Multilateral Development Banks and the Challenges of Green Hydrogen Financing in Emerging Markets
As the global energy transition accelerates, green hydrogen has gained prominence as a promising means to decarbonize sectors that are otherwise challenging to electrify. Produced through the electrolysis of water powered by renewable energy, green hydrogen offers a carbon-neutral fuel alternative critical for industries such as steel manufacturing, shipping, and heavy transport. Industrialized nations are increasingly looking to import green hydrogen from emerging markets and developing countries in the Global South, where renewable energy resources are abundant and production costs comparatively lower. This dynamic has positioned multilateral development banks (MDBs) as pivotal financiers in scaling green hydrogen infrastructure in these countries. However, a newly published study in The Journal of Environment & Development reveals that current environmental and social risk management frameworks employed by MDBs inadequately address the distinctive challenges posed by green hydrogen projects, potentially undermining their sustainable development promises.
The reliance on MDBs arises in part because private sector financiers remain wary of the technological uncertainties and financial risks associated with green hydrogen projects, particularly in emerging economies with often volatile market and regulatory environments. MDBs such as the World Bank, International Finance Corporation, European Investment Bank, European Bank for Reconstruction and Development, and Inter-American Development Bank have stepped in to fund these initiatives with the dual mandate of promoting climate mitigation and fostering sustainable development within host countries. Yet, the recently conducted content analysis spearheaded by Lai Yee Choy from the Research Institute for Sustainability (RIFS) suggests that the deployment of green hydrogen projects may not be as equitable or environmentally robust as anticipated, given existing policy frameworks.
Central to the study’s findings is the observation that most MDB sustainability policies were originally designed for conventional energy projects and thus lack the hydrogen-specific regulatory criteria necessary to manage unique environmental and social risks. For example, green hydrogen production entails significant water use, which can exacerbate water scarcity in vulnerable regions. Furthermore, the construction and operation of renewable energy facilities powering electrolysis, as well as associated infrastructure, pose substantial risks to local biodiversity and may lead to land-use conflicts, including potential displacement of indigenous communities. The absence of explicit guidelines addressing these risks creates a policy vacuum, compromising comprehensive risk mitigation.
The study meticulously categorized twenty distinct environmental and social risk domains, spanning issues such as land acquisition, indigenous rights, air and water pollution, and community health impacts. Despite well-established due diligence procedures, the study highlights deficiencies in how MDBs assess and manage emerging, technology-specific challenges inherent to green hydrogen. For instance, while existing frameworks demand environmental impact assessments and community consultations, they seldom incorporate enforceable performance thresholds or requirements tailored to hydrogen’s supply chain complexity and ecological footprints. This lack of specificity undermines the banks’ ability to enforce mitigation plans that sufficiently protect sensitive ecosystems and vulnerable populations.
Moreover, the inconsistency in policy enforcement between different development banks and projects generates uncertainty for project developers and host countries alike. Choy advocates for MDBs to establish dedicated environmental and social standards explicitly for green hydrogen projects. Uniform and hydrogen-sensitive standards would detail risk categorization, prescribe mitigation obligations, establish stakeholder engagement protocols that respect indigenous rights and local livelihoods, and implement grievance mechanisms reinforced by clear enforcement and penalty frameworks. Such harmonization would facilitate clearer expectations for investors and communities, reduce compliance ambiguity, and improve overall governance.
Economic considerations receive notably less attention compared to environmental and social dimensions, a gap that the study identifies as a potential source of inequity. Green hydrogen’s ability to spur local economic development hinges on its capacity to create jobs and build technical capabilities within host countries. Without deliberate policies focused on fair economic participation and benefit-sharing, there is a risk that wealth generated from hydrogen exports will disproportionately enrich external actors, leaving producing communities underserved. MDBs, given their development remit, must prioritize inclusive growth strategies that ensure green hydrogen projects contribute meaningfully to poverty reduction, energy access, and local empowerment.
A critical revelation of the study is the “soft” enforcement approach many MDBs adopt toward sustainability standards. While banks tend to require project proponents to measure and report environmental and social impacts, they often stop short of mandating verifiable performance benchmarks or imposing binding remediation obligations in cases of non-compliance. This approach permits residual negative impacts to persist without guaranteed compensation or offsetting mechanisms, weakening protections for high-risk areas such as biodiversity hotspots or water-stressed regions. Additionally, although all banks possess complaint resolution channels, the study finds a lack of explicit penalties or sanctions for failure to comply with agreed standards, exposing a governance gap that undermines accountability.
The potential consequences of these regulatory shortcomings are profound. As green hydrogen scales up, unmitigated social and environmental harms could jeopardize the very climate benefits that underpin the technology’s appeal. Biodiversity loss and water depletion not only degrade ecosystems but also threaten livelihoods dependent on natural resources. Community disenfranchisement may trigger social unrest and obstruct project deployment. From a geopolitical perspective, insufficiently equitable arrangements risk deepening north-south divides, contradicting the principles of just energy transitions. These risks highlight the critical importance of MDBs exercising their stewardship roles with greater rigor and transparency.
To address these challenges, the study recommends that MDBs adopt clearer normative commitments emphasizing equitable burden-sharing between importers and exporters of green hydrogen. Policies should mandate stringent environmental and social safeguards distinct to hydrogen’s lifecycle while promoting capacity building that equips host countries with governance and technical expertise. Introducing binding performance standards coupled with enforceable penalties for violations would elevate project accountability. Furthermore, improving stakeholder engagement to authentically incorporate indigenous perspectives and community concerns is essential for developing socially licit projects.
Ultimately, bridging the identified governance gaps could transform MDBs into indispensable enablers of a truly sustainable green hydrogen economy that aligns climate mitigation with inclusive development. The ambitious climate goals set forth in international agreements remain within reach only if foundational infrastructure investments do not exacerbate environmental degradation or social inequities. As hydrogen technologies evolve and their global footprint expands, MDBs must modernize their frameworks to reflect these new realities, ensuring that emerging projects contribute robustly to net-zero pathways and deliver tangible socio-economic dividends for developing countries.
Lai Yee Choy’s comprehensive content analysis shines a critical light on the pivotal role MDBs play and the urgent need for policy evolution. The findings serve as a call to action for international financiers, policymakers, and civil society to collaboratively craft a governance architecture tailored to the unique challenges and opportunities posed by green hydrogen. By doing so, green hydrogen can fulfill its transformative promise as a clean, equitable energy resource integral to a resilient future and a just energy transition.
Subject of Research: Not applicable
Article Title: Evaluating Multilateral Development Banks’ Environmental and Social Policies for Green Hydrogen Projects: A Content Analysis
News Publication Date: 9-Feb-2026
Web References: http://dx.doi.org/10.1177/10704965261418543
References: Choy, L.Y. (2026). Evaluating Multilateral Development Banks’ Environmental and Social Policies for Green Hydrogen Projects: A Content Analysis. The Journal of Environment & Development.
Image Credits: Not provided
Keywords: green hydrogen, multilateral development banks, environmental risk, social risk, sustainability policy, emerging markets, developing countries, renewable energy, water scarcity, biodiversity loss, social equity, climate finance
