Key initiatives and trends in aligning finance with the Paris Agreement

In 2015, governments adopted the Paris Agreement, which sets 3 main objectives for the international community:

• Holding the increase in the global average temperature to well below 2°C […];
• Increasing the ability to adapt to the adverse impacts of climate change and foster climate resilience […];
• Making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.

Since then, pioneer groups and coalitions of both public and private institutions across the financial community took joint commitments to “align” with these three objectives. These groups and coalitions rapidly started to 1) define what alignment means and implies for the different types of financial institutions and what may be expected from them specifically, and 2) develop common frameworks and approaches to assess the alignment of their activities with the goals of the Paris Agreement. While individual institutions may be using a range of different tools and methodologies, the guiding principles, frameworks and approaches developed by these pioneering groups may soon become de facto standards for respective types of financial institutions.

Nevertheless, further methodological developments are needed for a number of tools, including the harmonization of key methodological choices and agreement on the ‘minimum requirements’ for practice. These discussions are occurring in different forums, such as the Group of MDBs as well as part of new work undertaken by the Task-force on climate-related financial disclosures (TCFD) around climate-related metrics and portfolio alignment tools.

Alignment approaches are currently mostly voluntary, but some jurisdictions are starting to request financial institutions to report on this aspect. This is the case in France since 2015 where disclosure of contribution to climate goals as well as exposure to climate-related risks is mandatory. Influential initiatives such as the Coalition of Finance Ministers for Climate Action and the G20 Sustainable Finance Working Group have begun to “explore approaches to encourage financial institutions to align their practices with the goals of the Paris agreement”. Incentives, regulations and disclosure requirements are thus expected to increase in the coming years.

List of key initiatives:

• Coalition of Finance Ministers for Climate Action (CAPE): One of the 6 Principles of the Coalition is to “Align policies and practices with the Paris Agreement commitments”
• Glasgow Financial Alliance for Net Zero (GFANZ): This initiative is a forum for strategic coordination among the net zero finance initiatives working to contribute to the temperature goal of the Paris Agreement.
• The Institutional Investors Group on Climate Change (IIGCC): This network of investors launched a Paris Aligned Investment Initiative (PAII), which released a Net Zero Investment Framework for investors.
• International Development Finance Club (IDFC): This club of DFIs committed to align financial flows with the Paris Agreement and released 6 Principles guiding its members’ approaches to Paris Alignment.
• The Investor Agenda: This coalition of investors’ groups released guidance for issuing and implementing comprehensive climate action plans, including steps investors can take to support the goal of a net-zero emissions economy.
• Multilateral Development Banks (MDBs): This group committed to align financial flows with the Paris Agreement and developed an alignment approach relying on 6 Building Blocks.
• Task Force on Climate-Related Financial Disclosures (TCFD): This task-force launched by the G20 recently complemented its initial work and recommendations on risk management with work on climate-related metrics and created the Portfolio Alignment Team (PAT).
• Partnership for Carbon Accounting Financials (PCAF): This initiative developed a standard, which provides detailed methodological guidance to measure and disclose GHG emissions associated with six asset classes that may be used as part of Paris Alignment approaches.
• Poseidon Principles: These Principles establish a framework for assessing and disclosing the climate alignment of ship finance portfolios.
• Science Based Targets initiative, framework for financial institutions (SBTi FI): This framework guides financial institutions in setting science-based targets to align their lending and investment activities with the Paris Agreement.
• UNEP FI: The first principle of the Principles for Responsible Banking is “Alignment”. In addition, UENP FI has convened three net-zero alliances across the financial sector: the Net-Zero Asset Owner Alliance, the UN-convened Net-Zero Insurance Alliance and the Net-Zero Banking Alliance.