The Bank Group is successfully supporting clients to improve the EEPSCA, although the level of activity has not increased in recent years. The Bank Group has approved a significant portfolio of lending, nonlending, and AS activities. It has generally engaged on the most significant constraints on private sector climate action. It is strategically targeting mitigation-related enabling environment to the large middle-income countries that generate the most emissions and have the most potential for mobilizing private capital. It has provided comprehensive support in the energy sector, which is the largest source of emissions in client countries, and where emissions are continuing to grow rapidly. However, World Bank support and IFC support have remained relatively flat since 2016.

The World Bank and IFC have drawn on their individual institutional strengths. The World Bank has often provided comprehensive support, with analytics and diagnostics identifying key constraints and priority actions, policy dialogue to bring options to key decision makers, technical assistance to bring international best practice and experience, use of policy lending to strengthen reform champions to proceed with upstream policy reform, and investments that create financing platforms or provide key data. IFC has played a key role in bringing investor and firm perspectives into policy dialogue and transaction advisory and building the capacity of the private sector to engage on climate and has been a pioneer in some sectors, such as sustainable banking, solar and wind power, and green buildings. IFC tended not to engage on enabling environment on sectors outside of the core industries where it had established capacity and business models, preferring to come with downstream investments when the enabling environment was sufficiently advanced to allow initial investments.

The Bank Group’s diagnostics play a key role in identifying priorities and influencing clients to act. The Bank Group uses its sectoral diagnostic tools and brings its deep technical knowledge to identify critical constraints and engage policy makers, and often mobilizes its full set of instruments to pursue goals related to private sector climate action. Its new CCDRs incorporate the private sector in the investment and policy needs they identify.

Although there are gaps in data, Bank Group enabling environment activities have usually been effective in achieving their immediate goals and have sometimes contributed to significant private sector investment. Across sectors and types of activities, the enabling environment portfolio is generally successful at achieving its immediate goals, but the project evaluation system is not set up to generate evidence on indirect and subsequent effects that occur after project closure. Consequently, it is not surprising that most projects do not generate sufficient evidence to assess whether private sector climate action is occurring. However, where external data exist for renewable energy, evidence shows that Bank Group support is contributing to an improved enabling environment and increased private sector investment. Success factors have included establishing prices sufficient to incentivize private action, providing midstream support to identify feasible investments and build government capacity to manage those investments, addressing affordability constraints for poor households, and achieving institutional reform to set a conducive environment. Achieving private sector climate action works best under clear price signals, adequate information, strong public institutions, and risk diversification opportunities. All of this is in the context of macroeconomic stability and conducive private sector context, including rule of law.

Some important areas of support may warrant additional attention. The World Bank has provided relatively little support for risk management and related public sector institutional development, which will be crucial for countries’ ability to mobilize private sector climate action at scale. The World Bank has also infrequently engaged on policies that discourage GHG-emitting activities, such as regulation of air pollution. The Bank Group has rarely engaged on EEPSCA in the transport sector. Whereas the World Bank has frequently engaged on setting cost-reflective tariffs for power utilities, it has infrequently supported carbon price regulation policies or repurposing agricultural subsidies in its lending operations, in part because of limited client uptake.

The Bank Group’s ability to engage on enabling environment has been constrained by political economy barriers. Subsidies for fossil fuels and agriculture distort markets and promote unsustainable development pathways, but removing subsidies can have impacts on the poor or incumbent industries. Carbon taxes are often recommended but have been implemented by few countries, especially given concerns about penalizing industries in a time of economic stress. Repurposing agricultural subsidies to achieve climate goals might face fewer political economy challenges than subsidy removal, but this agenda is recent. Influential stakeholders may resist reforms they perceive as threatening their political or economic interests. On issues with political economy barriers, it has been difficult for the Bank Group to build client government support for reforms. Politically responsive policy design, enhancing information, and multistakeholder engagement may be able to mitigate political economy barriers in some circumstances. Bank Group efforts that try to address these kinds of enabling environment activities have a significant failure rate, but the institution needs to continue to engage on these reforms, given the potential upside for achieving climate action. When the Bank Group has managed to achieve success on these reforms, it has often been because external circumstances, including fiscal crisis, have created the impetus for change. In some circumstances, the Bank Group may not be able to address critical enabling environment constraints in the short term. In these contexts, the Bank Group should remain engaged, continue outreach, and remain ready to reach if a conducive context or a reform champion arise.

In low-income countries, enabling environment support for private sector climate action is likely to remain modest in scale. Engaging on private sector enabling environment for climate in low-income countries is difficult because they face a higher cost of funding under challenging market conditions and because their main needs are for adaptation, where business models for bringing investments are less developed and state capacity for enforcing resilient standards or codes is limited.

The Bank Group has facilitated private investment into climate mitigation sectors by developing standardized business models, but progress has been limited outside of renewable energy. The Bank Group has developed substantial enabling environment engagements in the energy sector, especially for wind, solar, hydropower, and energy efficiency, including green buildings. Standardization of contract terms, procurement processes, and financing models created replicable models that attracted investors. However, there has been much less engagement in other sectors. The Bank Group could draw on its experience to build standardized approaches in other mitigation sectors including transport, which is a major source of emissions but one where the Bank Group has engaged relatively little on private sector enabling environment. Although the goods and services offered by companies differ across sectors, their project revenue structures often have significant similarities, especially for sectors that provide public infrastructure. When companies receive predictable revenues, they can build tradable investment vehicles (such as asset-backed securities) out of the expected project cashflows and receive debt financing from a wide group of investors. Business models built on securitization of future streams of payments could use similar financing structures to those used for renewable energy or toll roads. Existing models of private sector participation could also benefit from applying low-emission technologies and resilience standards.

Creating standardized and replicable business models for attracting capital for climate adaptation is a new challenge, where the Bank Group could play an important role. The Bank Group has engaged much less on private sector enabling environments for adaptation than for mitigation. Although it has provided important support for adaptation-related information and resilience standards, the World Bank has engaged on climate adaptation in the most vulnerable countries only slightly more than in other countries, and IFC’s enabling environment support for climate adaptation is modest. However, the successful business models supported by the Bank Group for attracting private capital into mitigation-related public infrastructure apply to assets that generate some type of revenue, such as power generations and toll roads. These models have not been developed for adaptation sectors. Many important forms of adaptation enabling environment change the composition of existing investment flows to incorporate resilience, rather than channeling new investment; it may be possible to build standardized financing approaches for bringing in resilient practices and standards. A further challenge is that many of the countries that are most vulnerable to climate change are small states or countries affected by fragility, conflict, and violence, where private sector investment can be difficult to attract. Nevertheless, the Bank Group should identify opportunities for climate change adaptation and seek to develop business models where feasible.

Proposals for scaling up private sector investment in climate action may have better uptake if they are 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. Although the evaluation did not assess the influence or impact of these reports, their investment proposals may not be influential unless they are accompanied by identification of realistic proposals for sources of financing and actions that will help these take place. In most countries, the scale of investment proposed will not be generated from domestic financial sectors. Green finance is not at a scale where it could meet these needs, and the future rate of increase in demand for green finance is uncertain. The ability of country enabling environment improvements to generate investment is closely related to the degree of financial depth. Even as it pursues enabling environment improvements, the World Bank should also provide support for financial sector development. Although other Bank Group diagnostic tools, including FSAPs, Infrastructure Sector Assessment Programs, and Country Private Sector Diagnostics, address issues of financial and capital market development, none of them focus their recommendations on actions that could generate private sector financing at the levels envisioned in the CCDRs.

Generating private sector climate action at the scale needed to achieve the world’s climate goals will require scalable solutions. The emergence and deepening of new sectors that apply low-carbon or resilient approaches are critical for achieving climate change goals. Government guarantees can help initiate investments in new sectors in the context of insufficient information and lack of track record of the government contracting with the private sector. However, business models may struggle to scale if they rely on government guarantees, which can have negative fiscal impacts on client governments. Similarly, models that rely on donor finance will reduce scalability, unless development finance is increased substantially. Determining the optimal risk allocation for private sector investment in public infrastructure requires strong public institutions with the capacity to assess trade-offs and determine who is best placed to hold different risks. However, the Bank Group has sometimes supported business models that rely excessively on foreign exchange and other public sector guarantees and has not placed much 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. The opportunities for risk diversification increase with the ability to access domestic financial and capital markets.

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, donor finance, 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.