Partner: International Development Finance Club (IDFC)
Final agenda:
Keynote: Eric Usher, Head, UNEP Finance Initiative
Part 1 – Walking the talk of the alignment journey
Introduction: general overview of emerging approaches and practices, Claire Eschalier, Head of Secretariat, Mainstreaming Climate in Financial Institutions
Roundtable discussion: Stocktake of latest developments in joint Paris alignment approaches within the financial community
Moderation: Claire Eschalier, Head of Secretariat, Mainstreaming Climate in Financial Institutions
- Danielle Boyd, Investor Practices Senior Programme Manager, Institutional Investors Group on Climate Change (IIGCC)
- Nancy Saich, Chief Climate Change Expert, European Investment Bank (EIB)
- Nicola Mustetea, Director of the Climate Change Team, British International Investment (BII)
- Mustapha Kleiche, International Development Finance Club (IDFC climate facility)
Q&A with the room
Roundtable discussion: Stocktake of latest developments in tools and assessment methodologies
Moderation: Aki Kachi, Senior Climate Policy Analyst, NewClimate Institute
- Carel Cronenberg, Senior Technical Advisor, Council of Europe Development Bank (CEB)
- Alexis Bonnel, Senior Advisor, Foresight, Climate and Sustainable Development, Strategy Department, French development Agency (AFD),
- Sandra Lutz, Head of the Sustainable Finance Division in our Corporate Strategy Department, KfW
- Jorim Schraven, Director IESG, FMO
- Laura Sabogal Reyes, Policy Advisor, E3G and Mathilde Bord-Laurans, Head of the Climate and Nature Department, AFD
- Laila Darouich, Climate Policy Consultant, Perspectives Climate Research
Q&A with the room
Coffee break
Part 2 – Supporting financial institutions in their alignment journey
Presentation of the key results of the research project on how IFIs can support the alignment of their financial intermediaries, Alice Pauthier, Project Manager, I4CE
Stocktake of capacity building mechanisms to support Paris alignment:
- Arnaud Uzabiaga, Head of Impact, Proparco
- Daniel Fonseca, Senior Financial Operations Principal Specialist, Connectivity, Markets and Finance Division, Inter-American Development Bank (IDB)
- Dana Kupova, Associate Director, Head of Green Economy Transition, Financial Institutions Business Group, European Bank for Reconstruction and Development (EBRD)
- Francisco Avendano, Lead practitioner on ESG, Climate and Green Finance Underwriting, International Finance Corporation (IFC)
Conclusion: Secretariat of Mainstreaming Climate in Financial Institutions
Summary of discussions:
- Eric Usher, Head, UNEP Finance Initiative
COP21 in Paris launched the green finance revolution with progress in green bonds and renewables financing.
Since then, the financial sector started to operate a shift from greening at the margins towards greening entire institutions.
Financing doesn’t fill a policy void and is not a replacement for policy ambition.
Voluntary action is probably not enough but it is a good step in the right direction and can lead to mandatory approaches.
UNEP FI manages 3 net zero alliances within GFANZ and welcomes the High level expert group report on non-state actors’ net zero commitments. Alliances will work towards integrating these recommendations moving forward.
The last recommendation of the report is to create a task force on net zero regulation and this is perceived as particularly important.
Banks are getting more and more nervous about what they say and do (green hushing).
There will be legal cases around the divestment of coal assets.
Government, finance and industry need to work together.
There is now a need to adopt a holistic approach to alignment.
- Danielle Boyd, Investor Practices Senior Programme Manager, Institutional Investors Group on Climate Change (IIGCC)
IIGCC has two net zero vehicles, one for Asset Owners and one for Asset Managers.
These commitments demonstrate the ambition of actors in the sector.
The net zero investment framework developed by IIGCC includes different components (governance & strategy, portfolio reference targets, strategic asset allocation, asset level assessment & targets, implementation, stakeholder and market engagement and policy advocacy).
IIGCC highlighted 10 alignment indicators for companies:
- Ambition: a long term 2050 goal
- Targets: short- and medium term; scope 1,2 and material scope 3 emissions
- Emissions performance relative to targets
- Disclosure of emissions
- Decarbonization strategy: a quantified plan to deliver GHG targets, green revenues targets
- Capital Allocation Alignment: capital expenditures consistent with net zero by 2050
- Climate policy engagement: Paris Agreement-aligned climate lobbying
- Climate governance: oversight of transition planning & executive remuneration linked to targets & transition
- Just transition: consideration: consideration of transition on workers and communities
- Climate risk and accounts: transition risk TCFD disclosure and incorporating risks into financial accounts
IIGCC also released a discussion paper on what a climate resilience investment framework could look like.
Investors are not only looking at the risks of individual assets but also at how physical climate risk might affect the systems in which their assets are valued.
IIGCC identified 6 levers to build adaptive capacity:
- Integrating physical climate risk into investment processes
- Asset allocation & portfolio construction
- Asset alignment, engagement & stewardship
- Investment in adaptation solutions
- Policy advocacy
- Disclosure
- Nancy Saich, Chief Climate Change Expert, European Investment Bank (EIB)
When developing their approach, MDBs started looking at future operations as well as identify clients at risks in their existing portfolio.
MDBs have different approaches for different types of financing instruments (project, policy-based lending, intermediated finance, etc.).
MDBs will continue to share what they are doing as they will be increasingly moving from the methodological development work to the active implementation of Paris alignment.
One key lesson learnt from initial pilots is the need for MDBs to focus their efforts on working with companies and entities and not just focus on projects.
MDB strongly believe that in the end everyone should be Paris aligned, and MDB should support their clients in this journey.
But in the context of the crises we are facing, climate finance is still absolutely critical. MDBs also need to make major efforts to drive finance towards mitigation and adaptation projects. It is important to provide technical assistance and capacity building to help countries and clients make these projects bankable.
MDBs thus both aim to increase the impact of their climate finance, while ensuring that all of their operations are Paris aligned.
MDBs are currently developping approaches for the alignment of their financial intermediaries and hope to continue exchanging with commercial banks through the Mainstreaming Initiative.
- Nicola Mustetea, Director of the Climate Change Team, British International Investment (BII)
BII’s Paris alignment approach consists of a net zero target by 2050, while supporting the just transition, and adaptation and resilience. It combines a bottom-up approach for assessing the alignment of each investment while ensuring the alignment of the overall portfolio.
The joint Paris alignment process for EDFI was the following:
1- Commitment in EDFI Climate and Energy Statement
2- Proposal by working group (BII, CDP, DEG, Funnfund, FMO, OeEB, Proparco, IFU and Swedfund)
3- EDFI harmonisation taskforce
At the transaction level, EDFI uses a negative list for misaligned activities, a positive list for aligned activities and sector guidance for other activities.
Criteria for conditional investments in 3 areas: system level (country level), asset level, transition risk.
- Mustapha Kleiche, International Development Finance Club (IDFC climate facility)
In 2021, IDFC members committed 220 billion EUR in green finance and more than 80% of this green finance is climate finance.
To operationalize its joint Paris alignment commitment, IDFC created a climate facility to answer their needs, in terms of tools and methodologies, starting with teh development of a risk assessment tool.
In addition, IDFC members have worked with MDBs to update the common principles on mitigation and started implementation last year.
IDFC also partnered with E3G to assess the alignment of a few members.
Roundtable discussion: Stocktake of latest developments in tools and assessment methodologies
- Carel Cronenberg, Senior Technical Advisor, Council of Europe Development Bank (CEB)
CEB is an MDB with a specific mandate on social outcomes. All projects are seen through a social inclusion lens.
CEB made a Paris alignment commitment similar to other MDBs.
The social inclusion and climate nexus is particularly interesting.
In terms of mitigation CEB is not exposed to the high emitting sectors.
In terms of adaptation, CEB is looking at a resilience dimension of not only infrastructures but also communities and different groups and regimes to climate change, impacting different social groups. There is a need to look upstream and downstream.
CEB uses the methodologies of other MDBs but need to adjust those methodologies, principles and definitions to their own mandate and clients.
CEB identified a number of challenges around what is meant by net zero.
A good understanding on reporting is needed now that the methodology is in place. CEB will produce its first TCFD report.
- Alexis Bonnel, Senior Advisor, Foresight, Climate and Sustainable Development, Strategy Department, French development Agency (AFD)
AFD has developed a Sustainable Development Mechanism to mainstream SDG alignment. It is one of the different tools that are being developed and used by AFD.
Paris alignment is a journey and tools that are implemented will involve raising ambition from doing bad things, to doing good things, to doing the right thing.
AFD started looking at the process, the counterparts, the operations, the pathways within which the operations are implemented.
Objectives of this project-level mechanism:
- Apply a do no harm approach = no significant negative impact on any SDG
- Maximise positive impacts for greater contribution to SDGs
- Foster integration of all SDG dimensions
This ex-ante impact assessment needs to be transformed into an ex-post assessment.
The mechanism has 2 legs:
- An analysis done by operational teams, based on a shared methodology
- An opinion issued by a team independent from the operations, to inform decision-making bodies on sustainable development impacts
This independent opinion goes all the way to the board for decision-making.
The opinion provides a picture of the level of alignment of the project with SDGs.
6 dimensions are covered: social, gender, governance, economy, biodiversity, low-carbon, resilience
Analysis summary grid with assessment score from -2 to +3 (if leverage is transformational). If a project scores -2 it is not financed.
- Sandra Lutz, Head of the Sustainable Finance Division in our Corporate Strategy Department, KfW
KfW started in 2019 to develop a sustainable finance concept.
KfW integrated sustainability considerations into strategic targets in a binding manner.
KfW developed a steering system, composed of sector guidelines for 7 GHG-intensive sectors: shipping, automotive, steel, power generation, buildings, aviation (all 6 updated in 2021 based on net zero transition scenario by 2050 of the IEA), oil and natural gas (under development) .
KfW assesses whether activities are transformational, aligned, transitional or not aligned, or not relevant to consider for climate impact (e.g. education programme)
Transitional technologies are meant to decrease.
Sector guidelines set minimum requirements and the ambition level is increasing over time, binding for all new financing.
- Jorim Schraven, Director IESG, FMO
FMO is a regulated bank as part of the Dutch financial sector, which has a portfolio approach.
FMO developed a program with the Joint Impact Model and PCAF targeting 25 financial institutions to provide them:
- Access to the online tool
- Support on compiling a baseline carbon footprint
- Feedback rounds for further improvements on the tool
- Engagement on risks, opportunities, scenario planning and target setting
- Networking with other banks and experts
After this pilot program, the objective is to reach 500 financial institutions in emerging economies so they can also regularly disclose reliable carbon accounts as part of their transition plans.
This work should be completed with hard exclusions moving forward.
In addition, FMO is now aiming to complement its approach with a project level assessment.
- Laura Sabogal Reyes, Policy Advisor, E3G
E3G has developed an online matrix tool to make transparent how MDBs and other public banks are mainstreaming climate change and aligning with the Paris agreement objectives.
- each institution is at different stages on the journey towards Paris alignment and will take different paths to it.
- The tool enables the identification of evidence-based recommendations and areas of best practice amongst institutions.
- Comparison across institutions is useful for this.
4 categories were set: unaligned, some progress, paris aligned and transformational.
Highlights of AFD Assessment results: AFD is well on its way to become 100% Paris aligned
- Highest ratio of clean energy finance amongst all PBs E3G has assessed
- Integral approach to climate action action combined with SDGs
- Lending and fossil fuel exclusion policies among the best E3G assessed
- Transformation institutional leadership: supporting other institutions on their path to alignment
E3G recommendations to push its ambition further:
- AFD should implement a methodology for indirect finance, in coordination with the joint MDB work on this topic
- AFD should establish a portfolio-level target as a key component of its goal of full alignment with the Paris Agreement
- AFD should consider the implementation of a shadow carbon price to help inform decision-making on the low-GHG trajectories
- Mathilde Bord-Laurans, Head of the Climate and Nature Department, AFD
Mathilde Bord-Laurans highlighted three points in reaction to E3G’s presentation:
- Need to develop further analytical work on net zero approach on portfolio level
- Need for real acceleration on how partners are working on this
- Need for convergence of methodologies in the financial system – same clients so convergence is key
Dialogue will be proposed at the FICs together with NGFS and GFANZ
- Laila Darouich, Climate Policy Consultant, Perspectives Climate Research
Export credit agencies are often overlooked finance institutions. They represent the largest class of major G20 public finance institutions supporting the fossil energy sector (annual average of USD 40bn between 2018-20) which is more than 10x more financial support than for renewable energy exports (OCI 2022).
However, OCI started to look at ECAs and recently an export finance for future initiative was launched to increase transparency of portfolios of ECAs.
A reform of the OECD arrangement was adopted: ban of official export credit support for unabated coal-fired power plants.
COP26 statement on international public support for the clean energy transition.
Best practice examples:
- British ECA
- Dutch ECA
Perspectives developed a methodology to assess Paris alignment of ECAs, based on the E3G matrix with higher emphasis on mitigation through weighting approach.
7 G20 countries have been analysed (Germany, Japan, Netherlands, Canada, UK, US, Italy) and results are alarming.
- Obstacles:
- Free rider issue: perceived risk of losing out from ceding market shares when ceasing to support fossil fuels
- Fragmented supranational policy landscape of sustainable export finance consistent with 1.5 °C
- Opportunities:
- Political momentum from COP26 and the E3F initiative (e.g., diffusing the joint Transparency Reporting beyond E3F members)
- Leadership from first movers (e.g., Denmark, UK, Sweden)
- Potential to increase climate-related cooperation in different forums (e.g., G7 climate club proposal)
Presentation: How can IFIs support the alignment of financial intermediaries? Alice Pauthier, Project Manager, I4CE
- Supporting the alignment of financial intermediaries is an important step of IFIs’ alignment process, that can contribute to foster transformative outcomes
- A number of IFIs are starting to develop Paris alignment due diligence processes, together with climate-related risk due diligences. However, they are facing a number of constraints including the access to data and the fact that a number of institutions are at the early stages of this journey.
- To align financial intermediaries, IFIs need to support the “consistency” of the broader economic and financial system. IFIs are well placed to create enabling conditions for financial intermediaries to align as they can:
- Offer capacity building to financial intermediaries
- Engage with and provide support to national governments
- Engage with and provide support to national central banks, regulators and supervisors
- However, they need the resources and mandate to engage in these different areas of work at the scale that is needed
- Arnaud Uzabiaga, Head of Impact, Proparco
Proparco’s work on climate with partner financial institutions includes the following approaches:
- Climate credit lines: Credit lines where use of funds is (totally or partially) earmarked to investments with positive climate impacts (as per AFD-Group climate finance taxonomy)
- Note: Client is responsible for tracking and reporting on climate finance investments according to agreed-upon criteria
- Technical Assistance (TA) on climate topics: Proparco can provide both grant financing and technical guidance to help clients in mobilizing tailor-made expertise on a range of climate finance topics.
- TA projects focus on building capacities and driving transformation at an operational and strategic level, to increase performance and impact.
- The Pro Climate Approach:
- Credit line combined with Climate Action Plan to mainstream climate across the FI’s strategy and operations.
- Technical Assistance to support implementation of Climate Action Plan
- SUNREF programmes: An integrated approach to develop ecosystem for renewable energy (RE) and energy efficiency (EE) finance.
- Credit lines to partner banks for the financing of green (RE and EE) projects
- Large, comprehensive Te package for all market ecosystem actors (banks, green project owners, policy-makers, etc) to support both supply and demand for climate finance
- Note: SUNREF projects typically require external grant financing, and multiple participating FIs in a given country
The Pro Climate approach seeks to mainstream climate considerations into partner FIs’ decision-making processes and tools
- Due diligence assessment to determine where an FI currently stands along 3 axes:
- Policy/strategy
- System/tools
- Performance/monitoring and reporting
- Development of tailor-made climate action plans to guide progress (similar to ESAPs)
- Provision of technical assistance to implement climate action plans:
- g. capacity building, tool development, market research
- TA facility available
- Dana Kupova, Associate Director, Head of Green Economy Transition, Financial Institutions Business Group, European Bank for Reconstruction and Development (EBRD)
EBRD had adopted a client-based approach. The EBRD works with 300 very diverse financial institutions. Most clients are repeat clients, as such the EBRD is in a position to focus on the partnership with their clients and not only on the transactions.
EBRD started working on a green partnership with its clienrs two years ago as climate risk unfolded with TCFD and developed a survey to understand current practice within their clients.
Survey outcomes confirmed that there was a massive gap in the market and a need for EBRD to support its clients.
EBRD developed a Paris alignment matrix to map where they are in their practices and what is the next step.
EBRD developed a diagnosis tool made of several questions and includes both quantitative and qualitative questions.
Today the end point is not fixed as new guidance is coming. There is a need to accept uncertainty.
The Mainstreaming initiative will play a major role in convening everybody around the same principles.
Commitment, clarity and credibility will need to be fulfilled by IFIs.
- Francisco Avendano, Lead practitioner on ESG, Climate and Green Finance Underwriting, International Finance Corporation (IFC)
When looking at clients, two options are possible: looking at transactions or the overall readiness of the institution.
The engagement with the client is key for IFC.
The support provided by IFC aims to lead to concrete results.
For example, IFC aims to contribute to creating an enabling environment for a legal playground and engages with regulators, policy makers. This includes looking at the supervision guidelines of the banking system and how they may consider climate considerations like climate physical risks or carbon intensity.
In addition, IFC offers one-to-one advisory with the client to see how it can develop investing policies on fossil fuels investment for example or improving the resilience of their assets.
IFC has developed tools and methodologies for financial institutions (for example for climate resilience of crops).
Finally, IFC aims to work together with clients to develop Paris alignment business plans.
- Daniel Fonseca, Senior Financial Operations Principal Specialist, Connectivity, Markets and Finance Division, Inter-American Development Bank (IDB)
IDB has the mandate to discuss with policy makers, regulators, development banks etc. and thus can contribute to create the enabling environment of companies.
IDB engages in regional policy dialogues.
In addition, IDB engages with public financial institutions and will provide technical assistance.
From the private sector side, national development banks will be the bearers of what will be needed.
IDB Invest have a strong engagement with financial institutions.
IDB and IDB Invest are coordinating and this coordination will be key in this process.
Technical advisory helps support the institutional strategies of both public and private entities on what may be the green climate advances institutions would have.
The IDB provides:
- Blending of donor resources with green loans
- Access to capital markets with the preparation of thematic bonds
IDB is launching next year with ALIDE a working group on financial intermediaries’ Paris alignment to support the work on Paris alignment.