Aligning Policy-Based Finance with the Paris Agreement

The paper examines how multilateral development banks (MDBs) use policy-based operations (PBOs)—unearmarked budget support provided in exchange for policy reforms—and finds that current risk screening is insufficient to prevent these operations from undermining climate goals. Through an analysis of 126 PBOs and six case studies, the authors argue that policy actions can create path dependence in fossil-fuel-reliant activities and delay urgent climate spending. The document recommends that MDBs integrate long-term climate risks into macro-fiscal assessments, include at least one climate results indicator in every PBO, and provide more concessional finance, such as grants, to support ambitious climate action in vulnerable countries.

• Current risk screening procedures for policy-based operations (PBOs) are inadequate to prevent policy actions from hindering a just transition to climate neutrality by 2050 or undermining long-term macro-fiscal stability.
• Policy actions in PBOs can inadvertently lock countries into climate-vulnerable economic activities, such as fossil fuels and certain agricultural practices, while delaying necessary climate expenditures that would reduce overall transition costs.
• MDB diagnostics and social impact assessments frequently fail to systematically account for a country's macro-fiscal exposure to climate risks or the specific needs of a just transition in vulnerable sectors.
• While MDBs require Nationally Determined Contributions (NDCs) to be mentioned in country strategies, they are not systematically mainstreamed into the development plans that drive bank activities.
• Budget support accounted for 38 percent of new MDB commitments between 2015 and 2020, totaling US$139 billion, with a significant increase during the COVID-19 crisis.
• There is a lack of consistency and specificity in how bank staff apply environmental and social (E&S) risk screening to PBOs, often ignoring indirect effects despite policy requirements.
• Most PBOs have the potential to support Paris alignment, particularly through macro-fiscal overviews and development partner coordination, but evidence of actual reform benefits for climate action remains limited.
• Many low-income countries facing debt distress relied on MDB policy-based operations for emergency relief during the COVID-19 pandemic.

APA

Neunuebel, C., Gebel, A., Laxton, V., & Kachi, A. (2022). Aligning Policy-Based Finance with the Paris Agreement. World Resources Institute. https://files.wri.org/d8/s3fs-public/2022-10/aligning-policy-based-finance-paris-agreement_1.pdf?VersionId=R9ShYJxhMu5CW3wdtwyBZ6SWXBaLQGbK

Chicago

Neunuebel, Carolyn, Anja Gebel, Valerie Laxton, and Aki Kachi. Aligning Policy-Based Finance with the Paris Agreement. World Resources Institute, 2022. https://files.wri.org/d8/s3fs-public/2022-10/aligning-policy-based-finance-paris-agreement_1.pdf?VersionId=R9ShYJxhMu5CW3wdtwyBZ6SWXBaLQGbK.

Wikipedia

{{cite report |last1=Neunuebel |first1=Carolyn |last2=Gebel |first2=Anja |last3=Laxton |first3=Valerie |last4=Kachi |first4=Aki |title=Aligning Policy-Based Finance with the Paris Agreement |publisher=World Resources Institute |date=October 2022 |url=https://files.wri.org/d8/s3fs-public/2022-10/aligning-policy-based-finance-paris-agreement_1.pdf?VersionId=R9ShYJxhMu5CW3wdtwyBZ6SWXBaLQGbK |access-date=23 October 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{neunuebel2022aligning, author = {Neunuebel, Carolyn and Gebel, Anja and Laxton, Valerie and Kachi, Aki}, title = {{Aligning Policy-Based Finance with the Paris Agreement}}, institution = {World Resources Institute}, year = {2022}, month = oct, url = {https://files.wri.org/d8/s3fs-public/2022-10/aligning-policy-based-finance-paris-agreement_1.pdf?VersionId=R9ShYJxhMu5CW3wdtwyBZ6SWXBaLQGbK}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }