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Analysis

Strengthening Climate Action
through International Financial Institutional Reform

John Kirton, Director, G20 Research Group
June 10, 2023

Background paper prepared for the session on "Policy Brief Dissemination: Reorienting International Financial Institutions (IFIs) to Meet Emerging Development Financing Challenges" at the Task Force 5 T20 India 2023 Side Event on "Building Bridges to Sustainable Finance: The Reform Agenda of International Financial Institutions," organized by T20 India, Institute for Economic and Social Research in the Faculty of Economics and Business at the Universitas Indonesia, and the Centre for Strategic and International Studies, Bali, Indonesia, June 10, 2023. Presented virtually. Version of June 10, 2023.

Introduction

Two central questions are critical today: First, how can the international financial institutions (IFIs) be directed toward stronger support for climate finance in emerging and developing countries? Second, how can the G20 promote such reform through adopting the politically realistic, analytically sound recommendations provided by the Think 20 (T20)?

These questions are critical. We have little time left to control climate change, which has become an existential threat to the planet and its people as a whole. To do so, we need to mobilize and smartly deploy an enormous amount of climate finance – $5–7 trillion a year – with IFIs playing a central role. This requires the ambitious leadership of the G20 summit, whose members control these IFIs, and whose summits have already made substantial contributions but have still fallen short of meeting the proliferating need. The G20's summit in New Delhi, India, on September 9–10 can help close the gap, by committing to take and implementing several key steps.

To identify these steps, we must, first, focus on Sustainable Development Goal (SDG) 13 on climate action, which is essential to advance the rest of the 17 SDGs. Second, amidst all the sources of climate finance, the most money needed now lies within the G20 governments and the IFIs and multilateral development banks (MDBs) they control, led by the International Monetary Fund (IMF) and World Bank Group. Third, these steps must be both analytically attractive and politically realistic, must able to be turned into commitments by G20 governments at their New Delhi Summit and, more importantly, must be complied with by their governments when their leaders return home.

G20 Performance in IFI Reform

Recommended actions are more politically realistic if they build on what G20 leaders have already committed to and have complied with in the past, and if they are now upgraded in ways that the Dalhi's G20 leaders can politically accept. The G20 summit's past performance here, on climate finance, on IFI and MDB reform, and on development, are the foundations on which to build (Kirton and Wang 2021; Dobson 2022).

Commitments

Since their start in 2008, G20 summits have made 134 commitments on climate change, including 26 on climate finance (see Appendix A). But only one commitment, made in 2017, referred to an MDB. Three, made in 2011, 2012 and 2022, referred to an IFI. And four more, made in 2011, 2013 and 2014, addressed the Green Climate Fund. So G20 leaders seldom look to the IFIs or MDBs for the climate finance they seek.

On development, G20 summits have made 342 commitments, but only 15 of them contain references to climate change, the environment, ecosystems, the Paris Agreement, the green economy or the blue economy. At their most recent summit in Bali in November 2022, G20 leaders made 22 development commitments. Seven referenced the SDGs or 2030 Agenda on Sustainable Development. Only two, on the green economy and on the blue economy, pointed to climate change.

Two addressed the MDBs. Here G20 leaders (2022) asked "the Multilateral Development Banks to bring forward actions to mobilize and provide additional financing within their mandates, to support achievement of the SDGs including through sustainable development and infrastructure investments, and responding to global challenges." They also promised to "explore ways, including through balance sheet optimization measures, and other potential avenues, to maximize MDBs' development impact."

On IFI reform, G20 summits have made 150 commitments, but only one of them, made at Pittsburgh in September 2009, referred to climate change.

Compliance

G20 governments' compliance with their commitments on climate finance, development and IFI reform has been very low, as assessed by the G20 Research Group.

With their climate finance commitments, compliance averaged only 47%, all from 2011 to 2014, and focused on the new, climate-dedicated Green Climate Fund. This is much lower than the 69% compliance with the climate change commitments overall.

With their development commitments, compliance averaged 67%. However, the four assessed development commitments which specifically referenced the 2030 Agenda or the SDGs since 2015 averaged a very high 90%.

With their IFI reform commitments, compliance averaged 68%. None of these commitments referred to the 2030 Agenda, SDGs, sustainable development, climate change or climate finance.

From this fragile foundation, 15 recommendations emerge as politically realistic ones.

Recommendations for Action at the G20's New Delhi Summit

Priorities

1. On G20 priorities, focus on the IFIs and MDBs to secure climate finance. The core institutions, the IMF and World Bank Group, are full members of the G20. G20 members control their executive boards, their senior executive positions, and their financial contributions and disbursements. G20 summits have successfully reformed these institutions in the past.
2. Use the SDGs as the overall frame. All members agree with them and they apply to all. Several SDGs beyond SDG 13 contain targets on climate change (Kirton and Warren 2023). G20 development commitments referring to the SDGs or 2030 Agenda average compliance of a very high 90%.

Process

1. In the G20 institutional process, invite for the first time the executive heads of the United Nations Development Programme (UNDP) and some multilateral environmental organizations as guests to the G20 summit. The UNDP is responsible for the SDGs. The new International Solar Alliance, already invited to New Delhi, is only a small first step.
2. Create a climate and finance ministers forum. The G20 recently did this for health and finance ministers. The climate crisis is as serious as the Covid-19 one was then. It is certain to get worse in the coming years. There is no vaccine to serve as a silver bullet here. Holding such ministerial meetings improves compliance with G20 summit commitments on the subjects the ministerial meetings address.
3. Mount a special G20 summit focused on climate finance and the SDGs. The G20 did this for Covid-19 and for Afghanistan in 2021, but has done none since.
4. Create a Sustainable Infrastructure Hub by making the G20's Global Infrastructure Hub a formal multilateral organization, with a mandate to foster genuinely green infrastructure.
5. Mainstream climate finance in the IMF and MDBs. Revise their articles of agreement accordingly, if needed. Ajay Banga, the World Bank's new president, is committed to countering climate change and convinced that this goes together with development in synergistic, mutually reinforcing ways.

Policy

6. In G20 policy, end fossil fuel subsidies from G20 governments right away. G20 summits have repeatedly promised to do this since the G20's Pittsburgh Summit in September 2009. This would save governments trillions of dollars, cut 20% of emissions, and directly benefit many other G20 summit goals and the SDGs (McCullock 2023).
7. Give $100 billion a year immediately to developing countries for climate finance. In 2017, G20 leaders agreed to do this by 2020, but have not delivered yet. And double climate finance for adaptation from developed to developing countries, from 2019 levels starting now, as the 2021 Glasgow climate summit agreed and the 2022 Bali Summit endorsed. Use the IFIs and MDBs to reach this goal.
8. Raise the World Bank's climate finance in 2023 to $100 billion, following its doubling in 2022 to move up $32 billion.
9. Channel more special drawing rights (SDRs) from developed to developing countries (see Appendix B). Do so through the IMFs new G20-mandated Resilience and Sustainability Trust rather than the old traditionally focused Poverty Reduction and Growth Facility. G20 member should send more than 30% of their new SDRs there.
10. Improve MDBs' capital adequacy by a) redefining risk appetite; b) incorporating callable capital; c) strengthening lending headroom; d) addressing credit rating agencies methodologies; and e) improving governance frameworks (Capital Adequacy Frameworks Panel 2022).
11. End MDB and IFI finance for recipients that subsidize fossil fuels. The new Nigerian government just announced it is ending its fossil fuel subsidies, after the World Bank said in late 2022 that they helped make Nigeria face a "fiscal time-bomb" (Adeoye 2023; Pilling 2023). If Nigeria can do this, any developing country can.
12. Stop World Bank financing for new unabated coal, oil and gas projects.
13. Issue SDR bonds from the MDBs (Setser and Paduano 2023a, 2023b). The World Bank has done this on a smaller scale, with the International Development Association issuing $26 billion.
14. Authorize a new "SDR for SDG" allocation, with SDG 13 at the core. The G20 summits did this to stop the global financial crisis in 2009 (Kirton 2013). They did it again to stop the Covid-19 health crisis in 2020. They can do it again to control the far more serious climate crisis now.

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References

Adeoye, Aanu (2023). "Nigerians Fill Up Before Fuel Subsidies End." Financial Times, June 2, p. 4.

Capital Adequacy Frameworks Panel (2022). "Boosting MDBs' Investing Capacity." An independent review of Multilateral Development Banks' Capital Adequacy Frameworks. http://www.g20.utoronto.ca/biblio/CAF-Review-Report.pdf.

Dobson, Sonja (2022). "G20 Performance on Development," in John Kirton and Madeline Koch, eds., G20 Indonesia: The 2023 Bali Summit (London: GT Media), pp. 112–113. https://bit.ly/g20bali.

G20 (2022). "G20 Bali Leaders' Declaration." Bali, November 16. http://www.g20.utoronto.ca/2022/221116-declaration.html.

Kirton, John (2013). G20 Governance for a Globalized World (Abingdon UK: Routledge).

Kirton, John and Alissa Xinhe Wang (2021). "G20 Development Governance," in Dries Lesage and Jan Wouters, eds., The G20, Development and the UN Agenda 2030 (Abingdon UK: Routledge), pp. 25–52.

Kirton, John and Brittaney Warren (forthcoming). "Strengthening G20 Support for the UN's Sustainable Development Goal 13 on Climate Change." International Organizations Research Journal. https://iorj.hse.ru/en.

McCullock, Neil (2023). Ending Fossil Fuel Subsidies: The Politics of Saving the Planet (Warwickshire UK: Practical Action Publishing).

Pilling, David (2023). "Nigeria's President Need Only Top Low Expectations." Financial Times, June 2, p. 14.

Setser, Brad W. and Stephen Paduano (2023a). "How an SDR Bond Can Boost Concessional and Climate Financing." Council on Foreign Relations, June 1. https://www.cfr.org/blog/using-sdr-bond-creatively-boost-concessional-and-climate-finance.

Setser, Brad W. and Stephen Paduano (2023b). "How and SDR Denominated Bond Could Work." Council on Foreign Relations, March 16. https://www.cfr.org/blog/how-sdr-denominated-bond-could-work.

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Appendix A: G20 Climate Commitments That Refer to Finance ↩

Note: Compiled by John Kirton, June 2, 2023

Climate Finance Commitments

2009 Pittsburgh

• We will intensify our efforts, in cooperation with other parties, to reach agreement in Copenhagen through the UNFCCC [United Nations Framework Convention on Climate Change] negotiation. An agreement must include mitigation, adaptation, technology, and financing.
• We welcome the work of the Finance Ministers and direct them to report back at their next meeting with a range of possible options for climate change financing to be provided as a resource to be considered in the UNFCCC negotiations at Copenhagen.

2010 Seoul

• We all are committed to achieving a successful, balanced result that includes the core issues of mitigation, transparency, finance, technology, adaptation, and forest preservation.

2011 Cannes

• We discussed the IFIs [international financial institutions] report on climate finance and asked our Finance Ministers to continue work in this field, taking into account the objectives, provisions and principles of the UNFCCC.
• We stand ready to work towards operationalization of the Green Climate Fund as part of a balanced outcome in Durban, building upon the report of the Transitional Committee.

2012 Los Cabos

• We welcome the creation of the G20 study group on climate finance, in order to consider ways to effectively mobilize resources taking into account the objectives, provisions and principles of the UNFCCC in line with the Cancun Agreement and ask to provide a progress report to Finance Ministers in November.

2013 St. Petersburg

• We support the operationalization of the Green Climate Fund.

2014 Brisbane

• We reaffirm our support for mobilising finance for adaptation [such as the Green Climate Fund].
• [We reaffirm our support for mobilising finance for] mitigation, such as the Green Climate Fund.

2017 Hamburg

• Encourage more private resources to be mobilized and efficiently allocated in line with a pathway towards low greenhouse gas emissions and climate-resilient development with the contribution of MDBs [multilateral development banks].
• Mobilize and increase transparency of climate finance, including financial resources by developed countries to assist developing countries, with respect to both mitigation and adaptation in line with the obligations under the Paris Agreement.
• help overcome institutional and market barriers to green finance and private green investment.
• Those G20 countries who provide development assistance will strengthen their efforts to support partner countries in NDC [nationally determined contribution] implementation.
• We reemphasise the commitment by developed countries to the goal of mobilising jointly USD 100 billion per year by 2020, and their intention to continue this through 2025, in the context of meaningful mitigation actions and transparency on implementation, from public and private sources, for mitigation and adaptation in developing countries, taking into account their needs and priorities.

2019 Osaka

• To this end, we strive to foster inclusive finance for sustainable development, including public and private financing mobilization and alignment between them.

2021 Rome

• [We underline the many synergies in financial flows for climate, biodiversity and ecosystems, and] we will strengthen those synergies to maximize co-benefits.
• To this end, we reaffirm our commitment to the full and effective implementation of the UNFCCC and of the Paris Agreement, taking action across mitigation, adaptation and finance during this critical decade, on the basis of the best available scientific knowledge, reflecting the principle of common but differentiated responsibilities and respective capabilities, in light of different national circumstances.
• In this endeavour, informed by the IPCC [Intergovernmental Panel on Climate Change] assessments, we will accelerate our actions across mitigation, adaptation and finance, acknowledging the key relevance of achieving global net zero greenhouse gas emissions or carbon neutrality by or around mid-century and the need to strengthen global efforts required to reach the goals of the Paris Agreement.
• We will deliver national recovery and resilience plans that allocate, according to national circumstances, an ambitious share of the financial resources to mitigating and adapting to climate change and avoid harm to the climate and environment.
• We also commit to scale up adaptation finance, with a view to achieving a balance with the provision of finance for mitigation to address the needs of developing countries including by facilitating mechanisms, conditions and procedures to access available funds, taking national strategies, priorities and needs into account.
• We recall and reaffirm the commitment made by developed countries, to the goal of mobilizing jointly USD 100 billion per year by 2020 and annually through 2025 to address the needs of developing countries, in the context of meaningful mitigation actions and transparency on implementation and stress the importance of meeting that goal fully as soon as possible.

2022 Bali

• We acknowledge the urgent need to strengthen policies and mobilize financing, from all sources in a predictable, adequate and timely manner to address climate change … including significantly increasing support for developing countries.
• We recall and further urge developed countries to fulfil their commitments to deliver on the goal of jointly mobilizing USD 100 billion per year urgently by 2020 and through to 2025 in the context of meaningful mitigation action and transparency on implementation.
• We also support continued deliberations on an ambitious new collective quantified goal of climate finance from a floor of USD 100 billion per year to support developing countries, that helps in fulfilling the objective of the UNFCCC and implementation of the Paris Agreement.
• We also recall the Glasgow Climate Pact urging developed countries to at least double their collective provision of climate finance for adaptation to developing countries, from 2019 levels, by 2025, in the context of achieving a balance between mitigation and adaptation in the provision of scaled up financial resource, recalling Article 9 of the Paris Agreement.
• We endorse the 2022 G20 Sustainable Finance Report which articulates practical and voluntary recommendations for jurisdictions and relevant stakeholders in developing transition finance frameworks, improving the credibility of financial institutions' net zero commitments and scaling up sustainable finance instruments, with a focus on improving accessibility and affordability.

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Appendix B: G20 Members' Allocations and Channelling of Special Drawing Rights ↩

Compiled by Brittaney Warren, June 8, 2023.

Sources: International Monetary Fund (2021), "2021 General SDR Allocation," last updated August 23, https://www.imf.org/en/Topics/special-drawing-right/2021-SDR-Allocation; Ana Monteiro and Eric Martin (2022), "Low-Income Countries Burn Through Extra IMF Reserves, Raise Calls for More," Financial Post, August 25 (updated August 26), https://financialpost.com/news/economy/fragile-nations-burn-through-their-imf-lifelines-to-plug-gaps.
As of August 26, 2022: 11 International Monetary Fund members have pledged to re-direct a portion of their allocated SDRs. None had been disbursed. Additional rechannelling pledges beyond core G20 members have come from Spain (2.6B) and the Netherlands (2.4B).

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