Exploring the role of international development banks in promoting green financing mechanisms

 Corresponding author: Akomolehin F Olugbenga Copyright © 2025 Author(s) retain the copyright of this article. This article is published under the terms of the Creative Commons Attribution Liscense 4.0. Exploring the role of international development banks in promoting green financing mechanisms Olugbenga Francis Akomolehin * Department of Finance, College of Social and Management Sciences, Afe Babalola University, Ado-Ekiti. Ekiti -State, Nigeria. World Journal of Advanced Research and Reviews, 2025, 26(02), 2498-2513 Publication history: Received on 18 March 2025; revised on 29 April 2025; accepted on 01 May 2025 Article DOI: https://doi.org/10.30574/wjarr.2025.26.2.1539 Abstract This research examines International Development Banks (IDBs) while they implement green financing programs to support renewable energy projects and climate adaptation along with energy efficiency projects in developing regions. The study examines three geographic blocs to show how IDB strategic initiatives lead to both successful and unsuccessful outcomes. IDBs develop environmental emissions reduction and community resilience development through combined financial approaches that incorporate both green bond programs with concessional loans as well as blended finance to produce employment opportunities while advancing economic growth. Policy-makers play a vital role in determining IDB effectiveness through their commitment to ensure frictionless procedures and open governance systems with appropriate mechanisms to engage the private sector. IDBs operate differently from private sector financial institutions through public funding that lowers private investment risks and expenses for multiple business sectors across various industries. The evaluation methods focusing on success track two essential factors: environmental emission cuts alongside economic growth and social welfare advancement for assessing effects. Significant achievements by IDBs persist despite ongoing challenges related to limited funding availability and regulatory barriers affecting their operational effectiveness. The research provides three essential recommendations that stress public-private relations enhancement and institutional proficiency development and technological systems for overseeing projects. Accurate government regulations established according to international climate targets should force private companies to either make strategic investments or enhance their sustainability reporting and risk management programs. Wider implementing measures will enhance the effectiveness of IDBs to drive transformative growth in green finance.. Keywords: International Development Banks; Green Financing; Sustainable Development Goals (Sdgs); Renewable Energy; Emissions Reduction; Climate Adaptation. 1. Introduction Through its definition green financing moves money to environmental benefit projects whose objective is carbon reduction alongside energy efficiency improvements and sustainable development enhancement. A UNEP report explains that through green financing organizations direct money streams originating from banking along with microcredit insurance and investment sectors towards sustainable development targets [1]. This funding solution acts as an essential tool to fight climate change and establish sustainable financial growth. The importance of green energy financing grows rapidly because it contributes to achieving Sustainable Development Goal 7 (SDG 7) and Sustainable Development Goal 13 which works against climate change. The energy sector needs attention because it produces worldwide greenhouse gas emissions exceeding two-thirds thus making it essential for achieving these targets. Climate mitigation depends on three core environmental pathways: renewable energy implementation, improved energy efficiency performance and universal access to sustainable power networks [2]. Research investigations during recent World Journal of Advanced Research and Reviews, 2025, 26(02), 2498-2513 2499 times demonstrate the potential effectiveness and advantages of green financing to reach these objectives. The use of Organization for Economic Co-operation and Development (OECD) economies over 2000-2020 showed that green finance drives substantial advancement of SDG 7 and SDG 13 by enabling access to clean energy alongside promoting climate action according to [3]. The expanding green bond market signifies growing investments toward environmentally-friendly projects according to [4] who expect the market value to reach US27.4 billion. The essential foundation of green financing serves to reach global sustainability objectives. The definition of green financing allows financial resources to flow toward projects which achieve carbon reduction goals and improve energy efficiency while enhancing sustainability. According to the UNEP report green financing enables organizations to manage money flows starting from banking and micro-credit and insurance and investment sectors toward sustainable development targets ([1]). Sustainable financial growth together with climate change mitigation depends on this important funding mechanism. Green energy funding continues to gain importance because it supports the attainment of Sustainable Development Goal 7 (SDG 7) and Sustainable Development Goal 13 that fights climate change. Countries must focus on energy sector reforms since climate pollution from this sector exceeds twothirds of global emissions therefore requiring immediate action to achieve these targets. Renewable energy implementation together with improved energy efficiency performance and universal access to sustainable power networks form the three essential environmental pathways for climate mitigation ([2]). Research studies conducted in recent times have proven that green financing can successfully deliver these goals. Green finance through Organization for Economic Co-operation and Development (OECD) economies during 2000-2020 created notable progress toward achieving SDG 7 and SDG 13 through its dual role in delivering clean energy and climate change action as reported by [3]. [4] predicts that green bond market value will reach US27.4 billion as the market continues its expansion according to World Economic Forum (2020). Eco-friendly funding stands as the vital basis to fulfill worldwide goals promoting sustainability. IDBs operate as essential financial organizations dedicated to boosting economic development alongside sustainable regional progress. Examples of notable IDBs include the World Bank as well as the European Bank for Reconstruction and Development (EBRD) and the Inter-American Development Bank (IDB). The institutions provide monetary and methodological support and policy mentorship for projects which enhance economic advancement and reduce poverty while boosting sustainability practices. IDB operates within a funding circle dedicated to attracting capital for major public projects since private entities often avoid these initiatives due to high-risk elements and long duration for repayment. As key institutions, IDBs contribute to sustainable development through loans and grants and guarantees which collectively enable infrastructure financing and support education and healthcare initiatives besides environmental programs. The EBRD has committed to dedicating more than 40% of its financial resources to green financing that supports Paris climate targets according to [5]. During the recent years IDBs explicitly intensified their sustainable development emphase by integrating their activities with the United Nations Sustainable Development Goals (SDGs). Through their funding operations IDBs fundamentally contribute to climate change mitigation projects and renewable power initiatives along with sustainable construction programs. The World Bank has incorporated environmental and social safeguards into its project financing to promote results that maintain sustainability and inclusivity [6]. The Inter-American Development Banks works together with national governments along with private sector organizations and civil society groups to shape development policies that cater to specific member state requirements. The joint efforts between these development partners boost intervention success rates while maintaining sustainability through projects that align with local needs. The role of IDBs toward sustainable development is vital yet they face various obstacles in their operations. The assessment exposed major weaknesses in the process of gathering green finance resources while showing poor local development linkages and inadequate usage of innovative financial products which include green bonds. Studies show IDBs make good progress with their renewable energy financing but the development of equity-based and inclusive programs remains insufficient [5]; [6]. These challenges intensify because of geopolitical tensions alongside regulatory barriers and insufficient impact assessment frameworks. The primary intention of this research is to gauge the role of IDBs in sourcing funds for green financing along with their contribution to SDGs 7 and 13 as well as their barriers in promoting green energy projects. This analysis evaluates the adoption of green bonds and blended financing as well as the working relationships between IDBs and local governments and private sectors aimed at supporting these initiatives. This research addresses an academic void on IDB performance standards by providing both academic and operational strategies that enhance IDB functional efficiency. These initiatives display strategies which boost resource collection capability and establish operational alignment to sustainability goals and establish creative funding tools for climate response and renewable energy switching. World Journal of Advanced Research and Reviews, 2025, 26(02), 2498-2513 2500 2. Conceptual Review 2.1. Mechanisms for green financing In Green finance refers to financial flows (from national, international and private sources) to green initiatives and projects associated with environmental sustainability, prevention of environmental degradation, and a low carbon economy. They should support investments which help to achieve an ecological balance, for example lower emissions of greenhouse gases, the development of renewable energy, and of energy efficiency. This approach is in line with the overarching goal of sustainable development as articulated in the United Nations Sustainable Development Goals (SDGs), that is, the agreed SDG 7 (Affordable and Clean Energy), SDG 13 (Climate Action) and SDG 17 (Partnerships for the Goals) [7]. Green financing instruments are promoted by International Development Banks (IDBs) including the World Bank, the Asian Development Bank (ADB), and the African Development Bank (AfDB). They play a catalytic role in terms of capital mobilization, risk mitigation, designing financial instruments to support investment in sustainable infrastructure, and climate change-resilient ventures in developing economies ([8]; [9]). Key green financing tools include green bonds, green loans, sustainability-linked finance, climate funds, and carbon markets. Green bonds Green bonds are debt instruments issued for projects with a clear environmental return, such as renewable energy construction, energy efficient buildings and clean transportation. The total volume of green bonds exceeded $1 trillion for the first time in 2020, which reflects the expanding importance of climate-aligned investment products to investors [10]. The IDBs have been in the forefront of activity in issuing green bonds – often on a significant scale – and deploying these funds in the priority sectors which make a direct contribution to the Paris Agreement and national climate action plans [8]. The same is true of green loans, which are based on Green Loan Principles and provide capital to borrowers pursuing environmentally friendly projects. These have become popular both with development banks and private investors, largely because they are clearly focused on the environment and the use of proceeds is well‐specified [11]. Sustainabilitylinked loans and bonds They also differ from green or project-linked bonds and loans, in that they are not contingent on particular projects, but the ESG score of the borrower as a whole. They induce borrowers to meet higher ESG standards by conditioning the covenants of a loan to the attainment of predetermined ESG standards [12]. IDBs also contribute to international climate funding reservoirs, like the Green Climate Fund, that help to leverage public and private financing to implement large scale climate mitigation and adaptation infrastructure. Such investment finances infrastructure, ecosystem protection and local resilience efforts in affected areas [13]. Market based mechanisms such as carbon markets and ETSs put a price on carbon emissions, driving industry to minimise their environmental impact. IDBs could serve to support the development of CPMs, such as through assisting the introduction of regulatory frameworks and capacity-building for countries to implement, or take part in, a CPM [14]. Figure 1 IDB and Sustainable Development Interconnected Mechanism The increasing significance of green financing tools is reflected in their mainstreaming in IDB strategies, financial markets and policy reforms. The mass of green bonds and loans has continued to expand even as investors increasingly cast their attention to emerging products, such as sustainability-linked instruments and blended finance. These developments help the financial sector to integrate ESG factors in the investment process, increase transparency, as well as contribute to normalizing sustainable finance [4]. As IDBs grow their green financing books, these mechanisms are playing a critical role in addressing the climate finance challenge and advancing global sustainability targets. They are instruments to World Journal of Advanced Research and Reviews, 2025, 26(02), 2498-2513 2501 bridge green intention and financial action: they help transform investment decisions into not only economic but also long-term environmental and social performance. Thus green finance instruments, led and supported by IDBs, are indispensable to global transition to sustainable, inclusive development. This circular diagram illustrates how International Development Banks (IDBs) drive sustainable development through interconnected mechanisms—financing instruments (e.g., green bonds), green financing applications (e.g., renewable energy), and their outcomes in climate adaptation and economic growth. It highlights a continuous feedback loop where project success informs further financial innovation and investment priorities [8]. Figure 2 Green Financing Mechanism for Social Foundation This doughnut economics diagram illustrates the balance green financing mechanisms aim to achieve—meeting social foundations (e.g., health, education, work) without breaching the ecological ceiling (e.g., biodiversity loss, water use). The space between represents the safe and just space for humanity, where IDB-supported green finance can drive sustainable development outcomes [15]. 2.2. International Development Banks (IDBs) International Development Banks (IDBs) are crucial in driving green financing through capital mobilization for green initiatives, especially in developing economies. They are part of a global system of financial and technological CO2 sinks that cure the world by sinning less. In fact, the growth of green, social and sustainability bonds have been supported by the World Bank since issuance of its first green bond in 2008, thereby diversifying the development financing channels [8]. However, despite these contributions, IDBs face big challenges to scale up green finance. Emerging markets face a backdrop of regulatory gaps and a lack of sufficient incentives for local companies to pursue ambitious climate targets that limits the supply of green finance. According to a report by the International Finance Corporation (IFC), financial firms face challenges in increasing their green finance offerings in these market regions due to low market incentives and inadequate regulatory frameworks [16]. Further compounding the challenges is the complexity involved in accessing development and climate finance. The complex procedures required for accessing funds from such multilateral development banks and international financial institutions can delay the expedient delivery of climate projects, particularly in Least Developed Countries and Small Island Developing States [17]. To tackle these issues, the need for reforms of IDBs is widely recognized. Improving the effectiveness of green financing initiatives could be achieved by increasing the availability of information, simplifying access to funding, and promoting closer collaboration with private sector investors. According to the World Resources Institute, IDBs need reforms, not only more dollars, to adequately respond to current climate and development finance needs [18]. Despite the progress IDBs have made in facilitating green financing, they face regulatory, procedural and partnership challenges that need to be addressed to amplify their impact. Scalebility of green finance and realization of global sustainability objectives requires systemic reforms and extensive collaboration with private sector agents. World Journal of Advanced Research and Reviews, 2025, 26(02), 2498-2513 2502 2.3. Financing Mechanisms Used by IDBs Approaches embedded in Green Financing to overcome sustainable development project challenges by International Development Banks (IDBs). In developing economies, these mechanisms allow IDBs to mobilize resources, mitigate risk, and catalyse investments in projects that provide environmental and social returns. The financing of environmentally sustainable projects is one of the most significant tools that IDBs put in practice, and green bonds are a good example of it. These bonds are issued to raise capital for projects like renewable energy, energy-efficiency and climate-adaption initiatives. By reporting on how they will use proceeds, green bonds are popular with ethical investors. The World Bank, for example, has been at the forefront with nearly $18 billion in green bond issuance in multiple currencies since 2008 and has played a major role in developing the market [8]. IDBs lower the cost of capital and catalyze private sector engagement in funding for green projects when issuing green bonds. Another vital financing vehicle that IDBs deploy are concessional loans. These loans in conditions more favorable than the market conditions are usually lower than the rate of the market or longer than the repayment period in the commercial banks, making the green project financially viable in areas where the commercial financing could not consider the high risk and low return. The Asian Development Bank (ADB) extends concessional loans to finance renewable energy and climate resilience projects, especially in areas extremely susceptible to climate change [11]. These loans fill funding gaps for projects with high upfront costs but significant long-term environmental benefits. Grants and blended finance are other important tools that IDBs leverage. Grants are typically utilized to provide initial funding for feasibility studies, capacity-building, or pilot projects, thereby lowering risk to larger investments. Blended finance - the use of public funds (for example, grants or concessional loans) to leverage private investment, improving the structure of development finance and domestically or internationally reducing risk for private investors. For this reason, the Green Climate Fund is a good example of this – it blends public and private finance to support large-scale climate projects in developing countries, using limited public finance to leverage substantial private sector investment [13]. Green bonds and blended finance concessional loans and grants are critical instruments that allow IDBs to overcome financial obstacles, increase private sector involvement, and fund successful delivery of projects that meet broader sustainability agenda. Figure 3 Financing Mechanism used by IDBs This diagram illustrates the primary financing mechanisms employed by International Development Banks (IDBs), including green bonds, concessional loans, and grants blended with other financial tools. Green bonds are debt instruments earmarked for environmental projects; concessional loans offer below-market terms to incentivize sustainable investment; and blended finance combines public and private capital to de-risk projects in developing economies [8]; [10]. 2.4. Project Prioritization and IDB Initiatives Over 9/10ths of their financing goes toward: renewable energy, energy efficiency and climate adaptation projects that will help the world transition toward global sustainability goals and the inevitable impact of climate change. This is why renewable energy developments take precedence, as they offer cleaner, more sustainable solutions to many of the fossil fuel-driven problems we face, drastically cutting down our carbon footprint. With their work, bilateral development banks (IDBs) such as the World Bank have been heavily investing in projects for solar, wind, and hydropower to support energy access and sustainability. The World Bank, for instance, has financed renewable energy projects in developing nations, disbursing $1 billion annually for solar energy initiatives [8]. Energy efficiency is also a key pillar since it enables World Journal of Advanced Research and Reviews, 2025, 26(02), 2498-2513 2503 us to reduce energy consumption and emissions while increasing productivity at the same time. IDBs exclusively fund projects that enhance the efficiency of buildings, industrial processes, and urban transport systems. For example, the African Development Bank (AfDB) has initiated programs such as the Energy Efficiency Program for Africa, focused on advancing energy efficiency in residential and industrial sectors through innovative technologies and policy frameworks [19]. Such adaptation projects are needed to help communities cope with climate impacts, like rising sea levels, extreme weather events, and scarcity of water. Investments Include Strengthening Climate Resilience: IDBs are focused on projects that enhance climate resilience, including through infrastructure upgrades, sustainable water management, and agricultural adaptation. Funded by the Asian Development Bank and other IDBs, the projects have been geared towards climate-resilient infrastructure and improved livelihoods in vulnerable areas [13]. Alongside prioritizing projects, IDBs are involved in initiatives and partnerships to scale their impact. For example, the World Bank has partnered with governments and private sector stakeholders to mobilize financing and expertise in large-scale renewable energy projects, such as the Scaling Solar initiative, which aims to accelerate the development of solar energy in Africa ([8]). This often includes technical assistance and capacity-building programs, such as the International Renewable Energy Agency (IRENA) partnership with the African Development Bank aiming to boost the deployment of renewable energy across [52]; [19]. These progressive approaches illustrate the importance of IDBs' work in promoting collaboration to tackle financing gaps and tackling technical challenges. With their partnerships, IDBs leverage resources, share best practices, and coordinate efforts to maximize the impact with these partnerships on their investments, leading to global sustainable development and climate resilience. Figure 4 Total Funding by Year and Category: This figure displays the total funding allocated to each project category (Renewable Energy, Energy Efficiency, and Climate Adaptation) from 2022 to 2024. [20] Figure 5 Total Emissions Reduction by Year and Category The above figure highlights the cumulative emissions reductions achieved by each category over the same period. [20] World Journal of Advanced Research and Reviews, 2025, 26(02), 2498-2513 2504 Figure 6 Total Beneficiaries by Year and Category This figure shows the total number of beneficiaries impacted by projects in each category. [20] Figure 7 Regional Funding Trends (2022 - 2024) [20] The above figure displays renewable energy investment trends through a table and visualization that examine regional changes from 2022 to 2024. Asia leads in renewable energy investment growth because it generates big infrastructure development while receiving increased official backing. The investments in both North America and Europe maintain steady progression thanks to existing well-developed renewable markets which operate under stable policy frameworks. The areas of Africa and Latin America benefit from international concessional financial support to reach enhanced progress despite their diminished growth rates. World Journal of Advanced Research and Reviews, 2025, 26(02), 2498-2513 2505 Figure 8 Regional Emissions Reduction Trends (2022 - 2024) [20] The graph shows regional emissions reduction changes in Africa, Asia and Latin America spanning from 2022 until 2024 which demonstrated total emissions decreases. The visualization reveals which areas achieved the maximum carbon emission reduction while showing their specific trends throughout 2022-2024. Additional information along with further analysis requires confirmation if needed. 2.5. Comparative Analysis International Development banks ( IDBs) regions comparative overview: A survey of IDBs in Africa, Asia and Latin America and their approaches towards green financing and sustainable development in a comparative context. In Africa, the IDBs, the African Development Bank, amongst others, plays a major role in financing utility-scale renewables to meet energy access gaps. Initiatives like the Desert to Power programme set a target of providing solar energy to millions, substantially lowering carbon emissions while promoting development around the region [21]. In Asia, the Asian Development Bank does energy efficiency and climate adaptation projects while prioritizing urban sustainability and climate resilience in vulnerable areas. Programs such as their climate-smart cities program have integrated advanced technologies and private sector partnerships to improve project outcomes [11]. For instance, in Latin America the Inter-American Development Bank has focused on combating deforestation and supporting renewable energy projects, which also reflect distinct regional features, including the need to conserve biodiversity and meet energy needs [22]. In contrast to the private sector, IDBs typically have wider development mandates and take on broader risk in relation to enabling green financing initiatives. Private sector projects tend toward larger, more financially appealing projects such as utility scale solar and wind farms in stable markets. Unlike IDBs, which are more inclined to fund high-risk, highimpact initiatives in underserved areas, IDBs tend to finance projects with lower risk profiles, closer to bankable projects, like off-grid renewable energy solutions or rural electrification projects. Additionally, IDBs frequently use blended finance instruments to draw private money to green projects by reducing risks and issuing concessional financing. IDB-led frameworks/risk-sharing are used to catalyze private-sector investment in challenging markets [10]. Success metrics for IDBs and private sector initiatives share some convergence but may reflect different priorities. At the same time, emissions reduction is an important metric for both because it’s connected to global data targets on the climate. Example projects include the African Development Bank’s renewable energy projects across the continent that are used to help reduce emission and serve as benchmarks when compared to similar investments in large-scale solar farms in the private sector [23]. Job creation is another metric that they share, as IDBs often favor projects that create local jobs. For example, the green infrastructure projects of the Asian Development Bank have generated around 12 million jobs in construction and maintenance, as well as developing skills [11]. But the latter is a key area of focus for IDBs who tend to prioritize wider socio-economic outcomes — like increased access to energy and improved productivity — over financial returns. Typically, IDBs employ region-wide strategies to address the unique challenges and opportunities of the areas they are growing in, while private sector initiatives are attracted by the most commercially viable projects. Insisting on emissions reductions alongside job creation and economic growth as success metrics, highlights the complementarity of roles played by IDBs and private sector players in making meaningful contributions towards global sustainability goals. World Journal of Advanced Research and Reviews, 2025, 26(02), 2498-2513 2506 Figure 9 Comparative Overview of IDB Strategies in Africa, Asia, and Latin America. The diagram presents a comparative overview of IDB strategies in Africa, Asia, and Latin America. It highlights regionspecific priorities—solar expansion in Africa, urban climate resilience in Asia, and deforestation mitigation in Latin America—demonstrating how IDBs tailor green financing to local needs while supporting global sustainability goals ([22]; [23]; [11]). 2.6. Challenges, Opportunities and Future Directions Foreign Development Banks (IDBs) have a good number of challenges as well opportunities to encourage green financing and promote sustainable development. It is crucial to unpack these dynamics to maximize their impact and align their activities with global climate and development goals. Funding limitations continue to be a major issue for IDBs, particularly as the need for green financing rises in developing economies. Several of them are limited in their ability to mobilize significant capital to finance increasing renewable energy, climate adaptation and energy efficiency projects. While there are some attempts to mobilise funding on a large scale using instruments such as green bonds and blended finance, achieving long-term stable financial resources continues to be a challenge, with notable funding gaps remaining. Funding challenges are compounded by limited contributions from donor countries and competition for capital among multiple development priorities [13]. Institutional roadblocks are another challenge, particularly at places with weak governance, limited technical capacity and fragmented regulatory frameworks, which have made IDB operations, even more challenging. Inefficiencies in the project approval process, lack of coordination among stakeholders and insufficient local expertise can hamper project implementation and diminish the effectiveness of IDBfunded initiatives. For example, the African Development Bank has pointed out that the strong legal protections and frameworks needed to deploy green financing effectively are lacking in many African countries [23]. Also, IDBs' role in promoting green financing is also constrained by Policy uncertainties. At the same time, inconsistent policies, regulatory uncertainty, and insufficient market signals for private sector engagement discourage investments in green initiatives. In particular, unstable national policies, which are common in emerging markets, can disrupt project discipline and disincentivize long-term investment in renewable energy and climate resilience efforts [8]. Notwithstanding these challenges, IDBs have much to gain from strengthening their contributions to sustainable development. Green Finance Global investments for such green financing have increased over the past years, making this development a potential path forward for IDBs to diversify their funding basis. Ever-increasing interest in sustainable finance from institutional investors, aligned with the growth of ESG-compliant investments, presents opportunities for IDBs to attract private finance and leverage their impact [10]. Another opportunity is an efficiency improvement in project execution. The IDs can facilitate the implementation of green projects by whipping the services, improving collaboration among stakeholders, and introducing innovative financing mechanisms. With the help of technology and big data analytics, improvements in project monitoring and evaluation could be achieved, and result in better performance of green financing projects [11]. Similarly, increased sustainability provides a vital pathway for IDBs to realign with global climate objectives. 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