Aligning Policy-Based Finance with the Paris Agreement: Potential to Bolster Cooperation with Governments and PDBs

The Glasgow Climate Pact calls upon multilateral development banks (MDBs) to accelerate their alignment with the Paris Agreement, but an approach for policy-based operations (PBOs) has not yet been determined. PBOs support macro-fiscal stability and development plans by financing government budgets–mostly as sovereign loans– in exchange for policy and institutional reforms, or “policy actions”. We define Paris alignment in PBOs as whether their policy actions and budget support undermine or promote long-term macro-fiscal stability and a just transition to climate neutrality by 2050. The World Resources Institute, Germanwatch, and the NewClimate Institute reviewed bank policies and evaluations, interviewed 29 bank staff, analyzed a representative sample of PBOs in three policy areas, and examined six case studies to formulate recommendations.

This paper aims to support MDBs and government shareholders to align policy-based finance with the Paris Agreement. It explores three research questions:

1. How should Paris alignment be defined in policy-based operations?
2. How should MDBs operationalize the “do no significant harm” principle in policy actions?
3. What is the potential of policy-based operations to support governments with climate action, and other stakeholders make full use of its transformative benefits?