused on growing the institutions’ lending capacity. 

Much of civil society as well as many Global South heads of state have been making calls for more substantive changes across the global financial architecture system: notably Brazilian President Lula da Silva, Colombian President Gustavo Petro, and Barbadian Prime Minister Mia Mottley, among others, calling out the inequities and imperialist nature of our global financial system, calling for comprehensive debt cancellation, the creation of a global green bank, and a new Marshall Plan among other solutions. 

This dynamic played out with the decision to host the Loss and Damage Fund at the World Bank Group — despite pushback from Global South countries, who argued that the “World Bank is too slow, inefficient, unaccountable and lacks the organizational culture to tackle climate change” ultimately unfair rules meant it was agreed that the World Bank will host the new fund temporarily.  

Currently, there is an overemphasis and almost unquestioned assumption among wealthy country leaders that the Multilateral Development Banks (MDBs) are best placed to be conduits of increased climate finance given both their central role in the global financial system and as providers of development finance. 

While these institutions drag their feet and have continued to offer up more of the same, what we need is a dramatic transformation of the financial system to a feminist one, rooted in justice that is rights-based, people-centred, democratic and transparent. One part of this requires exploring alternatives to MDBs, particularly the Brettonwoods Institutions, to finance a just energy transition.

Using this moment only to primarily push for changes to the MDBs and the IMF risks missing one of the last best chances to build a multilateralism that can deliver any semblance of climate justice. Overall, we need to use this moment instead to get on the right path in three areas:   

• Changing the rules to free up fiscal space in Global South countries: Winning fairer governance for the global financial system that creates a path away from the net $2 trillion a year outflow from Global South countries to the Global North. This includes changing debt, trade, and tax rules, as well as prioritizing long-promised governance reviews at the MDBs and IMF before proposals to grow their financing and power. The Just Transition Africa report provides a great overview of what needs to be done here. 
• Growing the pie, including by securing a strong new climate finance goal (NCQG) at COP29 this year: Winning new measures to raise more public funds for just transition both domestically and especially to flow from Global North to South. This year the ‘new collective quantified goal’ (NCQG) is the centrepiece of COP29, and governments agreeing here to increase international climate finance on fair terms is a key first step. 
• Better equipping alternatives to the MDBs to play a larger role in just transition: Fixing and winning increased funding for other public finance channels will help ensure enough just transition-related project finance flows. Many institutions are already better fit to act in the public interest or easier to transform to secure more just outcomes than the MDBs. 

We focus here on the third area — what channels are needed to ensure the right quality and quantity of public funding can flow to pay for a just transition? 

The MDBs: Not fit for purpose

Before we look at alternative institutions, here are just a few of the reasons why we should be wary of expanding the role of MDBs when it comes to delivering a just energy transition:  

1. Still financing climate chaos: Despite repeated joint commitments since 2016 by MDBs to align their finance with the Paris Agreement, between 2020 and 2022, they provided an annual average of USD 3.2 billion in direct fossil fuel finance. This is only a portion of their ongoing support for fossil fuels and does not include most support through trade finance, financial intermediaries, or technical assistance. A recent Urgewald report found that in 2022, the World Bank Group alone provided $3.7 billion in trade finance for oil and gas.
2. Lack of democratic governance and representation: While most climate finance needs to be channelled to the Global South countries, it has long been pointed out that these governments lack equal positioning at the negotiating tables of MDBs. This means that, by design, they have little say over how finance flows. While we urgently need more finance, we also need to put control over how this finance flows, and what kinds of projects are supported into the hands of recipient communities.
3. Emphasis on privatization and leveraging private finance: The MDBs have deeply embedded policies favoring privatization over investing in public goods, including for climate finance. Speaking ahead of COP28 to the Washington Post, the new World Bank President Ajay Banga said: “I don’t believe that there will ever be enough money in government coffers or in rich or poor countries” to get ahead of the climate challenge. The answer…. is private capital.” It thus comes as no surprise that the World Bank announced a new Private Sector Finance Lab focused on attracting profit-seeking private investments. 
4. Little accountability: The sheer size and inaccessibility of MDBs means that impacted communities have few meaningful channels to hold them accountable. When it comes to climate finance, and the Paris Alignment Process, much of it has been happening behind closed doors with few opportunities for public consultation.
5. Stalled reform efforts: Despite MDB efforts to align with the Paris Agreement, to date, this process, including the World Bank’s Evolution Roadmap, has lacked ambition. Among the criticisms are that they have failed to implement the necessary reforms including on gender equality, and have overemphasized the role of private finance as holding the solutions.

Together, these conditions mean that allowing Global North countries to instead mostly narrow global financial architecture reform debate to “bigger MDBs” is eroding trust, stalling progress on fossil fuel phase-out and tripling renewable energy (RE). Private sector finance mobilization by MDBs has a role in financing the RE transition in the Global South but wealthy countries and lender-dominated institutions have overstated its efficacy (which is decreasing further in the current high interest environment) and structured theme ineffectively and inequitably. Aside from this emphasis on using public funds to mobilize private capital resulting in not enough investment, the wrong things being funded, and community harms, this approach is also contributing to the eroding trust between North and South countries and is repeatedly explicitly named as a barrier to more ambitious fossil fuel phase-out, tripling RE agendas. 

Beyond the MDBs

As the debate continues on how to raise the public funds we need for a just energy transition, we need to push against framing the MDBs as silver bullets and equip a greater variety of financing channels to do the job. While other existing public finance institutions are not without their issues, many of them are already fundamentally more democratic than the MDBs. This gives them clearer and potentially easier pathways for transformation that could deliver more just outcomes. 

Some of these institutions are also already leading on more innovative pro-public renewable solutions that we can draw on and advocate for. This includes:

• Public-public partnerships: Germany’s bank KfW provides long-term, low-interest rate loans in collaboration with government department research to municipalities in Germany to jump start municipal renewable energy and climate-related public infrastructure projects.
• Cooperative and alternative ownership models: Banco Popular in Costa Rica has green lending facilities that are geared to community energy cooperatives, local schemes to fund low-income residential solar installations, and micro-, small- and medium-sized enterprises.
• Democratic governance for renewable power: Banco Popular is worker-owned and government with a representative assembly. Germany’s KfW’s 37-member board has trade union, municipal, and government representatives, the majority representing democratically elected entities. Both banks have helped build successful large-scale public and community-owned renewable energy system buildouts in their countries.

Some of the alternative institutions include:

Sub-national and national public banks: There are some 693 public banks globally with assets totalling $37.72 trillion in assets representing 10% of annual investments. This is far more than the MDBs, and could be tapped into as a key source of public finance for a just transition. 

Ultimately, these domestic public banks are a diverse set of institutions that reflect the political contexts they operate in, and many carry some of the same problems as MDBs highlighted above. 

However, in many cases these banks:

• better understand the economic and social conditions of the countries where they operate, and are better placed to understand the specific needs when it comes to a just energy transition. 
• can offer more opportunities for local governance, accountability, consultation and community engagement compared to MDBs. We have already seen a number of these institutions like the Agence France Locale (AFL) in France adopt fossil fuel exclusion policies while the MDBs have fallen behind. 

One potential path forward is to reform some of the relatively good actors in this space and push them to become real champions of just transition finance. Sub-national and national public banks could also be channels for international just transition funds like the EIB’s national promotional bank system where finance is given directly to public banks. 

The UN Climate Funds: The Green Climate Fund and Global Environmental Funds, among other UN funds, were designed to be more democratic and flexible than the MDBs and to give developing countries more power over their climate action. This includes donor-recipient parity on its board, consensus based decision making processes, and more mechanisms for civil society engagement. The GCF also provides a far greater share of its financing through grants than MDBs. In practice, however, the fund has not been without issues.

Wealthy donor countries have been criticized for failing to live up to their finance commitments and have set up financing terms that do not work for low-income nations, and the GCF has struggled with a lack of funds. This has been in part to blame for both a toxic workplace and a slow and inaccessible process where developing countries have been unable to access adequate funds. There have also been accusations of political interference and instances of project approvals that violate human rights. 

Some of these issues speak to the challenges of setting up new international organizations that aim to deliver far more equitable North-South relations.  As a relatively new organization there is much room for improvement, and there are a number of recommendations that have been made to address ongoing concerns with the GCF including: updating the Simplified Approval Process, creating a minimum country funding allocation, and implementing new operations for readiness support, among others. 

Before we consider scaling up finance at MDBs, wealthy donor countries should fulfil their finance commitments to the GCF so that it is properly resourced, instead of spread too thin and unable live up to its full potential and deliver fully on its mandate. This will help to address some of its current shortcomings so that it can more rapidly administer grant funding and direct access funding to developing countries as they had anticipated it would.  

Progressive bilateral development finance:  There is a role that more progressive development finance institutions and government ministries could play as examples of what just transition financing from the wealthy countries to the Global South could look like, but this is not without challenges. Development Finance Institutions (DFIs) are also diverse in their structures, but many have been a tool for neo-colonialism and imperialism. There is also considerable research showing wealthy country DFIs have become more ‘self-interested’ in recent decades. 

To start to break this path and use every channel we can for just transition finance, we can start by advocating for development departments and development finance institutions that have some strong precedents or are structured to have some democratic accountability to set best practices. 

Already, through the Clean Energy Transition Partnership or CETP, several development finance institutions have delivered on their pledge to end all direct international public finance for unabated fossil fuels by the end of 2022. There is now potential for this group of signatories to deliver on the second part of the pledge to: prioritize their international public finance for the clean energy transition. Some development finance institutions already have monetary targets in place for clean energy financing, including the Dutch entrepreneurial development bank FMO, and the Belgian Investment Company for Developing Countries.

However, an IISD report on the clean energy policies of CETP signatories finds that a common gap is a lack of provisions to ensure that financing is feminist, fair and transformative. As such, it could be of value to pursue and develop joint targets and guidelines for these institutions on international public finance for clean energy. This should include:

• ensuring clean finance is delivered through grants-based instruments or is highly concessional
• Funds transformative projects including key enabling infrastructure like 100%
• renewable-ready grids, universal affordable energy access and community-owned projects, and projects aimed at efficient and equitable energy consumption
• prioritizes countries and regions where need is greatest
• delivered  finance in partnerships with national development banks or regional/domestic governments in project countries, who have more localized knowledge 
• specific provisions for human rights safeguards, gender sensitivity
• meaningful community participation and ownership including of women, youth, and marginalized communities in decision-making and implementation. 

The need to dramatically scale up and accelerate climate finance from the Global North to the Global South is undeniable. With the 80th Anniversary of the Bretton Woods Institutions, it is far past time to challenge the supremacy of these institutions in our global financial system, particularly as we work to transform economies to be just, equitable, feminist, climate resilient, and low carbon. 

Indeed climate finance will be a key focus of this year’s international climate diplomacy and a key theme of COP29 being held this November in Baku. Their governments will set a new post-2025 finance goal. Alongside pushing governments to scale up climate finance, we also must interrogate how these funds are flowing and ensure that these funds are being channeled through institutions that can deliver climate justice outcomes.