How can multilateral development banks help make a “just” transition?

Finally, on 14 November – following weeks of discussions and an entire day of negotiations – the European Investment Bank decided to stop financing fossil fuels from the end of 2021. Just a day earlier, the African Development Bank had announced that it would not fund a major coal-fired power plant in Kenya, and that it would no longer fund new coal plants.

The majority of multilateral development banks (MDBs), however, continue to finance fossil fuels, and to delay the ramping up of needed funding for green energy projects. From 2013 to 2017, all major MDBs – with the exception of the Inter-American Development Bank – still reported significant amounts of funding for non-renewable energy projects, as shown by data from the Organisation for Economic Co-operation and Development reported by donors and accessed through our Aid Atlas online platform. The African Development Bank provides a stark case in point. Over the past three years, it spent almost twice as much on energy generation from non-renewable sources than from renewables.

Commitment to moving away from fossil fuels

Recently MDBs have signalled that they intend to do things differently.

At the UN Climate Action Summit in September, nine development finance institutions jointly recognized that their work is “key for countries to achieve ambitious transformation” in line with the Paris Agreement. This group, which committed “to helping our clients deliver on the goals of the Paris Agreement,” and to taking “actions to help clients move away from the use of fossil fuels”, includes the Asian Development Bank, Asian Infrastructure Development Bank, African Development Bank, European Investment Bank, European Bank for Reconstruction and Development, Inter-American Development Bank, Islamic Development Bank, the New Development Bank, and the World Bank Group.

This commitment sets the stage for MDBs to act on their responsibility to finance a transition to net-zero emissions. It is hugely important that they take on this task. Equally important is the matter of how they take it on. They should also ensure that their work supports transition processes and outcomes that are “just”.

“Justness” looks beyond workers

In the 1990s, trade unionists in North America were the first to coin the term and concept of a “just” transition. Initially, the concept applied to workers. As such, the International Labour Organization (ILO) published guidelines on the topic – and later, the Paris Agreement, too, formally recognized “the imperatives of a just transition of the workforce” in its preamble.

However, fossil fuel extraction and carbon-intensive industries shape the lives of many other people beyond the workers in such industries. The upheaval from a transition of such enormity will affect partners and children of employees, people whose lands contain fossil fuel supplies and reserves, and entire communities, regions and nations in which the economy, politics, power structure, and social fabric have been inextricably tied to extractive industries for generations.

Researchers, activists and policymakers have therefore come to think of “just” transitions in a much broader sense. “Just” now means that a transition should look at all those who are likely to lose out in the process – and at those who are particularly vulnerable from having suffered past injustices.

Supporting “just” transitions

MDBs are aware that they have a role to play in such efforts. At September’s Climate Action Summit, they indicated that they would “develop…financing and policy strategies supporting a just transition that promotes economic diversification and inclusion” in time for the United Nations Climate Change Conference (COP26) in late 2020. However, even now, with COP25 unfolding in Madrid, some ways in which MDBs can support a just transition are already clear. Our recent work, undertaken for the European Bank for Reconstruction and Development, examined the issues that surface in just transitions by combining insights from recent academic literatures and analysis of case studies involving historical periods of industrial transitions. Our research leads us to suggest the following:

• First, banks should avoid making things worse. They should not deepen carbon entanglements, or create another generation of likely losers who will suffer in a future transition. This means deliberately choosing not to invest in activities that connect the prosperity of workers, of local, regional and national economies, or of political regimes to carbon-intensive enterprises and economies. Across the full spectrum of MDB engagement – including support for new industries and small- and medium-sized enterprises, investments in new infrastructure, and policy dialogues with governments – the banks should ensure they do not inadvertently create more dependence on existing carbon-intensive economies.
• Second, banks should encourage decarbonization. Banks can and should target low-carbon investments, such as renewable energy, energy efficiency, and sustainable transport. They can and should also push carbon-intensive industries to change production modes. The financial levers they wield can and should be brought to bear in helping economies to diversify.
• Third, banks should not delay. The “just” concept doesn’t mean – or warrant – postponing the inevitable decarbonization that must take place. Those who are vulnerable as this epic transition takes place cannot come out winners if the planet loses. The basic concept of a “just” transition instead means bringing decarbonization forward as soon as possible to address global injustices and inequalities associated with climate change, while, at the same time, addressing local impacts and inequalities in regions that must phase out carbon-intensive industry.

What’s needed: different ways of thinking and working

Of course, MDBs alone cannot ensure that the transition will be “just”. They are only part of a global change ecosystem. The enormity of the task at hand requires working together at all levels – with international bodies, national governments, local and regional authorities and organizations, civil society, the private sector and individual people from all walks of life playing parts. Nevertheless, well-executed programmes and investments from development banks are unique financial levers for change, and the banks have an important contribution to make in steering transitions so that both processes and outcomes keep “justness” in mind and in reach.

To make their contributions, MDBs have to work and think differently across all operations. They have to re-evaluate their guiding principles. When assessing project proposals, they need to ask new questions and to use new indicators.

How will a proposed project work to advance the green economy transition, and, at the same time, how will it work to advance equality? Banks will also have to take a hard look at their own staff incentive mechanisms. Can the key staff performance indicators expand to encompass more than business volume? Can – and should – performance parameters incorporate green and “just” transition goals?

At COP24, the climate conference held last year in Katowice, in the heart of Poland’s coal-mining country, MDBs announced a joint framework for aligning their activities with the Paris Agreement. At COP25, they are set to report on their progress – both as a group and individually. But COP25 should also kick off a process of transformation, not just away from a fossil fuel-based economy, but away from a fossil fuel-enabling lending environment. The MDBs’ mission should be to make sure that their work helps to spur transitions, and that these transitions endeavour to be just ones.