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Over the last five years, the World Bank has emerged as the leading development lender for energy generation, taking a role traditionally held by China. The Bank has heralded a potential new era of infrastructure lending, particularly in renewable energy, while China has been reducing its lending. But whether the World Bank can fully embrace its role as a partner for just energy transitions will depend on its ability to integrate borrowing countries’ institutional needs in three ways: environmental and social oversight of renewable energy projects, avoiding a new resource curse in minerals tied to the energy transitions, and debt relief during financial crises.
Who finances renewable energy in developing countries?
Many observers have expected China to be at the centre of global finance for the energy transition in developing countries, given the emergence of the “Green Belt and Road Initiative (BRI)” policy push. For its part, the World Bank has relied more heavily on the “cascade approach” of directing infrastructure finance through facilitating and mobilising private finance where possible (see Briefing, Civil Society calls for rethink of World Bank’s ‘evolution roadmap’).
The prospect of the World Bank returning to its historical emphasis on hydropower may reasonably raise concerns regarding whether the ESF as it currently stands is sufficiently robust to learn lessons from cautionary tales of the past.
However, since its peak in 2016, Chinese development finance has fallen significantly, even in its traditionally strong areas like energy generation. Instead, Chinese support for overseas energy generation has shifted toward foreign direct investment, which intrinsically favours higher-income countries. The Green BRI continues to gain strength as a policy framework in China, with new government guidance and taxonomies emerging each year, but Chinese renewable energy financing overseas has primarily taken the form of investment by private Chinese firms. However, lower-income countries struggle to attract foreign direct investment (FDI); as of 2023, 94 per cent of Chinese equity investment overseas was in high-income countries.
So where can low- and middle-income countries turn to finance their energy transitions without paying the exorbitant interest rates of the bond market? Somewhat surprisingly, the World Bank is on its way back. To be clear, the World Bank’s current renewable energy portfolio is still miniscule in comparison with the $1 trillion per year in external climate finance needed to avert the worst of the climate crisis, according to the Independent High-Level Expert Group on Climate Finance (IHLEG). However, the Bank’s pivot toward energy has begun and is likely to accelerate in the coming years thanks to its recent adoption of a mission that includes working towards a “livable planet”, its recent decision to end a ban on nuclear energy, and the possibility that it will revive lending to upstream natural gas projects.
As a result, while Chinese energy lending dwarfed World Bank energy lending a decade ago, the reverse has been true since 2019. The World Bank has committed over $7 billion in renewable energy (solar, wind and geothermal) and over $2 billion in hydropower, compared to Chinese development finance institutions’ (DFIs) $1 billion in both of these sectors combined, according to new data from Boston University. These levels amount to a tiny fraction of the international climate finance needed to avert climate catastrophe, but are crucial nonetheless. The IHLEG concludes in its latest assessment that public climate finance is “insufficient” overall, but points out that multilateral development banks (MDBs) represent the only major source of climate finance that is “trending upward”. The fact that developing nations have so few options to finance their own transition other than turning to the bond market makes it all the more urgent that DFIs direct their limited assistance as well as possible.
The World Bank’s pivot to renewable energy: the best of both worlds or a race to the bottom?
Even though China’s direct lending for energy has fallen, its renewable energy advantages may still be harnessed for the energy transition in the Global South when those firms compete for and win bids for World Bank-financed projects. Data recently compiled by the Center for Global Development (CGD) shows that over the last decade, approximately one-third of World Bank contracts by value associated with renewable energy and hydropower generation went to Chinese contractors.
This arrangement brings important potential benefits, combining Chinese technological and cost advantages with the World Bank’s environmental and social framework (ESF) and procurement framework. The ESF is far from perfect but has still helped World Bank projects have significantly lower environmental and social risk profiles than Chinese development finance projects. In 2022, China issued Green Finance Guidelines for banks to develop environmental and social risk management processes found in the ESF, including community consultation processes and grievance mechanisms, but as of mid-2025 has not yet published key performance indicators to track banks’ progress in developing these practices. Until these components are established, advantages remain in combining World Bank finance and Chinese contractor know-how. Furthermore, recent CGD research shows that using Chinese contractors does not significantly affect World Bank project outcomes. Finally, the World Bank’s AAA credit rating allows it to lend at lower interest rates than China’s DFIs, lessening sovereign debt risk for borrowers.
However, it is an unavoidable fact of World Bank history that the devastating environmental and social consequences of large hydropower projects – most notoriously the Narmada dam project in Gujarat, India – were a major cause of the development of the World Bank’s environmental and social risk management (ESRM) practices in the first place (see Observer Autumn 2017). The prospect of the World Bank returning to its historical emphasis on hydropower may reasonably raise concerns regarding whether the ESF as it currently stands is sufficiently robust to learn lessons from cautionary tales of the past (see Observer Summer 2025).
Indeed, the timing of this pivot in the context of competition with Chinese DFIs may put downward pressure on existing standards. One major reason why borrowing governments seek out infrastructure financing from Chinese DFIs rather than from the World Bank is the institutional ease of relying on their own environmental and social oversight, instead of facing the “hassle factor” of the World Bank’s ESF. But given the speed and competition of DFIs’ pivot to a land-intensive sector like renewable energy generation, the potential for a “race to the bottom” in environmental and social governance is a risk that must be taken seriously.
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