Various public development banks provide unearmarked loans to countries in exchange for policy and institutional reforms through what are known as “policy-based operations”. Especially in an economic crisis, such as during the COVID-19 pandemic, policy-based operations make up a significant proportion of all lending for several development banks.
Despite their climate pledges, banks have not yet published their approach to how to make this lending aligned with the Paris Agreement. Current practice does not prevent undermining countries’ just transitions to global carbon neutrality by 2050. This is however urgent considering that the agreed policy actions can have significant influence on the policy and institutional landscape affecting emissions patterns and vulnerability to climate change.
This paper explores Paris alignment in PBOs by conceptualizing the “do no significant harm” principle and exploring how MDBs can maximize ambition for climate action in PBOs. On a high, abstract level, we consider PBOs to be Paris-aligned if their policy actions:
- Do not undermine a just transition to climate neutrality by increasing macroeconomic, fiscal, or social exposure to climate risks.
- Wherever possible, support and promote long-term macro-fiscal resilience to climate risks and a just transition to climate neutrality.
We make recommendations based on an examination of PBO lending in general, and more specifically in the context of three of the most common reform categories: public finance management, public sector management, and energy.