Management of the World Bank Group thanks the Independent Evaluation Group (IEG) for the opportunity to respond to the IEG report World Bank Group Support to Demand-Side Energy Efficiency The evaluation focuses on the Bank Group’s approaches to demand-side energy efficiency (DSEE) by conducting a portfolio analysis of energy efficiency projects supporting supply- and demand-side interventions. Management thanks IEG for their cooperation throughout the process.

World Bank Management Comments

Overall

Management welcomes the report’s recognition of the role DSEE plays in furthering the World Bank’s twin goals of eliminating extreme poverty and boosting shared prosperity. In particular, the World Bank’s DSEE engagements since the early 1990s have been guided by complementary goals of addressing client country development needs (through enhancing energy security and productivity, addressing infrastructure bottlenecks and air quality concerns, modernizing infrastructure and building stocks, and making energy services more affordable for the energy poor) and mitigating climate impact (through greenhouse gas emissions reduction). The report correctly notes that the Bank Group has committed to increasing DSEE as part of its Climate Change Action Plan (CCAP) and Sustainable Development Goals targets and believes that further intensification and scale-up are needed to address today’s many developments and global crises (for example, COVID-19 recovery or the ongoing global energy crisis). Management agrees with the overarching narrative for more DSEE scale-up and will endeavor to internalize lessons from the report and implement the proposed recommendations.

Management is pleased with the report’s conclusion that World Bank–supported DSEE projects were effective and that they mostly met their intended outcomes. The report notes that 95 percent of closed projects were rated as moderately satisfactory or above, with similar success across investment project financing and development policy operations, indicating broad achievement of outcomes. The World Bank has indeed sought to intensify its efforts in energy efficiency, lending more than $17.4 billion from fiscal year (FY)10 to FY22 in all six Regions for both supply-side and demand-side energy efficiency, with DSEE representing approximately $5.2 billion. These results are significant when paired with the report’s conclusion that the World Bank’s approach has generally been internally and externally coherent. At the same time, management notes that opportunities for improvement exist to better track the broader socioeconomic benefits of DSEE programs in project results frameworks and to improve internal knowledge sharing and collaboration to optimize impact. Management has already taken steps in these regards.

Management recognizes opportunities to intensify the scale-up of engagements but qualifies the report’s conclusion that most DSEE interventions during the evaluated period did not scale up. Over the analyzed period, World Bank’s average DSEE project size, level of ambition, leverage, and scale have indeed increased, with several high-profile projects and national-level programs in the portfolio (for example, the Energy Efficiency Scale-Up Program in India and the Energy Efficiency in Public Buildings project and the Seismic Resilience and Energy Efficiency in Public Buildings Project in Türkiye). Although increasing lending volumes is an important consideration for expansion, as implicit in the definitions used in the report, this is less consequential in smaller client countries where other drivers are more prominent. As the report notes, Bank Group support for improving the policy environment, often through advisory and analytical services (ASA) in parallel with DSEE investments, reflects a shift in the traditional sequence of financing happening after policy reforms, which has been the cornerstone of efforts to expand. At the same time, management does acknowledge that some DSEE projects had shorter-term goals, such as rapid energy savings to address short-term energy crises, and that some other projects were expected to be sustained and further scaled up beyond the World Bank project period but were not due to changing client priorities. In spite of the results, increasing DSEE has been a core consideration behind the World Bank’s energy strategy for all clients. Management remains committed to continuing its efforts to intensify DSEE engagement in middle-income countries (MICs) and lower-middle-income countries (LMICs) and will continue to seek greater scale, particularly through Programs-for-Results and by seizing the new opportunities presented by the Multiphase Programmatic Approach.

Management emphasizes that the Energy Sector Management Assistance Program (ESMAP) has played an important role in the World Bank’s DSEE engagement and will continue doing so. In terms of effectiveness, ESMAP tracks its impacts on World Bank lending but also on more upstream activities, such as government policy information and institutional capacity development, which are also highlighted in IEG’s report as being critical enablers. ESMAP’s global knowledge is anchored in its extensive country-level ASA, which allows such knowledge to be credible and operational. ESMAP’s business plan over the IEG evaluation period has explicitly included DSEE targets, underlining its mandate to support progress toward Sustainable Development Goal 7, something that the Consultative Group has endorsed. Management remains fully committed to ESMAP maintaining a strong role in DSEE and is now developing plans to intensify its DSEE programs in the current and subsequent business plans.

Management finds that the evidence presented in the report on the effectiveness of lending to state-owned enterprises (SOEs) and de-risking instruments is inconclusive. The World Bank has a long history of supporting energy SOEs in their core business of energy supply but has been more circumspect in lending to large industrial SOEs, which are at times less creditworthy or competitive. Although the report refers to de-risking as critical for scale up, it does not provide evidence on what types of de-risking would be transformational and sufficient to unlock commercial financing in the DSEE sector. World Bank operations have largely targeted underserviced markets (for example, small and medium enterprises, smaller municipalities, schools, hospitals, and households). In these contexts, the use of fully commercial instruments or de-risking tools for noncommercial or marginally commercial markets has not always worked effectively, and several de-risking and guarantee programs did not fully meet their intended goals.

Recommendations

Management agrees with recommendations 1 (“intensify DSEE support to MICs for decarbonization and wider socioeconomic benefits” [75]) and 2 (“develop energy efficiency sector-specific approaches in a select group of LMICs that seek productivity gains alongside or via DSEE, even if energy efficiency policy reforms are in early stages” [75]). These recommendations align with the World Bank’s evolving approaches over the past 3 to 5 years and are consistent with the increasing emphasis by our client countries on energy security, affordability, and climate. Management will continue to develop deeper engagements on DSEE, including policy reforms and frameworks, and seek appropriate instruments to support clients. This will be backed up by selective upstream ASA work, including DSEE inputs to Climate Change and Development Reports to assess DSEE potential and develop road maps on impactful policies. For LMICs, ASAs will help identify strategic sector entry points from which to anchor meaningful and results-oriented policies and programs. Although opportunities to scale up may be more limited in such economies, DSEE can still have important development and fiscal impacts, including helping poor people.

Management agrees with recommendation 3 (“expand DSEE approaches by incorporating reduction of indirect emissions (scope 3), including embodied and operational carbon, in DSEE project design” [76]) and underscores the challenges associated with it. Management acknowledges that reducing scope 3 emissions is important and is committed to aligning its operational engagements with the Paris Agreement and the long-term decarbonization goals of its client countries. At the same time, management notes that scope 3 emissions are complex and extend well beyond DSEE projects. Expanding DSEE development objectives, project designs, or metrics to include such aspects poses substantial transaction costs in the design and implementation of such operations and, therefore, will need to be carefully managed, piloted, and measured.

Management also agrees with recommendation 4 (“exploit untapped DSEE opportunities and help clients leapfrog . . . by exploring cross–Practice Group . . . and cross–industry group . . . interventions and approaches” [76]). Management is committed to working across relevant Global Practices, including Digital Solutions; Finance, Competitiveness, and Innovation; and others, to deepen the collaboration, innovation, and opportunities to build a stronger DSEE portfolio. Recent projects have sought to do this (for example, the collaboration between the Energy and Extractives and the Poverty Global Practices to deliver a Program-for-Results in Poland; the Urban, Disaster Risk Management, Resilience, and Land and Energy and Extractives Global Practices’ investment project financing in Romania and Türkiye; the Macroeconomics, Trade, and Investment and Energy and Extractives Global Practices’ development policy operation in Albania; and the Energy and Extractives Global Practice and Financial Solutions team guarantee in India), and offer a good basis to intensify these efforts based on lessons learned, in addition to the findings of this report.

International Finance Corporation Management Response

Management of the International Finance Corporation (IFC) welcomes IEG’s evaluation World Bank Group Support to Demand-Side Energy Efficiency and the recognition of IFC’s coherent approach to mainstreaming DSEE across diverse sectors.

This comprehensive evaluation comes at a highly relevant time: The Bank Group is at the midway point of implementing the 2021–25 CCAP and has also launched the Bank Group evolution road map process to increase its ambition with respect to global public goods. Because DSEE plays a paramount role in both decarbonization and combating climate change, this evaluation offers a welcome opportunity to reflect on the barriers and opportunities for DSEE and provides practical recommendations for scaling up DSEE interventions. We particularly agree on expanding focus on MICs and large industries, the need to address demand-side energy savings in a broader decarbonization context, and recommendations on enhancing attention to policy and enabling environment. IFC will ensure that these recommendations feed into its operations to enhance our work in DSEE, while noting the limitations of IFC’s influence on policy and enabling environment compared with the World Bank and public sector partners.

In addition, major barriers faced by the Bank Group to attract private sector investment in promoting DSEE include insufficient aggregation and scale and the consequentially persistent high transaction costs due to very small individual investments and project sizes. Increasing DSEE financing in the private sector requires financial de-risking mechanisms and advisory services to address technology barriers, counterparty risks, the misalignment of interests, and split incentives.

IFC management largely finds the recommendations relevant and helpful but would like to share some observations, as follows.

Recommendation 1 (for the Bank Group). “Intensify DSEE support to MICs for decarbonization and wider socioeconomic benefits” (75).

IFC management agrees with the recommendation that MICs present a critical opportunity for global decarbonization efforts, as was articulated in the Bank Group’s 2021–25 CCAP. Comparatively, the greater level of industrialization in MICs provides significant opportunities and needs for decarbonizing buildings and transport and hard-to-abate manufacturing sectors. IFC is adopting a multisectoral, supply chain–wide DSEE approach in these areas that promotes vertical and horizontal scaling. Before efforts can be intensified, barriers need to be addressed through specific actions, such as establishing an enabling environment that incentivizes decarbonization, including, for instance, implementing appropriate carbon regimes either through cap-and-trade or carbon tax programs, financial market policies to incentivize the domestic financial sector to channel funding to DSEE, and provision of local currency solutions.

IFC would like to note that additional instruments and cofinancing, including donor funds, grants and concessional finance, will be required to substantially increase programs and crowd in private sector financing to overcome those barriers and deliver meaningful impacts in emerging markets in general, including in MICs and in LMICs. In addition, a conducive enabling environment, policy reforms, and capacity building are needed in the areas of fossil fuel subsidies, integration of distributed renewable energy into the grid, efficiency standards for equipment and machinery, building codes and carbon pricing policies.

Recommendation 2 (World Bank and IFC). “Develop energy efficiency sector-specific approaches in a select group of LMICs that seek productivity gains alongside or via DSEE, even if energy efficiency policy reforms are in the early stages” (75).

IFC management broadly agrees with this recommendation, however, deployment of energy efficiency technologies at the project or client level are unlikely to yield full scale of socioeconomic benefits for client countries (for example, productivity gains) when energy efficiency policies at the national level are absent or nascent. Therefore, for LMIC countries, maximizing the extent of energy efficiency activities and their impact requires top-down support by the World Bank to national governments, complemented by bottom-up advisory, upstream support, and financing by IFC through client engagements in the financial intermediaries, manufacturing, agribusiness, and services, and infrastructure sectors.

Recommendation 3 (World Bank and IFC). “Expand DSEE approaches by incorporating reduction of indirect emissions (scope 3), including embodied and operational carbon, in DSEE project design” (76).

IFC management agrees with the recommendation in principle but would like to acknowledge some limitations. IFC acknowledges that reducing scope 3 emissions is paramount to reaching the goals of the Paris Agreement, and reduction activities should be considered, assessed, and incorporated in project design where relevant and feasible. Scope 3 assessment and mitigation is a complex effort. Scope 3 emissions are the scope 1 or 2 emissions of other activities and are under their control and responsibilities.

Management would like to highlight some of the actions IFC has taken to reduce indirect emissions and to promote collaboration with the World Bank and Multilateral Investment Guarantee Agency (MIGA) on this issue. As recognized in the report, IFC is working to reduce embodied emissions in construction materials through its Excellence in Design for Greater Efficiency (EDGE) green building certification program. The EDGE program has had a tremendous impact: it has certified over 50 million square meters of green buildings in more than 80 countries. IFC has worked closely with the ESMAP team on both an auction facility for EDGE green housing in Indonesia and knowledge products such as the Primer on Zero Carbon Buildings. Several World Bank low-income housing projects in the Arab Republic of Egypt, Indonesia, and Argentina are certified under EDGE, meeting emission reduction requirements for embodied carbon. MIGA and IFC also collaborated on a number of EDGE projects in Africa and the Caribbean. IFC’s Green Pathways for Real Estate Institutional Portfolios initiative is another example of moving from energy efficiency investments on a project-by-project basis to helping clients develop and execute decarbonization strategies of portfolios of assets over time. Furthermore, IFC has (i) supported businesses producing low-carbon building materials; (ii) invested in the infrastructure for a circular economy to offer market solutions to reduce the carbon footprint of embodied materials; and (iii) worked with agricultural companies to address sustainability and emissions in their supply chain.

Nonetheless, IFC management would like to point out that it is impractical to integrate scope 3 emissions in project design for every engagement. The main reasons include (i) the size of individual IFC clients and their limited influence and position in markets of operation across manufacturing, agribusiness, and services sectors; (ii) constraints in concessional agreements for infrastructure sectors; (iii) lack of capacity and ability among clients and limited incentives to fully assess and consequently address their scope 3 emissions (including upstream supply chains and especially end-user behavior); and (iv) clients’ lack of access to complete information and insufficient resources needed to both collect and update such information.

Despite the challenges, IFC is actively exploring solutions to help certain clients meaningfully reduce their scope 3 emissions. Our engagement with manufacturing, agribusiness, and services clients thus far has revealed additional barriers, such as lack of access to suitable finance instruments (for example, a risk-sharing facility), difficulties in aggregation, high transaction costs, lack of industry alignment on how to address overlapping or double counting of emissions from shared suppliers in supply chains, lack of influence over decision-making of suppliers to invest in scope 3 emissions reductions, and so on. IFC has achieved some initial successes in working with global multinational companies that have made ambitious corporate sustainability commitments in the textile, apparel, and footwear sectors (for example, Levi’s) by providing advisory services to support their efforts to reduce scope 3 emissions with complementary efforts to develop appropriate finance mechanisms. Building on work in the textile and apparel sector, IFC is now piloting this approach in the technology sector by delivering advisory services on behalf of Microsoft to help their suppliers identify, assess, and implement appropriate decarbonization solutions, including energy efficiency, cleaner production, and distributed renewable energy. However, as noted, this would not be feasible or practical in every transaction. It is still early to assess what IFC investments may result from the aforementioned advisory work with global brands and clients’ willingness to implement or co-invest in programs to reduce scope 3 emissions. IFC will learn from our engagement with selected first movers to refine our approach and offer.

Recommendation 4 (World Bank and IFC). “Exploit untapped DSEE opportunities and help clients leapfrog—that is, develop innovative approaches that adopt and adapt digital and financial solutions from developed countries by exploring cross–Practice Group (World Bank) and cross–industry group (IFC) interventions and approaches” (76).

IFC management agrees with the recommendation on the importance of incorporating digital and financial innovations and emphasizes its efforts in that area. On the former, IFC has been exploring opportunities to support technological innovations, such as smart sensors, energy management systems, automation, prepaid electricity meters, and so on. However, these technology companies are at a rather early stage of their growth, which also makes quantifying their actual impact a challenge. Furthermore, IFC’s ability to promote the adoption of these kinds of technological innovations is limited because, while IFC always advocates and increases clients’ awareness of innovative and best available technologies, it is our clients who ultimately make the relevant investment decisions.

IFC management would like to note that sustainable finance is a fast-growing innovative finance offering from IFC that covers a variety of instruments, such as green loans and bonds, sustainability-linked loans and bonds, and blue finance instruments. IFC has championed and successfully scaled up its sustainable finance instruments across industry groups. For example, the Financial Institutions Group worked with Treasury in growing green finance (especially green bonds), which has been widely adopted by the real sectors. Another case in point is the development of green loans at IFC, which was a cross-cutting and collaborative effort involving all industry groups. In addition, the Climate Business Department and real sector departments have successfully promoted sustainability-linked financing at IFC and supported knowledge sharing within IFC, which has been rapidly growing its business with this product. More importantly, IFC has played a key role supporting clients in creating sustainable financing frameworks, identifying eligible green and blue assets, linking concrete key performance indicators to their financings, and setting up a reporting and monitoring system that provides credibility to projects with IFC’s stamp of approval. IFC is also building its capacity to offer decarbonization and Paris Alignment advisory support to clients, and this requires additional funding and resources.

Often, IFC’s ability to offer tailor-made innovative financial solutions is limited by local financial market regulations or applicable standards and by the distributed nature and low financing volumes of DSEE projects. Suitable donor funds, including grants and concessional finance for de-risking and to provide advisory services for decarbonization solutions, will be required to meet the needs of the market and our clients.

Multilateral Investment Guarantee Agency Management Comments

MIGA welcomes the IEG evaluation World Bank Group Support to Demand-Side Energy Efficiency, which assesses how well the Bank Group supports client countries in achieving end-use energy savings by expanding DSEE vertically and horizontally. The report supplements the previous evaluation on supply-side energy efficiency (energy generation via grid infrastructure and power producers), which covered MIGA’s active hydro, solar, and other renewable energy production interventions (World Bank 2020). The report addresses the coherence question both internally and externally and provides one recommendation covering the Bank Group’s activities. MIGA appreciates that relevant MIGA projects were covered in this evaluation, although IEG was not able to assess MIGA’s effectiveness because the Agency’s DSEE portfolio is not operationally mature and had not been evaluated by IEG at the start of this evaluation. MIGA also thanks the IEG evaluation team for the engagements and rich discussions.

Multilateral Investment Guarantee Agency Support for Demand-Side Energy Efficiency

MIGA’s strategic emphasis on climate finance started systematically in FY17, and since then, MIGA has been increasing its issuance of guarantees in support of DSEE. MIGA appreciates the report’s recognition of the Agency’s increased support to DSEE projects. Many projects with explicit DSEE objectives (rather than projects that aimed at upgrading production facilities to be modern, efficient, and energy saving) became part of MIGA’s specific objectives in the wake of the first Bank Group CCAP. MIGA’s support for DSEE is an integral element of the Agency’s key strategic priority of demonstrating leadership in climate change through its guarantees, as articulated in MIGA’s current (FY21–23) Strategy and Business Outlook.

The report assesses MIGA’s portfolio (a total of $1.4 billion across three countries and eight projects, primarily hospitals), and concludes that MIGA’s DSEE clients have been well-positioned to embrace either the Leadership in Energy and Environmental Design or EDGE global standards for buildings. The report also concludes that MIGA, alongside its development partners, applies a coherent approach to green building standards in its projects. The report acknowledges joint IFC-MIGA efforts in promoting DSEE standards, for example, partnering in a hospitality-cluster project and further supporting the client’s adoption of the EDGE certification standard.

Recommendation

The report has one recommendation (recommendation 1) applicable to MIGA, as part of the Bank Group: “Intensify DSEE support to MICs for decarbonization and wider socioeconomic benefits” (75). Specifically, “this recommendation entails an increased role in MICs for IFC and MIGA—including through IFC upstream interventions and MIGA business development approaches—in countries that are ready for greening of public assets and assets of SOEs (for example, China, India), subject to client demand” (75).

MIGA broadly agrees with the recommendation. MIGA is continuously exploring opportunities to support climate finance mitigation solutions to serve markets in MICs. MIGA’s efforts in these areas will be enhanced through the continued work of the World Bank and IFC to support the appropriate policies and regulations to create the enabling environment for MIGA’s downstream credit enhancement and de-risking products. For greening of public assets and assets of SOEs in MICs, MIGA’s nonhonoring product is especially applicable. The new Country Climate and Development Reports should be helpful in providing a strong platform for recommendations focused on energy efficiency, tailored to specific country circumstances, and focused on both opportunities and challenges. With MIGA’s continuing efforts to partner with the World Bank and IFC through the Country Climate and Development Reports and through the Bank Group Country Engagement process, MIGA is hopeful that these Bank Group approaches will help make possible more downstream opportunities for MIGA’s business development activities in DSEE in support of both public and private sector projects, especially in MICs.

MIGA continues to explore opportunities for DSEE projects in MICs. For example, MIGA issued a guarantee covering commercial bank loans’ risk of nonpayment by an SOE, the OCP Group of Morocco, in May 2022.1 The OCP Group will use the funds to finance the construction of a new university campus for the Mohammed VI Polytechnic University. With MIGA’s support, the OCP Group has committed to pursuing green building certification through the US Green Building Council’s Leadership in Energy and Environmental Design certification program for many of its campus facilities, including securing third-party verification and will be monitored by a Leadership in Energy and Environmental Design accredited professional. MIGA is also active in supporting DSEE projects in low-income countries. For example, since 2021, MIGA has provided a series of guarantees to Kasada Hospitality Fund LP to cover a portfolio of hotels acquired by this fund in Sub-Saharan Africa. As a part of the project activities, the Kasada Fund aims to achieve IFC’s EDGE certification in at least 20 percent of its hotels by 2025, with the aim of improving energy and water efficiency in the acquired hotels.2 These recent projects illustrate MIGA’s increased attention to and efforts in aligning its operations with the low-carbon and climate-resilient development goals of the Paris Agreement.