As climate change brings a seemingly endless stream of weather disasters across the world, countries are struggling to adapt to the new reality. Preparing to better withstand hurricanes, floods, heat waves, droughts and wildfires will cost hundreds of billions of dollars.

And then we need to address the root cause of climate change – the burning of fossil fuels like coal, gasoline and oil – by switching to clean energy like wind and solar power.

It will cost billions of dollars.

Enter climate finance, a broad term that means different things to different people but boils down to: financing projects aimed at adapting to and combating the cause of climate change. Climate change financing is particularly important for developing countries, which do not have the same resources or access to credit as rich countries.

International megabanks, funded by taxpayers’ money, are the largest and fastest growing source of climate finance for the developing world. Called multilateral development banks because they receive contributions from various countries, there are only a handful of these banks in the world, with the World Bank being the largest among them.

How these banks allocate their resources is among the most important decisions made in shaping how poorer countries can respond to climate change. This is one of the main reasons why, in 2022, the world achieved the goal that countries set in 2009: providing developing countries with $100 billion per year to fight climate change.

At the annual United Nations climate conference that opens Monday in Azerbaijan, world leaders are expected to discuss how to generate billions of dollars for climate finance in the years to come. The non-profit research group The Climate Policy Initiative estimates global needs about five times the current annual amount of climate finance to limit warming to 1.5°C (2.7 degrees F) since the late 1800s. Currently, globally average temperatures are about 1.3 C (2.3 degrees F) warmer.

A new goal must go higher and hold institutions and governments to deliver on their promises, said Tim Hirschel-Burns, an expert at Boston University’s Global Development Policy Center.

“The key is to get a target that is going to catalyze actions that will close the really significant climate finance gap that developing countries are facing, which is well over $100 billion,” he said.

As the international community accepts the reality of climate change, the debate has shifted to where the money to finance the energy transition will come from, said Dharshan Wignarajah, director of Climate Policy’s London office. Initiative.

“The question is not ‘are we going to transition?’ ”, but “how quickly can we organize the transition?” “, said Wignarajah, who helped lead climate negotiations convened by the Conference of the Parties when the UK hosted it in 2021. “This has forced finance to take an increasingly prominent role important in COP discussions, because ultimately it all depends on who pays. »

Developing countries depend much more on these banks to finance their climate projects than industrialized countries.

In the United States and Canada, commercial banks and corporations financed more than half of climate-friendly projects in 2022, according to the Climate Policy Initiative. In sub-Saharan Africa, these private lenders represented only 7%.

It’s because it’s more difficult for developing countries to obtain low interest rates.

“If you are in Kenya and you want to borrow from private lenders, they might charge you 10% interest rates because your credit score is not very good,” Hirschel-Burns said.

But multilateral banks have better credit ratings than many countries. For example, the International Development Association – an arm of the World Bank and the main provider of international aid to Kenya – has the highest possible rating from Moody’s Investor Servicewhile Kenya itself is classified as undesirable.

Banks borrow money with this better rating, then lend in turn to developing countries, offering a more reasonable rate than governments could get if they borrowed directly from private lenders.

The development objectives of multilateral banks are broad. They seek to improve people’s health and the environment, expand access to energy and end poverty. Tackling energy access has meant banks providing billions of dollars for fossil fuel power plants, according to an AP analysis, even as their policies have improved and fewer projects of this type have been funded in recent years.

Fossil fuel investments continue to rise globally, reaching $1.1 trillion in 2024, according to the International Energy Agency. And multilateral banks continue to be among the largest financiers of projects extending fossil fuels, helping to “lock in a high-carbon trajectory” for countries. according to a Clean Air Fund reportwhich campaigns for the financing of projects aimed at improving air quality.