Opinion: How can European development finance institutions align with the Paris climate goals?

UNFCCC Executive Secretary Christiana Figueres, former U.N. Secretary-General Ban Ki Moon, COP21 President Laurent Fabius, and former French President Francois Hollande raise hands after the adoption of a historic global warming pact at the 2015 COP21 climate conference. Photo by: UNFCCC / CC BY

On March 14th, the One Planet Summit takes place in Nairobi, Kenya, an important international moment for climate action. The conference of the Association of European Development Finance Institutions, or EDFI, took place last week — the club for 15 public development finance institutions investing in the private sector in developing countries, many of whom are investing in Africa.

However, unlike the multilateral development banks and the International Development Finance Club, the EDFI group has yet to make a collective statement on aligning finance with the Paris climate goals.

Under the Paris Agreement on climate change, countries have committed to making finance flows consistent with a pathway toward low greenhouse gas emissions and climate-resilient development.

There’s no time for delay given the world is currently off track to meet the global climate goals.  Many of the world’s most vulnerable people are already facing severe impacts.

EDFI is investing substantially in climate action and the United Nations Sustainable Development Goals. Together, these institutions had a collective portfolio of more than €37 billion ($41.73 billion) in committed investments at the end of 2017.

With climate finance of the group so far amounting to almost €7 billion at the end of 2016, the group is already doing a lot to invest in green projects such as solar and wind energy. But could this group be missing further opportunities to raise its ambition on climate action?

Private investments and greening the financial sector

EDFI was founded in 1992 and according to the group’s website, over a third of the group’s finance goes toward the financial sector.

Investments in the financial sector, including in local banks and microfinance institutions, provide a great opportunity to support green finance and climate resilience. There are existing lessons from the International Finance Corporation, the World Bank’s private sector arm, which has developed a green equity investment approach and asks clients to disclose their exposure to coal.

The group already supports banks to raise their environmental and social standards. EDFI could go a step further by supporting the banks they work with to track their emissions or scale up green finance.

There may be more opportunities for members of the group to issue green bonds. For example, FMO, the Dutch development bank, is already active in sustainability bonds, while PROPARCO, part of the French Development Agency Group, invested in the first green bond issued by Banque Centrale Populaire, one of Morocco’s largest banking groups.

Investing in local banks is also an opportunity to support resilience. For example, the European Bank for Reconstruction and Development invests in the Climadapt program in Tajikistan — which provides loans to local households and small businesses for investments in climate change resilience.

Sustainable infrastructure and power

The second biggest sector this group invests in is power infrastructure, with around a fifth of the group’s total investments. The group generated an additional 74,000 GWh of electricity supply in 2016. How much of this is generated by clean energy we do not know. EDFI members should make efforts to report this. The power sector will have to shift to a net zero world by mid-century in order to stabilize the world’s climate.

Most European governments that are shareholders of EDFI members are part of the Powering Past Coal Alliance, a coalition of national and subnational governments, businesses, and organizations working to advance the transition from unabated coal power generation to clean energy, demonstrating a commitment to end dependency on coal.  

The group may be able to actively support a transition away from fossil fuels in the countries and companies they invest in, especially since more than 40 percent of coal plants globally are unprofitable. As an example of good practice, the U.K. CDC Group excludes investments in coal via financial intermediaries.

In future, the group’s exclusion list could potentially be further updated to exclude high-risk investments such as oil exploration, something already excluded by the World Bank and EBRD.

Greening the portfolio and taking up new opportunities

Several members of the group are already taking steps to align lending with the Paris accord. For example, Dutch agency FMO made a pioneering commitment to align with a 1.5 degree Celsius pathway and developed a methodology to do this.

PROPARCO has a strategy to be 100 percent compatible with the Paris Agreement. This is a less technical approach, applying a set of compatibility criteria across their investments.

In terms of tracking emissions, the group members could explore whether to adopt a common approach to greenhouse gas accounting — for example, using the International Financial Institutions’ approach. A few members of the group are taking part in this wider working group to share learning. Several have also adopted a portfolio approach to greenhouse gas accounting. They account for the total emissions of their total investment portfolio rather than just the emissions of individual projects. All members should strive to adopt this approach.

Another opportunity could be on annual reporting on how much climate finance has been catalyzed, perhaps using methodologies from the main development banks. Some of the group have existing commitments to scale up climate finance. PROPARCO, for example, has earmarked €2 billion to climate projects by 2020.

By sharing learning, the group will be better able to take up opportunities for the low-carbon transition and make their investments more resilient. IFC estimates that climate investment opportunities will total $23 trillion in emerging markets by 2030, many of which are in green buildings and energy efficiency.

In summary, by aligning with international best practices and standards, this group can help unlock the potential for green finance and align with other international financial institutions in supporting the low-carbon transition.

About the authors

  • Helena wright

    Helena Wright

    Helena Wright is a senior policy advisor at E3G, where she leads the work on international financial institutions. Prior to joining E3G, Helena worked for the U.K. government as a climate finance policy advisor, where she led on the NDC Partnership programme and on climate finance accounting. She has previously worked on renewable energy and green business advice as well as working for the United Nations on green growth. She has written multiple book chapters and articles on climate change and was a contributory author for the Intergovernmental Panel on Climate Change.
  • Samantha attridge

    Samantha Attridge

    Samantha Attridge is a senior research fellow at the Overseas Development Institute, with a particular interest in innovative finance, mobilisation of private capital, sovereign debt management and debt sustainability and global economic and financial governance. She is currently leading ODI's research on blended finance.