29 September 2023

Research Reveals World Bank’s Billions in 2022 Funding for Fossil Fuels

3 min read

In 2022, the World Bank found itself under scrutiny as it was revealed that it had channeled substantial financial resources into fossil fuels, despite its previous commitments to prioritize the transition to a low-carbon economy. Urgewald, an organization dedicated to monitoring global fossil fuel finance, conducted research that shed light on this disconcerting trend, indicating that approximately $3.7 billion had been funneled into fossil fuel projects through a financial mechanism known as trade finance.

Trade finance plays a crucial role in facilitating international transactions, making it a favored avenue for the movement of funds across borders. However, unlike traditional project finance, which is often earmarked for specific well-defined purposes, trade finance operates in a more obscure manner. It encompasses a myriad of intricate financial instruments employed by banks and financial institutions to provide working capital to governments and businesses. These instruments can take various forms, such as credit or guarantees.

One of the World Bank’s key motivations for engaging in trade finance is to “de-risk” financial transactions in developing countries, where obtaining private financing often comes with prohibitively high interest rates. Trade finance essentially functions as a safety net, ensuring that payments are made for goods and services involved in international trade.

The crux of the issue lies in the lack of transparency associated with trade finance. The International Finance Corporation (IFC), the private finance arm of the World Bank, does not disclose the details of these transactions. Consequently, it is virtually impossible to ascertain whether funds provided through trade finance ultimately support fossil fuel developments.

Heike Mainhardt, the researcher behind the Urgewald study, has voiced her concerns and called for reforms within the World Bank and the IFC. She argues that these institutions must enhance transparency regarding trade finance transactions. Without such transparency, it becomes challenging to determine whether the World Bank aligns with the goals of the Paris Agreement, rendering its claims questionable.

Mainhardt emphasizes that fossil fuel companies are likely to exploit this opacity to secure public funding covertly. By doing so, they can avoid attracting attention while receiving financial support for their projects.

In her research, Mainhardt examined past trade finance transactions conducted by the IFC and made estimates based on data available up to 2012. These estimates suggest that the proportion of funds directed towards fossil fuels has likely remained relatively consistent over time. This is especially concerning given the World Bank’s ongoing dealings with oil-producing nations, particularly in the Middle East and Africa.

Calls for reform of the World Bank have been growing louder, with numerous countries, both developed and developing, urging the institution to realign its efforts with the transition to a low-carbon global economy. The appointment of a new World Bank president, Ajay Banga, in June, following the resignation of the previous incumbent, David Malpass, has brought renewed hope for change.

Mainhardt’s proposed reforms include greater transparency in trade finance transactions and the inclusion of oil, gas, and coal on the exclusion list, effectively preventing the IFC from financing projects in these sectors. Such reforms, she argues, are imperative to ensure that the World Bank and its private finance arm truly commit to the objectives of mitigating climate change and advancing towards a sustainable future.

In response to these allegations, the IFC has defended its practices, stating that Urgewald’s report contains inaccuracies and exaggerations. According to the IFC, it excludes coal from trade financing and only permits limited involvement in oil and gas projects for distribution purposes, contingent on development impact and energy security needs in specific countries.

As the debate over the World Bank’s commitment to a low-carbon economy rages on, the need for transparency in financial transactions and a clear stance on fossil fuel funding remains paramount. The world is watching, demanding accountability and action in the face of the global climate crisis.