Climate Change and increasing interest rates: the role of the world bank.
In recent times the topic of the potential impact of rising interest rates on the renewable energy sector and the global transition to cleaner energy has become increasingly important. As governments and businesses around the world continue to shift towards renewable energy, the sector has become increasingly reliant on low interest rates to finance projects and infrastructure. However, rising interest rates pose a significant threat to the renewable energy sector. As interest rates increase, the cost of borrowing for renewable energy companies will rise, making it more difficult and expensive to finance new projects. This could slow down the growth of the renewable energy sector and make it more difficult to achieve global climate goals.
One way to mitigate the impact of rising interest rates on the renewable energy sector is through policy interventions, such as government subsidies and tax incentives. These interventions can help to offset the higher cost of borrowing and make it easier for renewable energy companies to finance new projects.
In addition to this, a recent article from the Financial Times discusses how rising interest rates might hurt poor countries’ access to climate transition funds. The UN and others have urged big asset managers to fund climate transition projects in poor countries. However, groups such as CDPQ and Nordea have explained that asset managers will not do this without de-risking mechanisms (both for credit and currency risk), investor access to credit data and shovel-ready projects. This has generally been missing until now.
Efforts are accelerating to fix this, but the real window of opportunity might have been missed. During the era of quantitative easing, western asset managers were eager to find alternative investment assets to boost returns, but now they can get good returns on other assets. It is tragic that reforms did not materialize during QE.
The World Bank and the UN could counter this issue. In a recent conversation with Axel van Trotsenburg, the newly promoted senior managing director of the World Bank, he argued that critics are partly wrong in blaming the bank for its reluctance to take a riskier approach to climate finance. Much of the criticism of the bank has erupted because David Malpass was appointed by Republican former US president Donald Trump. Van Trotsenburg insisted that although “we hear people saying that the bank is not doing anything [on climate], it is just not true.” To back this up, he has been circulating a presentation which shows that around 60% of the bank’s loans are currently linked to “global public goods”, including climate action, and the bank’s overall lending jumped during Malpass’s tenure, from about $40bn a year to more than $70bn.
However, van Trotsenburg views the criticism as a smokescreen for the fact that rich countries’ aid to poor countries has been flat and even dwindling in recent years. This resource constraint means that if the developed world puts pressure on the bank to expand climate financing without raising donations, the bank may be forced to cut concessional loans to poor countries. Van Trotsenburg dislikes this idea since he fears it would move money from fragile nations to middle-income countries.
This implies that there needs to be an honest discussion about whether the bank’s shareholders will back a general capital increase and whether the bank can raise leverage. After all, nothing can occur without shareholder approval. “The discussion we need to have is, does the membership want to be ambitious?” he said, “I think we should be hugely ambitious but it is the board that decides on the level of ambitions and by extension how much we can lend each year.” This debate started at the spring meetings last week in Washington and will accelerate in the autumn meetings, scheduled to take place in Marrakesh.
In summary, the potential impact of rising interest rates on the renewable energy sector and climate transition funds in poor countries highlights the need for policy interventions and honest discussions about the World Bank’s role in climate finance. While efforts are accelerating to address these issues, the window of opportunity may have been missed, and the World Bank and its shareholders may need to be hugely ambitious in order to achieve their climate goals.