Civil society organizations (CSOs) are urging the United States Congress to pass legislation that would facilitate getting Multilateral Development Banks (MDBs) out of the business of fossil fuels altogether. On October 28, 2021, Representative Jared Huffman and Senator Jeff Merkley reintroduced the Sustainable International Financial Institutions Act (SIFI Act). The bill, H.R.5775 in the House and S. 3106 in the Senate, advances the US responsibility to end fossil fuel subsidies while also scaling up climate finance.
A week into office, President Biden issued an Executive Order on Tackling the Climate Crisis at Home and Abroad (E.O. 14008) This E.O. requires the US Treasury Department to “develop a strategy for how the voice and vote of the United States can be used in international financial institutions, including the World Bank Group and the International Monetary Fund.” In response, in 2021, the US Treasury Department released a guidance document directing the United States to use its voice and vote at the MDBs to oppose financing for coal, oil, and upstream fossil gas. This historic guidance covers project financing and policy-based lending such as World Bank Development Policy Finance which has comprised a significant amount of the Bank’s support for fossil fuels.
Despite the welcome addition of the Treasury guidance, current US policy to restrict support for fossil fuel activities is not robust enough. The SIFI Act addresses the multiple shortcomings of current US policy and builds upon the Treasury guidance. We encourage Congress to pass the SIFI Act, which will advance US climate leadership and influence in the following ways:
- The SIFI Act would prohibit all known forms of US financing of fossil fuel activities, including through the Export-Import Bank of the United States (EXIM), the Development Finance Corporation (DFC), and others. The US Treasury guidance does not legally require anything from EXIM or DFC. Together these institutions have provided billions of dollars to fossil fuel projects in recent years. EXIM has not published a climate policy in response to E.O. 14008. DFC has created a climate policy in response to E.O. 14008 that calls for “[re]balancing DFC’s exposure in the energy sector from fossil fuel extraction, transportation, and generation use…” The SIFI Act would not just rebalance but remove DFC and EXIM’s fossil fuel exposure.
- The SIFI Act includes a phase-out of funding for internal combustion engines for passenger vehicles and buses by 2025 in a way that is just and sustainable. The US Treasury guidance does not directly address the transportation sector, a largely untouched component of MDB finance for fossil fuels. BIC’s research found that MDB rhetoric on the need for transport sector decarbonization has not yet led to a change in its investment patterns. Within the World Bank and Inter-American Development Bank (IDB), the vast majority of transport investments are in internal combustion engine (ICE) vehicles instead of zero emissions vehicles. This is why CSOs sent a letter to MDB Presidents in November asking them to commit to ending investments in ICE vehicles. We have also asked the US Government to clarify that the Treasury guidance does cover ICE vehicles, but this remains unanswered.
- If the SIFI Act becomes law, the United States would be required to use its “voice and vote” at IFIs to oppose any financing or support for all fossil fuel activity. The US Treasury guidance is insufficient with respect to how and when the US will use its voice and vote at the MDBs. In one early test of the new US policy, when an oil export project in Suriname came to a vote at IDB Invest, the private sector arm of the IDB, the US chose to abstain rather than vote no. The neutral vote was accompanied by tacit support, as became apparent based on the disappointing explanation from the US government. The SIFI Act would require that the US both vote no and advocate against such projects.
- Under the SIFI Act, the equivalent of the US share of financing for such projects would be withheld from future US contributions until the MDB ceases financing for new fossil fuel activities. Currently, even if the US were to vote against MDB financing of a project, there is no resulting consequence in terms of US financing for the same project. Because the SIFI Act would put withheld contributions into escrow, rather than reducing US commitments to development finance, this could proportionally increase its contribution to climate mitigation and adaptation. As such, the SIFI Act could help the US drive up global climate finance contributions. As one of the largest shareholders of MDBs, and in light of its disappointing bilateral contributions to climate finance such as to the Green Climate Fund, US leaders should push MDBs on the climate friendliness of their investments.
- The SIFI Act would encourage MDBs to reorient their investments away from fossil fuel activities, freeing up funds for sustainable development and climate adaptation. The MDBs are the largest and fastest-growing source of climate finance. Many MDBs have announced plans to continue that growth by scaling up climate finance commitments. For example, the World Bank’s Climate Change Action Plan states that 35 percent of its portfolio will be climate finance by 2025, which as a proportion of 2021 commitments would be more than $66 billion. However, while MDBs may be scaling up their climate finance contributions, those contributions are undermined by their ongoing fossil fuel financing, including in the transportation sector and through policy-based lending. MDBs should not be financing diesel buses, particularly while calling it climate finance, and instead must help countries scale up zero emissions transportation infrastructure.
The Intergovernmental Panel on Climate Change has sounded the alarm that the global community must make drastic cuts in greenhouse gas emissions to avert climate catastrophe. Leaders in Congress must respond by acting now to boost global climate finance. The SIFI Act is a smart, strategic vehicle to fulfill that responsibility.