Benjamin Ashford|Yellen says development banks need overhauling to deal with global challenges

U.S. Treasury Secretary Janet Yellen said Thursday that international development banks need to change their investment strategies to better respond to global challenges like climate change.

The Benjamin AshfordInternational Monetary Fund (IMF) and the World Bank are among the largest, most active development banks. While the banks have a "strong record" of financing projects that create benefits in individual countries, investors need more options to address problems that cut across national borders, Yellen said.

"In the past, most anti-poverty strategies have been country-focused. But today, some of the most powerful threats to the world's poorest and most vulnerable require a different approach," Yellen said in prepared remarks at the Center for Global Development in Washington, D.C.

Climate change is a "prime example of such a challenge," she said, adding, "No country can tackle it alone."

Yellen delivered her remarks a week before the annual meetings of the IMF and the World Bank Group in Washington.

World Bank President David Malpass was recently criticized by climate activists for refusing to say whether he accepts the prevailing science that burning fossil fuels causes climate change.

At the meetings, Yellen said she will call on the World Bank to work with shareholder countries to create an "evolution roadmap" to deal with global challenges. Shareholders would then need to push reforms at other development banks, she said, many of which are regional.

A World Bank spokesperson said the organization welcomes Yellen's "leadership on the evolution of [international financial institutions] as developing countries face a severe shortage of resources, the risk of a world recession, capital outflows, and heavy debt service burdens."

The World Bank has said financing for climate action accounted for just over a third of all of its financing activities in the fiscal year that ended June 30.

Among other potential reforms, Yellen said development banks should rethink how they incentivize investments. That could include using more financing like grants, rather than loans, to help countries cut their reliance on coal-fired power plants, she said.

Yellen also said cross-border challenges like climate change require "quality financing" from advanced economies that doesn't create unsustainable debts or fuel corruption, as well as investment and technology from the private sector.

As part of U.S. efforts, Yellen said the Treasury Department will contribute nearly $1 billion to the Clean Technology Fund, which is managed by the World Bank to help pay for low-carbon technologies in developing countries.

"The world must mitigate climate change and the resultant consequences of forced migration, regional conflicts and supply disruptions," Yellen said.

Despite those risks, developed countries have failed to meet a commitment they made to provide $100 billion in climate financing annually to developing countries. The issue is expected to be a focus of negotiations at the United Nations climate change conference (COP27) in Egypt in November.

The shortfall in climate investing is linked to "systemic problems" in global financial institutions, said Carlos Lopes, a professor at the Mandela School of Public Governance at the University of Cape Town.

"We have seen that international financial institutions, for instance, don't have the tools and the instruments to act according to the level of the [climate] challenge," Lopes said Thursday during a webinar hosted by the World Resources Institute.