Better governance and clearer roles and responsibilities can strengthen IMF–World Bank cooperation on climate

In recent decades, the Bretton Woods institutions—the IMF and the World Bank—have successfully contributed to global stability, unprecedented economic growth, increasing prosperity, and broad-based poverty reduction. Yet climate change is a new global challenge that calls for a timely, global response. New multilateral institutions to focus on climate action would take too long to set up. Equipping existing institutions to coordinate the global fight against global warming is a better choice.

This additional climate mandate for the Bretton Woods institutions must not, however, come at the expense of their core mandates—economic and financial stability in the case of the IMF and sustainable development and poverty reduction in the case of the World Bank. Furthermore, to enhance their work on climate, these two institutions must take three key steps related to financing, governance, and mandates.

These recommendations draw on a new publication from the Bretton Woods Committee’s Multilateral Reform Working Group titled “Strengthening the World Bank and the IMF to Meet 21st Century Global Challenges,” to which I contributed as a cochair with Joaquim Levy and Siddharth Tiwari.

Financing

Climate action at the IMF and the World Bank will not come for free. It needs substantial additional financial resources, not simply redirection of existing resources or depletion of financial buffers.

The IMF’s Resilience and Sustainability Facility (RSF) is a case in point. It is a well-intentioned innovative approach to funding IMF climate action, but repurposing billions of dollars of “unused” special drawing rights (SDRs) for climate action means an undesirable trade-off between climate action and the IMF’s core mission. Dedicating central bank reserves or SDRs to climate action is another problem.

It would be more appropriate to fund the RSF with new financial commitments from a coalition of countries willing to sponsor such climate action (and ideally all IMF member countries would participate along their respective quota allocations). It would also be more consistent to treat these climate-related IMF activities in all member countries ultimately as financial obligations of the general government, which would formally increase the country’s government debt. IMF climate-related action is not a central bank responsibility; it should be consistently accounted for as a new IMF task in support of its members’ environmental policies financed by general government expenditures.

Governance

To be effective, a clear division of labor between the IMF and the World Bank for their additional climate mandates is essential. Funding obligations and decision-making powers at the IMF and at the World Bank need to be closely aligned. Although the effective execution of climate policies should rest with the executive management of the Bretton Woods institutions, the shareholders of these institutions need decision-making powers to effectively oversee and control management’s action on climate.

For the core mandate of sustainable development and poverty reduction, the World Bank Development Committee serves as an advisory council, usually composed of member countries’ finance or development ministers. Its role is to advise and make recommendations to the governing boards of the World Bank Group and the IMF on critical development issues and policies.

For the climate agenda of the World Bank, an extended development and climate committee should be the true decision-making body, with powers similar to those of a general shareholder assembly in the corporate world. This oversight body should be composed of member countries' finance ministers. Its role should be to approve the general guidelines of the Bretton Woods institutions on climate action, funding, and collaboration.

The International Monetary and Financial Committee is the key advisory body of the IMF on its core financial stability mandate. It is composed of finance ministers and central bank governors from IMF member countries. Its primary role is to provide guidance and advice on critical international monetary and financial issues, such as exchange rate policies, global economic stability, and IMF policies and operations.

For the IMF’s climate agenda, a new governing body, the “IMF Council,” should be charged with oversight and direction of the climate action of the board of governors and the executive board. It should comprise one governor from each member country, typically the country’s finance minister. The IMF Council should meet at least once annually to steer the climate action of the IMF.

Mandates

To address climate issues effectively and cooperatively, the IMF and the World Bank need to focus on their historical strength and expertise and leverage their 80-year global experience. The key strength of both institutions has historically been in giving policy advice, usually top-down macroeconomic advice at the IMF and bottom-up project support at the World Bank. Another area of historical influence for the Bretton Woods institutions is financial assistance, traditionally concessional lending and debt relief at the IMF and development grants and project funding at the World Bank.

In the area of climate-related policy, the IMF should focus on macroeconomic policy advice on the integration of climate considerations into fiscal, monetary, and exchange rate policies, as well as on macro-financial stability assessments. The World Bank should offer policy advice on climate-related development policies and infrastructure investments.

Regarding climate-related financial assistance, theIMF should provide concessional lending to help countries address immediate balance of payments and fiscal challenges exacerbated by climate-related shocks. The World Bank should mobilize climate financing through concessional and nonconcessional lending, grants, and innovative financial instruments to support climate-related projects and programs, particularly in low-income and vulnerable countries.

In recent years, the IMF and the World Bank have taken several steps to address climate change and support climate action.

The World Bank has significantly increased its financing for climate-related projects and initiatives, with a focus on renewable energy, energy efficiency, sustainable transportation, climate-resilient infrastructure, and natural resource management. As part of its innovative financing strategy, the World Bank issues green bonds to finance climate-friendly projects and programs, mobilizing capital from investors for renewable energy, energy efficiency, sustainable agriculture, and other climate-related initiatives. Importantly, the World Bank also provides technical assistance, policy advice, and policy-based lending to help countries design and implement carbon pricing mechanisms, such as carbon taxes and emissions trading systems, to internalize the costs of carbon emissions and promote low-carbon development.

The IMF conducts assessments of climate-related risks to macroeconomic stability, financial systems, and economic growth in member countries, providing analysis and policy recommendations to mitigate these risks. It also offers policy advice to members on integration of climate considerations into their fiscal, monetary, and structural reform agendas—promoting low-carbon growth strategies and resilience-building measures. The IMF includes climate-related risks in its financial sector surveillance activities, assessing financial institutions’ exposure to these risks and promoting measures to enhance their resilience and sustainability. It supports the development of green finance markets and instruments, including green bonds, climate insurance, and carbon pricing mechanisms, to mobilize private sector investments for climate-friendly projects and initiatives. 

A lot has already been done at the IMF and the World Bank to fight climate change, and better governance and clearer roles and responsibilities will make them even more effective. Ultimately, the responsibility for widespread climate action rests with the shareholders of the Bretton Woods institutions: they must kick in the additional financial resources needed to scale up and leverage the kind of climate action needed to conquer the climate crisis.

Opinions expressed in articles and other materials are those of the authors; they do not necessarily reflect IMF policy.