There is an increasing need for public development finance to address multiple crises. The investment needs for climate, health, food, and energy security grow ever larger, and the geopolitics increasingly difficult. Against this background, Public Banks (PBs) have the opportunity – and the imperative – to assume a lead role in the transition to a climate-safe world. Their potential contributions extend beyond simple financing and include their ability to influence policy development at the national and sub-national level and their convening power to bring together public and private partners. It is the combination of guiding influence and financial strength which reflects the true value-add of PBs and their potential for climate leadership in the contemporary polycrisis scenario.

To fulfil this role, it is critical that PBs are themselves aligned with the Paris Agreement. Orienting operations in this manner is essential to ensuring PBs continue to adhere to their development mandates in a manner compatible with the necessity for climate action. How then, should Paris alignment be measured and approached? And how does this hold up in the polycrisis context?

Tracking the Alignment of Public Banks with the Paris Agreement

In line with this thinking, most Multilateral Development Banks (MDBs) and Bilateral Development Finance Institutions (BDFIs) have pledged full alignment of all new investments with the Paris Agreement before 2025. For example, EDFI has committed to fully align all new financing of its members by 2022, with net-zero portfolios by 2050 (EDFI 2020). However, despite this momentum there is still no common Paris alignment methodology across PBs. In fact, the direction of travel is currently the reverse, with most banks currently in the process of establishing their own individual approaches to alignment.

In view of this lack of consensus, E3G has developed a Public Bank Climate Tracker Matrix that tracks and compares Paris alignment across PBs. In doing so, it aims to make transparent the extent to which PBs are mainstreaming climate change in their work, whilst also providing evidence-based recommendations and identifying areas of best practice amongst institutions. The tool provides greater granularity, as compared to the more broad-brush Paris alignment approaches proposed by the EDFI group, the International Development Finance Club (IDFC) and the Joint MDB group, translating them into concrete policies to be tracked and quantified. The resulting framework is constituted by 15 metrics, broadly categorised using the six ‘building blocks’ of Paris alignment identified by the Joint MDB group: (1) climate finance; (2) climate risk, resilience, and adaptation; (3) internal activities; (4) mitigation; (5) engagement and policy support, and; (6) reporting.[1]

Whilst recognising the differing contexts, capacities and relevant counterparties across PBs assessed by providing tailored recommendations, it still remains valuable to identify best practices and exemplary approaches relevant to all institutions. PBs face varied contextual considerations, but do not operate in vacuums – there is clear value to coordination and common learning.

The State of Public Banks’ Progress on Paris Alignment

At present, no MDB or DFI covered by E3G’s Matrix has been found to be 100% aligned with the Paris Agreement. However, since 2018 (when the tool was established) there has been massive, albeit mixed, progress towards alignment. Yet this is facing challenges from the present polycrisis context, which has challenged MDBs and other DFIs in terms of what some perceive as competing mandates (i.e., climate action and development) thus leaving potential impact unrealised.

A telling example is the area of greenhouse gas (GHG) accounting at portfolio level and corresponding emission targets. From the DFI perspective, portfolio level accounting and the corresponding targets can be viewed as potentially distortionary because emissive projects may be vital for development. However, it is also not helpful for developing countries to continue to invest in carbon-intensive assets, thus increasing the risk of potential lock-in or stranded assets. Unsustainable assets have a measurable lifetime and can accordingly be accounted for in forward-looking portfolio steering. This perceived “trade-off” between development and Paris alignment is particularly relevant in the current geopolitical context and to the area of fossil fuel phase-out. Whilst some MDBs like the World Bank (WB) continue to finance fossil fuel projects, others which had already phased-out fossil fuel financing are currently under pressure to backslide on this pledge, such as the European Investment Bank (EIB) (Financial Times, 2022).

Short-term decision-making justified by geopolitics and immediate development needs, however, should not come at the expense of the long-term. The role of PBs in this context should be one of contributing to avoiding any long-term lock-in of unsustainable and ultimately unprofitable assets, rather than facilitating any path dependent emissions trajectory. Furthermore, thinking in terms of trade-offs is fallacious – development must and can be sustainable for developing countries in order for these same countries to be best-placed to succeed in a climate-safe world.

Climate Action and Development

In the context of the “Just Transition” of the Paris Agreement, there is clearly a broader role to be played by PBs. Through country-level facilities, PBs are well-placed to leverage their expertise through technical assistance to governments in defining national low carbon development models which mitigate against the unwanted effects of the transition. In this way, PBs could collaborate to finance the most impactful projects. Moreover, the aforementioned models should be accompanied by robust transition plans, attached to temperature scenarios and guided by appropriate implementation and monitoring frameworks. Through this combination, concrete investment plans can be generated which incorporate indispensable climate considerations whilst fulfilling development needs.

Fundamentally, it is in the interest of PBs and the countries where they operate to commit to a low-carbon transition and put in place climate resilient infrastructure. Pushing for low-carbon development models, aligned with the Paris Agreement and with interwoven mitigation and adaptation considerations, is therefore critical. In sum, Paris alignment is far from a trade-off for development mandates – it should be a crucial part of their fulfilment.

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Sources
Financial Times, 2022. “European Investment Bank resists pressure to fund gas projects”, Available at: https://www.ft.com/content/b00ea2e5-78a0-46c5-b2b0-33e6a40b96af

BMZ – Federal Ministry for Economic Cooperation and Development of Germany, 2022. “World Bank needs to restructure to address global challenges of the future”, says Development Minister Schulze. Available at: https://www.bmz.de/en/news/press-releases/schulze-world-bank-annual-meetings-2022-125264

E3G Public Bank Climate Tracker Matrix. Available at: https://www.e3g.org/matrix/

EDFI, 2020. European Development Finance Institutions announce joint ambitions for climate action. Available from: https://www.edfi.eu/news/edfi-climate/

Saldinger, A., 2022. John Kerry calls on MDBs to step up on climate finance. Devex. Available at:  https://www.devex.com/news/john-kerry-calls-on-mdbs-to-step-up-on-climate-finance-103065

[1] A breakdown of all metrics, along with details regarding how benchmarks are determined for each and justifications for the score of each assessed PB, is available on the website.

About the authors

Laura Sabogal: Policy Advisor for E3G´s Public Banks Team, leading the work around E3G´s Public Bank Climate Tracker Matrix.

Viktor Ahlgren: Junior Researcher for E3G´s Public Banks Team, focusing on providing research and analysis for the E3G Public Bank Climate Tracker Matrix.

Dominique Schmutzer: Junior Researcher for E3G´s Public Banks Team, focusing on providing research and analysis for the E3G Public Bank Climate Tracker Matrix.

The published essay represent the views of the authors alone, and do not reflect the opinions of either the EDFI Association or its member institutions.