The private sector has a critical role to play in addressing climate change. Climate change caused by greenhouse gas (GHG) emissions is an urgent challenge that is pushing the Sustainable Development Goals further out of reach. The private sector is a critical stakeholder in fighting climate change because it can invest in low-carbon technologies, develop new technologies, and build climate resilience into its investments and operations. Private sector financing will be critical for meeting the needs for global finance flows; however, private sector climate finance to date has been very low. One reason for this is that most countries lack a conducive enabling environment for the private sector to engage in climate action.

This evaluation assesses the World Bank Group’s efforts to improve the enabling environment for private sector climate action (EEPSCA), defining EEPSCA as the set of policies (laws and regulations), incentives, standards, information, and institutions that encourage or facilitate the private sector to invest or behave in ways that reduce GHG emissions or adapt to the current or anticipated impacts of climate change. An EEPSCA exists in the contexts of country macroeconomic conditions and broader private sector enabling environments, which may also constrain private investment in climate action. The private sector includes large, medium, and small firms; domestic and international financiers; and smallholder farmers and other producers.

Purpose and Scope of the Evaluation

The purpose of this evaluation is to derive lessons from Bank Group experience in improving the EEPSCA. The evaluation covers the Bank Group’s efforts to improve the climate change enabling environment in client countries. This includes both efforts to improve upstream policies and midstream efforts to help build a pipeline of bankable projects. The evaluation covers World Bank lending and nonlending activities, including International Finance Corporation (IFC) advisory services, for operations approved during fiscal years 2013–22. IFC investment services and advisory services that target specific firms (rather than governments or industries) are not covered because they generally do not support efforts to improve the enabling environment. Since the Multilateral Investment Guarantee Agency did not support activities on the creation of an enabling environment during the evaluation period, it is excluded from the evaluation. The evaluation excludes both higher-level macro issues and the general private sector enabling environment, as well as downstream effects of direct project financing or guarantees, including through indirect pathways, such as demonstration effects or market creation, and it does not cover climate finance or private capital mobilization issues.

Main Findings on Relevance

The Bank Group has approved a substantial portfolio of activities supporting EEPSCA, although this represents only a small portion of its climate change engagement. Between fiscal years 2013 and 2022, the World Bank approved 268 lending operations containing EEPSCA activities in addition to substantial nonlending work, whereas IFC approved 116 advisory services projects containing EEPSCA activities. World Bank support for EEPSCA increased around the time of the Bank Group’s first Climate Change Action Plan and remained steady since then. The World Bank’s EEPSCA activities have supported climate change mitigation more than climate change adaptation, although the share of support for adaptation has increased since 2016, and lower support for private sector adaptation is consistent with the global context. IFC support for EEPSCA has remained flat through the period and provided little EEPSCA support for climate change adaptation. Bank Group support for private sector climate change adaptation is lower than for mitigation in part because of the lack of standardized investible adaptation business models.

The most significant enabling environment constraints to private action can be described in terms of price and nonprice regulations, market information, and risk management and institutions. Climate change mitigation and adaptation involve externalities that distort market behavior when they are not internalized. These externalities can be addressed through policies that correct price signals, provide incentives or subsidies for particular sectors, or regulate high-emitting or nonresilient activities. A lack of awareness and information can be addressed by provision of information to the market, including through provision of data or research to the private sector, by identifying green activities to firms and investors, signaling pipelines of investible projects, and removing related entry barriers. Excessive or poorly allocated risks can be addressed by mitigating or transferring those risks and building the capacity of public sector institutions to do so.

The Bank Group has engaged on the most significant constraints on private sector climate action, but it has provided insufficient support for risk management and only modest support for carbon taxes or fossil fuel subsidy reform. The World Bank has provided significant support in lending operations for activities addressing price and nonprice regulations. Although forward-looking policy recommendations embedded in Country Climate and Development Reports (CCDRs) have ambitious proposals for carbon taxes, World Bank lending operations have included these infrequently to date because of slow global progress on carbon pricing. The World Bank and IFC have frequently supported activities that addressed insufficient information, and IFC has been a pioneer on supporting regulations to identify climate-related sectors to investors, but only a few World Bank lending operations have supported development and sharing of market information. The level of Bank Group support for risk management has been insufficient, with only rare efforts to support activities that improve risk management or increase related institutional capacity of the public sector, outside of strong IFC support for solar power. These actions are also not featured in forward-looking policy recommendations. Insufficient emphasis on risk management and related public sector institutional capacity has potential effects on the ability of countries to mobilize private sector climate action at scale.

The Bank Group EEPSCA support for climate change mitigation is somewhat aligned with sectors and countries that generate GHG emissions but has had a heavy emphasis on electricity relative to other sectors. The Bank Group has provided some EEPSCA support across all sectors that are significant sources of GHG emissions in client countries (electricity and heating, manufacturing and industry, agriculture, transport, fuel use, land use change, buildings, and waste management), but it has concentrated on renewable energy and energy efficiency, which have standardized models for private sector participation, significant internal Bank Group capacity, and rapid global growth. Bank Group support for transport has been low, as has its support for upstream policy reform in agriculture. The Bank Group’s EEPSCA activities are broadly aligned to the countries with the highest emissions and are focused on middle-income countries. The main disparity is that Bank Group support to China is low relative to its share of emissions. Countries with high needs for climate change adaptation receive only slightly more adaptation support than other countries.

Country-level climate analytics, especially CCDRs, include the role of the private sector in the investment and policy needs they identify but do not offer realistic proposals for financing needed investments. The Bank Group introduced CCDRs in 2022 as a new country diagnostic that integrated climate change and development considerations. The evaluation undertook a desk review of the first batch of 23 CCDRs. These CCDRs provide valuable diagnostics and describe the actions needed to address climate change in the countries they cover, including the role of the private sector. CCDRs lay out the long-term effect of climate change and the impact of different policy scenarios, highlighting in some cases the transition costs. They provide solid diagnostics based on state-of-the-art models to identify needed investments, finding that climate change investment needs are proportionally larger in low-income countries. However, CCDRs cover unevenly the enabling environment for private sector investment across countries and sectors, and the reports do not sufficiently articulate the difficulty of bringing private sector capital to challenging contexts. CCDRs also do not include proposals for financing that are consistent with the investments they propose, and they offer insufficient attention to the financing challenges presented to the private sector by public sector’s overindebtedness and the limited development of domestic capital and financial markets. Most CCDRs propose green finance but do not address the limitations of the country context for green finance instruments. Global green bond markets are small, and they may not grow at a pace sufficient to finance countries and global climate action. Financial Sector Assessment Programs are increasingly addressing climate change using dedicated notes but are overemphasizing the development of green financing, including in countries where traditional financial markets are not sufficiently developed.

In case studies, the Bank Group usually diagnoses the most important constraints to private climate action for sector interventions and usually engages on these constraints; when it does not, this is typically because of a lack of government buy-in or political economy constraints. In case studies across eight countries, the Bank Group identified virtually all of the most significant constraints to desired private sector climate action. When there are constraints that are not diagnosed, these are usually relatively minor; in only a few cases, important issues were not diagnosed in part because they did not naturally align with sectoral boundaries. Although some enabling environment constraints can be addressed by technical solutions, others involve trade-offs that may face political economy barriers, bringing a need for politically informed policy approaches. The Bank Group usually engaged on constraints that can be addressed by technical solutions. When the Bank Group does not engage, this is usually because the constraint is a higher-level issue or has significant political economy challenges or because client buy-in or ownership is lacking. The Bank Group has sometimes been able to engage on politically sensitive issues when the external context creates a sense of urgency, such as at time of crises. The Bank Group has been able to accommodate its interventions to policy boundaries imposed by governments, including limitations in the role that they see for the private sector in the economy. In most cases, engaging substantially on enabling environment barriers required use of analytics combined with lending and nonlending instruments. The Bank Group was often able to usefully combine upstream policy changes with midstream activities that build a pipeline of projects. Evidence suggests strong collaboration between the World Bank and IFC in renewable energy sectors, whereas there is little evidence of collaboration for public-private partnership activities. Bank Group–supported approaches have frequently applied incentive policies (“carrots”) for emission-reducing or adaptive behaviors but rarely applied penalties or costs (“sticks”) to emitting or maladaptive activities.

Main Findings on Effectiveness

The Bank Group usually achieves its indicator targets related to EEPSCA, but these indicators are usually inadequate to assess whether private sector climate action is being achieved. The Bank Group portfolio on EEPSCA is relatively young; hence, only a subset of it can be assessed in terms of effectiveness. The World Bank achieved its indicator targets for enabling environment activities 73 percent of the time and partially achieved another 18 percent. IFC achieved 70 percent of its targets and partially achieved another 1 percent of its targets. These success rates do not vary much across different types of enabling environment activity or other project characteristics. Across the Bank Group, the main reasons for indicator nonachievement were lack of political consensus or government ownership, project implementation delays, design weaknesses, and force majeure typically related to the COVID-19 pandemic or conflict. However, the indicators included in the projects are rarely adequate to assess whether private sector climate action is being achieved—two-thirds of projects capture only improvements in enabling environment or output delivery rather than capturing evidence of private sector climate action. The evaluation found examples of operations with good practice indicators for measuring private sector climate action.

World Bank lending activities have led to improvements in enabling environment for renewable energy and to private sector investment in renewable energy in countries with relatively higher financial development. The evaluation used the Bank Group portfolio on enabling environment for renewable energy and external measures of enabling environment and renewable energy investment to conduct econometric analysis to test the effectiveness of Bank Group activities. World Bank lending activities led to a significant improvement in renewable energy enabling environment after two to four years and to an increase in private sector investment for countries with relatively higher financial development. This suggests the need to support both enabling environment improvements and the financial development agenda. The analysis also found that IFC advisory services have been effective in attracting private sector investments in wind and solar renewable energy. Countries with multiple Bank Group renewable energy interventions have also received high private investment, and the effect is stronger in countries with more financial development.

The Bank Group has often been effective at achieving improvements for enabling environment, but these have only sometimes translated into private sector climate action. In most case studies, the Bank Group achieved at least some significant improvements in enabling environment, although success is mixed for activities that require overcoming political economy challenges. The Bank Group contributed to increased private sector investment in wind and solar power in the Arab Republic of Egypt, use of climate mitigation and resilient practices in private investment in major highways in Colombia, and private sector geothermal exploration in Türkiye. However, in other cases, private sector action has not occurred because of political economy challenges, because there were important constraints that were not addressed, or because of unsupportive macro contexts for private sector development. In many cases, despite the Bank Group engagement on elements of enabling environment for several years, it is still too soon to tell if these will lead to private sector action.

Key success factors include establishing price levels sufficient to incentivize private sector action, developing standardized and replicable business models, addressing affordability for poor people, and fostering institutional reform. Policies that ensure that price levels are sufficient to incentivize private action have been critical to success or failure, although the World Bank has rightly moved away from older models, such as feed-in tariffs, which potentially create significant fiscal liabilities for governments. Development policy financing has played a powerful role in supporting critical high-level policy changes; however, they sometimes faced reversals or barriers to implementation beyond their direct conditionalities. Bank Group models that address affordability constraints by low-income households and smallholders have been critical for achieving climate action by these groups. IFC has played a valuable role in bringing investor and private sector firm perspectives into policy dialogue and a leading role in initiating Bank Group action on topics such as sustainable banking. The success or failure of institutional reform that seeks to create structures conducive to private investment has been a key determinant of enabling environment.

However, the Bank Group has often supported business models that are not scalable. Bank Group–supported business for private investment in large public infrastructure projects has involved a buildup of currency risk for governments. This accumulation of currency risk can impose significant fiscal burden, which limits the scalability of these business models. Indexing consumer tariff rates to exchange rates to pass risk on to consumers is not a feasible solution, and long-term currency hedging is also unlikely to be an immediate solution. Scalable approaches to private financing of climate action will require deepening of domestic financial sectors. Public sector guarantees have facilitated engagements of private sector investments. However, risk allocation decision-making should optimize the use of guarantees because excessive use can inhibit scalability. Some business models are also limited by their reliance on donor finance.

Conclusions

The Bank Group has facilitated private investment into some climate mitigation sectors by developing standardized models, but progress into other climate mitigation sectors is pending, and creating standardized and replicable business models for climate adaptation is challenging. The Bank Group has developed substantial enabling environment engagements in the energy sector, especially for renewable energy. Standardization of contract terms, procurement processes, and financing models created replicable models that attracted a large base of investors. Yet, there has been much less engagement in other mitigation sectors. The Bank Group has also engaged much less on adaptation than mitigation. This is partly because business models for private investment in adaptation are less developed but also because many of the countries that are most vulnerable to climate change have contexts that make it difficult to attract private sector capital.

Proposals for scaling up private sector investment in climate action may have better uptake if accompanied by realistic proposals for financing. The Bank Group has articulated well the need for scaling up investment in climate action, including by the private sector, in its initial CCDRs, but their proposed investment plans may not be financed by domestic financial sectors, or by green finance, without further financial sector development.

Generating private sector climate action at the scale needed to achieve the world’s climate goals will require scalable solutions. Business models may struggle to scale if they rely on government guarantees or donor finance. Strong public institutions will be required to determine optimal risk allocation. However, the Bank Group has not placed sufficient emphasis on building the capacity of public sector institutions to deal with complex private sector contracts or risk allocation considerations in the climate-related business models it has supported.

Recommendations

Recommendation 1. The World Bank and IFC should develop and standardize private sector business models for new areas of climate action. The Bank Group should build on its successful private sector engagements models, such as solar power and energy efficiency, and apply similar approaches to selected other sectors, such as public transport, agribusiness, offshore wind power, battery technology, waste management, and sustainable forestry. Developing business models for climate change adaptation will be more challenging than for mitigation, but the Bank Group should identify these when opportunities arise. Standard business models would include, for example, private sector contract and dispute settlement terms that meet international investor expectations, transparent and well-paced procurement processes, clear technical requirements, financing models that allow securitization of payment streams, risk allocation to the parties best able to hold them, and price levels that compensate for these risks.

Recommendation 2. The World Bank and IFC should identify and articulate realistic long-term financing strategies for climate action in relevant country-level climate diagnostics, including the CCDR. These country-specific strategies could include indirect measures that may take time to bear fruit, including policy actions to increase the depth of domestic financial and capital markets and develop the potential for developing currency hedging markets, to enable higher levels of private sector financing in the medium-long term. Proposals for investments might lay out different scenarios of what could be possible given different assumptions about private capital mobilization, financial sector growth, and international climate finance. Assessments of sources of finance might vary across countries based on the level and type of investment needed, the ability of the economy to take on currency risks, the depth and structure of the financial sector and its governance structures, the role of public banks in long-term financing, and the preferences of the government for private financing, among others.

Recommendation 3. The World Bank and IFC should explicitly consider the scalability of private sector climate business models that they support. Pathways to scalability could be explicitly included in Bank Group analytical work, policy advice, and related advisory and lending activities that support private sector climate action. These should not rule out the use of subsidies or government guarantees for emerging sectors that are important to achieving climate goals, but interventions should involve a long-term strategy for reducing and optimizing reliance on these instruments, including support for models that diversify risks across stakeholders. Bank Group support for private sector climate business models should also include efforts to build the capacity of public sector institutions to manage and allocate risks and improve access to domestic sources of funding. To implement the recommendation, at the intervention level, the Bank Group could use concept, quality enhancement, appraisal, and decision reviews to screen activities with a scalability lens. The Bank Group could also support interventions that encourage increased corporate and household savings, such as tax incentives and pension reforms. It could also support regulatory changes to facilitate investments in climate action of domestic institutional investors, such as pension funds and insurance companies.