A new World Bank report reveals that nearly 60% of banks in Emerging Market and Developing Economies (EMDEs) allocate less than 5% of their portfolios to climate-related investments, with over 25% of these banks offering no climate financing at all. This is significant as banks are the dominant financial institutions in these economies, unlike in advanced economies where the financial sector is more diversified. The report stresses the need for increased investment to address the significant economic and developmental impacts of climate change on these countries. World Bank Senior Managing Director Axel van Trotsenburg highlighted the need for collective action and increased private investment in low-carbon, climate-resilient projects. He emphasized the vital role of the banking sector in financing sustainable development. The report points out that climate financing strategies are still underdeveloped in EMDEs. Only 10% of these countries have adopted green and sustainable taxonomies—classification systems that identify activities and investments to meet environmental goals—compared to 76% in advanced economies. The report also notes that adaptation financing is insufficient. Only 16% of climate finance in EMDEs is directed toward adaptation, with 98% of this coming from public or official sources. World Bank Vice President Pablo Saavedra stressed the need for larger capital and insurance markets in these countries to provide long-term funding for climate-resilient infrastructure and improve financial access for vulnerable groups. The “Finance and Prosperity 2024” report, the first in an annual series, examines financial sector trends and risks in low- and middle-income countries.
It found that 30 percent of the 50 countries analyzed, which account for 93 percent of the bank’s total assets in EMDEs, will face major financial sector crises in the next 12 months now. Many lack the political framework and governance to meet these challenges. The report also highlights the issue of high government debt holdings by banks, especially in countries with weak macroeconomic policies and public debt challenges. From 2012 to 2023, banks’ exposure to government debt has increased by more than 35 percent. To avoid these problems, the report recommends that countries strengthen bank defenses, manage financial safety nets, conduct stress tests and implement crisis management tools. These include emergency financial assistance, effective bank resolution frameworks and self-funded financial insurance systems. The report also recommends introducing disclosure requirements for banks’ exposure to government debt to facilitate risk management and market learning.