AFD

Overview of climate mainstreaming approach and goals:

Building on more than 10 years of climate action, the Group Agence Francaise de Développement (AFD) is implementing an ambitious climate strategy composed of 4 key commitments :

1) ensure a 100% Paris Agreement compatible activity:

2) increase volumes of climate finance (based on a climate finance target of 50% climate co benefits)

3) contribute to redirecting financial flows and investments towards climate;

4) participate in international debates, on climate finance, but also on the role of development banks and investors to better mainstream climate change issues in their activities.

In 2020, AFD performed a mid-term review of the climate strategy. It aimed to do an assessment of AFD’s climate achievements and progress to fully meet the objectives of the strategy. It revealed that AFD is well positioned to meet and overpass its objectives and outlines several areas of progress including a better convergence with biodiversity.

AFD will launch the process to prepare its new Climate Strategy in 2022, taking into consideration the necessary convergence with biodiversity and nature related topics.

AFD’s CEO, Rémy Rioux is Chairman of the International Development Finance Club (IDFC), IDFC, created in 2011, is the leading group of 26 national and regional development banks from all over the world, a majority active in emerging markets. IDFC is the largest provider of public development and climate finance globally with USD 4 trillion in combined assets and annual commitments above USD 600 billion, including USD 150 billion of climate finance. AFD hosts the Secretariat of the IDFC.

Cognizant of its unique role, the IDFC has worked actively to integrate climate considerations into strategy and operations by:

• Publishing every year its Green and Climate Finance Mapping since 2012;
• Committed to align with the Paris Agreement, alongside the MDBs, at the One Planet Summit in 2017;
• Publishing a position paper spelling out a specific understanding of alignment for IDFC members at COP24 in 2018;
• Publishing an operational framework for Paris alignment in 2021, elaborated by two independent think tanks: the New Climate Institution (NCI) and the Institute for Climate Economics (I4CE). The study provides clear and practical guidance on how IDFC members – and the financial community at large – can reach a better alignment of their strategies, programs, and operations, with the requirements of the Paris Agreement.

 Principal Strategic Documents:

• Group 2018-2022 Strategy (2018)
• Climate & Development – 2017-2022 Strategy (2017)
• Midterm Assessment of AFD’s climate strategy (2020)
• 2019-2022 AFD Energy transition strategy (2019)
• Public Consultation on AFD Group’s 2023-2027 Strategy | AFD – Agence Française de Développement (to be published soon)

Principal Tools and Methodologies:

AFD has been one of the first financial institutions to integrate climate consideration in its activities and in its strategy, starting in 2005. Four years ago, AFD updated its climate strategy and decided to go further and to become the first development bank with an explicit mandate to be 100% aligned with the Paris Agreement. This means that through each project, program or policy we support, we accompany countries in their transformation towards climate-friendly development trajectories :

• 50% of AFD Group portfolio is dedicated to projects with climate co benefits (adaptation and mitigation) following the common principles of IDFC and the MDBs for accounting for climate finance and applying internal methodological considerations for some sectors.
• A general and systematic analysis of low-carbon transition and resilience issues is conducted for all countries of operation, based on the NDCs.
• A specific process for analyzing project consistency with low carbon and climate-resilient trajectories has been incorporated into AFD’s Sustainable Development Analysis and Opinion mechanism.

In short, “100% Paris Agreement” for AFD means:

• answering the Paris Agreement objective to align financial flows with pathways towards low carbon and resilient development;
• looking at 100% of its operations to make sure that none is incompatible with the climate objectives, following a “do not harm” principle;
• assessing projects through national context of climate issues and policies;
• influencing partners to align their financial flows.

Regarding Climate risks :

Since 2019, AFD has been implementing a transversal roadmap on climate-related financial risks for the group (including Proparco), around 4 pillars:

1. Understand AFD’s exposure to climate risks ;
2. Integrate climate risks into our public policy dialogue ;
3. Contribute to the uptake of climate risk analysis tools by AFD’s financial partners ;
4. Contribute to international discussions and to the elaboration of tools and standards.

Physical climate risks

• Since early 2018, AFD initiated a mapping exercise of the exposure of its loan portfolio to physical climatic risks, as well as an effort to develop a risk assessment tool for new loans.
• This work started by estimating the climate vulnerability of a subset of assets of AFD’s portfolio according to 5 specific indicators, some of which reflect either extreme climate events as well as the gradual evolution of chronic climate parameters: extreme rainfall, rising sea level, cyclones, hurricanes and storms, heat stress, and water stress. Each indicator is standardized on a relative scale from 0 to 100. Whilst the AFD is not intending to roll-out this rather complex methodology on its entire portfolio, this work helped shaping AFD’s thinking on the alternatives for integrating physical climate risks into its credit risk assessment processes, both at the origination stage and in the regular monitoring.
• In terms of the assessment of new clients (and new loans for existing clients), AFD decided not include climate risk as a new dimension in its credit rating methodology and instead set up an independent scoring system for each physical risk. To help assessing those scores, AFD went on to develop two new sets of tools
  • a sector-country matrix that produces preliminary scores and red flags for each client, based solely on 2 simple inputs: the country and the sector the client is operating in.
  • a ready-made questionnaire intended to be used during the due diligence process for new projects in order to have more complete information on whether the client is aware of the identified risks and has elaborated potential adaptation strategies.
• In terms of assessment of the existing portfolio, a simplified assessment, based on the sector-country matrix, is being rolled-out for all existing clients in the portfolio to ensure that an adequate climate risk monitoring process is in place.
• This new process will enable AFD to remain focused on its mandate: the goal is to assess risks adequately but not reduce our risk appetite towards the most vulnerable clients that AFD can support in improving their resilience to climate change.

Transition risks

• Similar work at the portfolio level and risk assessment tool has been engaged on the issue of transition risks. This approach will be implemented in 2022.
• In parallel to this top-down approach, AFD’s research team has initiated a series of in-depth bottom-up country case studies, in partnership with the think tank Climate Policy Initiative (CPI). Willis Towers Watson (WTW) has since absorbed CPI Energy Finance. The first such case study has been on South Africa, was supported by Development Bank of South Africa, and published by CPI in March 2019. A similar study is on-going in Colombia with the support of National Planning Department and academics from Universidad de Los Andes. Discussions are on-going for launching similar studies in a few other countries in 2021/2022, usually with Finance Ministries, Central Banks and IDFC members.

TCFD Report

• In the sidelines of the Second edition of the Finance in Common Summit (FICS) in October 2021, AFD published its first TCFD report around the four areas of climate reporting defined by the working group: governance, strategy, risk management and the indicators and metrics used.
• As a “100% Paris Agreement” development agency, AFD gives a central place to climate-related opportunities and risks in its governance, in its dialogue with clients and partners, in the choice of operations financed, and in the various indicators used to monitor the Group’s activities. This report establishes and documents this, in order to allow regular exchanges on these subjects with all our clients and partners.

Other tools:

• Common Principles for Climate Change Adaptation Finance Tracking
• Common Principles for Climate Mitigation Finance Tracking – Version 3 – 18 October 2021
• AFD Carbon Footprint Tool for projects
• AFD’s sustainable development analysis
• IDFC Position Paper Aligning with the Paris Agreement
• IDFC Green Finance Mapping Report 2020
• Operationalization Framework on Aligning with the Paris Agreement for the IDFC
• AFD and Macroeconomic Modelling Tools for the Ecological Transition | 
• Adapt’Action: Tackling Climate Change Together | AFD 

Key reports and other materials published by the institution:

• AFD’s first TCFD report
• Climate – 2020 Activity Report | AFD – Agence Française de Développement
• Why and How Should Development Banks Take Physical Climate Risks into Account? | AFD – Agence Française de Développement
• AFD’s Rapport d’Activité et de Responsabilité Sociétale 2020 (RSO)
• AFD Group and Financial Systems | AFD
• Climate – 2021 Activity Report | AFD