Management of the World Bank Group thanks the Independent Evaluation Group for the opportunity to provide comments on the report titled Creating an Enabling Environment for Private Sector Climate Action: An Evaluation of World Bank Group Support, Fiscal Years 2013-22. The evaluation is a timely input for the Bank Group evolution process by bringing together two key priorities: tackling climate change and attracting private financing. The Bank Group’s commitment to step up its work on climate spans all spheres of its engagement—analytics, policy barriers, financing, leveraging of private capital, measurement of climate results, and partnerships. This report touches on many of these areas through the lens of the Enabling Environment for Private Sector Climate Action (EEPSCA).

World Bank Management Response

World Bank management welcomes the balanced assessment of the Bank Group support within an overall challenging context for EEPSCA and notes opportunities for improvement. The report indicates that addressing climate externalities requires policies that correct price signals, facilitate provision of incentives or subsidies, and ensure regulation of high emitting or nonresilient activities. This is a complex agenda, and the report recognizes the low levels of private climate financing in the face of enormous needs. Several factors influencing the pace of change are well described in the report: different carbon pricing mechanisms, variations in the policy environment of countries, political economy, skills and institutional constraints, shallow financial sector development in some countries, and limited risk appetite of investors. Within this context, the report identifies areas where the Bank Group’s EEPSCA support has been relevant and impactful by addressing constraints to private sector climate action, aligning support for high greenhouse gas–emitting countries, and achieving tangible results. Given the pressing context, the report notes opportunities for improvement, which management recognizes and will act on.

Management acknowledges that Bank Group efforts during the evaluation period focused mainly on climate mitigation, with increased attention to adaptation only in more recent years. During the evaluation period, 50 percent of the World Bank support was for mitigation, 22 percent for adaptation, and 28 percent for both. The report acknowledges the challenges in developing standardized and replicable business models for adaptation that are attractive to the private sector. Nevertheless, adaptation has become more prominent in World Bank support through the 2021 Climate Change Action Plan. Management will continue to address both aspects of climate change and to strengthen the focus on climate outcomes.

Management concurs with the need for stronger climate outcome indicators to measure project success, and work is underway to improve climate metrics. The report notes that “only a subset of indicators explicitly or implicitly assessed whether enabling environment changes were contributing to the desired private sector climate action, including firms’ investment in a new technology, adoption of a behavior change, or use of a new financing or risk-sharing mechanism” (55). Management is currently undertaking work on Paris Alignment and climate outcome indicators, which taken together with the theory of change in project documents, will help assess project success and contributions toward desired climate and EEPSCA outcomes.

Recommendations

Management concurs with the first recommendation to develop standardized private sector business models to be rolled out over time and aligned with sector readiness. The report proposes that business models be developed for several sectors—public transport, agribusiness, offshore wind power, battery technology, waste management, sustainable forestry, as well as in areas related to climate adaptation. Given that the readiness of each sector for new business models differs, management will begin this exercise for a few sectors that have the potential for climate mitigation and expand to other sectors, including for adaptation, based on lessons from experience and availability of opportunities.

Management agrees with the second recommendation that Bank Group diagnostics should include an assessment of the cost and sources of funding of climate investments. Although the scope of Country Climate and Development Reports (CCDRs) has expanded since the initial reports (covered in this evaluation), management still uses them in conjunction with other diagnostics such as Country Private Sector Diagnostics, Infrastructure Sector Assessment Programs, and Financial Sector Assessment Programs. Structural constraints such as currency risks, financial sector structure and governance, and the role of public sector banks are incorporated in complementary advisory services and analytics and country dialogue. Management will endeavor to bring together and cross-reference the key issues from these analytics to get a more comprehensive picture of climate financing needs as well as opportunities for support in each country.

Management concurs with the third recommendation to assess the scalability of Bank Group–supported private sector climate business models. The review process of operations, from concept note review to decision meetings, provides opportunities for considering the scalability of operations, and this assessment is often reflected in project documents. The report identifies several challenges to scalability, including the need for deepening capital markets, likely fiscal burden on governments, accumulation of currency risks, some of which are unlikely to be addressed with a single operation or in a short period of time. Management will explore opportunities for replicable and scalable interventions and programmatic approaches to private sector engagement for climate action, including potentially through the Global Priority Program.

International Finance Corporation Management Response

The International Finance Corporation (IFC) welcomes the Independent Evaluation Group’s efforts in producing an informative evaluation report titled Creating an Enabling Environment for Private Sector Climate Action: An Evaluation of World Bank Group Support, Fiscal Years 2013-22.

This comprehensive evaluation comes at a highly relevant time, as the Bank Group is in the midst of implementing its 2021–25 Climate Change Action Plan and its Paris Alignment commitment started as of July 1, 2023. Climate is a global public good, meaning that policy and regulatory action will be vital for mobilizing the private sector to contribute at the scale needed to combat and adapt to climate change. This evaluation offers a welcome opportunity to reflect on the barriers and opportunities for engaging private sector participation at sufficient scale and provides practical recommendations for doing so.

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

Recommendations

On recommendation 1, IFC management agrees with the need to standardize, replicate, and scale models of intervention and provide risk mitigants to catalyze growth in these new areas. We also support the evaluation’s finding that climate adaptation is a more challenging area for private sector engagement and investment as it is typically a non-revenue generating public good. The evaluation recognizes IFC’s successful track record in replicable models such as Scaling Solar, which is a good example of coordinated Bank Group interventions around standardized public-private partnership advisory interventions with staple Multilateral Investment Guarantee Agency guarantees, IDA guarantees, and IFC financing offers. Other proven models have been in green buildings (the EDGE certification approach) and in green finance. Inspired by these successes, IFC has focused much of its Upstream expansion on increasing such replicable approaches. Current models gaining traction include onshore wind power (Scaling Wind), engagements for water utilities (Utilities for Climate), waste (Circularity Plus), cities (Apex), financial institutions (Blue Finance), mini grids (Scaling MiniGrids), real estate, and building resilience. Nonetheless, management notes that standardization in rapidly evolving markets, which is the case for many climate solutions, present challenges, and pilots, learning and a level of stability are needed before transitioning to scaled and replicable solutions.

Management agrees with recommendation 2. IFC’s joint report with the International Energy Agency identifies the development of domestic capital markets as one of the priority actions for scaling up private finance for the clean energy transition.1 The same report also recognizes that building local capital markets takes time and raises the importance of developing currency hedging instruments, including those supported by blended finance. Blended finance is a vital potential solution in the short to medium term, especially where emerging market developing economies rely on foreign private capital flows for financing the clean energy transition. The Bank Group’s Joint Capital Markets program is a coordinated effort for the long-term development of local capital markets.

Management would like to highlight that the extent to which such strategies may be appropriate for each country circumstance and the extent to which these issues may be covered in CCDRs (versus other analytical work, which may focus on aspects of macroeconomic management, such as Country Economic Memorandums, or private capital mobilization such as Country Private Sector Diagnostics) is likely to vary in practice. Similarly, the ability to develop scenarios mentioned in the recommendation will be conditional on the availability of data and the development of robust methodologies that can be deployed across CCDRs, which would require further consideration and analysis. We welcome the further identification, support, and implementation of policy actions—via climate diagnostics and the CCDRs in particular—that help address obstacles to mobilizing private capital to climate action.

Management broadly agrees with recommendation 3, and notes that over the past two years, IFC has applied the lessons learned from scalable models and broadened its climate focus on energy and the built environment to other sectors, including agriculture, manufacturing, transport, mining, cities, water, and waste. This is reflected in the diversification of IFC climate finance across sectors. Depending on the stage of evolution of the market in question, IFC adjusts its role to either pilot, demonstrate, scale, or wholesale private investment in the market. While consideration of long-term scale is always appropriate, it is not the focus at the piloting and demonstration phases, where proof of concept is a necessary first step.

In all cases, catalyzing private investment at the unprecedented scale needed to respond to climate change, with the need to fundamentally decarbonize the global economy in a few short years, will require strong and consistent government and policy action to remove subsidies on fossil fuels and create and enforce an effective and increasing price on carbon.