EDFI has adopted harmonised approaches to how its member institutions will align their financing with the Paris Agreement, in line with the commitments in EDFI’s Statement on Climate & Energy Finance, which was released in November, 2020, and anticipated regular public disclosure of the progress made. EDFI member institutions have taken important strides in harmonising how they will measure their greenhouse gas emissions, their approach to alignment with the Paris Agreement, and their climate-related financial disclosures. These harmonised approaches complement previous harmonisation efforts that have seen members align around a common definition of climate finance and exclude fossil fuel investments.
These are the highlights of the harmonised approaches adopted by EDFI:
As the harmonised approach to assess greenhouse gas emissions of loans and investments at the portfolio level, EDFI member institutions have adopted the “Global Standard,” launched by the Partnership for Carbon Accounting Financials (PCAF), which has also already been adopted by almost 180+ financial institutions. EDFI has also adopted the Joint Impact Model (JIM) tool as the tool to estimate GHG emissions in cases where project-specific information is not available. Earlier in 2021, PCAF and JIM announced a collaboration to make the JIM available to PCAF participating banks in developing countries, and the adoption of the approach based on PCAF and JIM offers a credible measurement tool for European DFIs to deliver on their pledge to reach net-zero emissions by 2050 at the latest.
At the project level, EDFI has adopted an approach for direct investments that separates investments into the categories of “aligned”, “misaligned”, and “conditional financing”, with “aligned” investments defined as those that qualify as climate finance based on the MDB / IDFC Common Principles For Climate Mitigation Finance Tracking (2015) and “misaligned” investments to be defined, at a minimum, as those on the EDFI Fossil Fuel Exclusions List. “Conditional financing” includes loans and investments that are not automatically aligned or misasligned, and these will be assessed using criteria to consider alignment from a (i) system level, (ii) asset level, and (iii) transition risk perspective, with a particular focus on sectors with significant risk of misalignment and an assessment of the principle of “do no harm” as applied to mitigation and adaptation goals.
In addition, European DFIs have also carried out a project to benchmark members’ climate related financial disclosures against the TCFD recommendations and provide support to further strengthen disclosures.
Next steps in DFIs’ climate action
Recognising that EDFIs are diverse institutions, member institutions will follow different paths in using their reasonable best efforts to implement and report on the harmonised approaches on alignment with the Paris Agreement, with choice for individual institutions in the scope and timing of application. During a pilot phase ending in 2023, members will engage in a regular exchange of experiences to further refine the approaches for our markets. The adopted approaches will also be backed by further development of guidance materials and tools, such as JIM, that can support European DFIs’ clients to align with their own Paris Agreement objectives, as well as strategies to continue to reduce emissions to net zero by 2050.
EDFI will also continue its engagement with other international and like-minded financial institutions, through initiatives such as the Climate Finance Leadership Initiative (CFLI) and the Global Energy Alliance for People and Planet, to promote high standards and highlight innovative policy options and financing solutions to unlock climate finance and increase private capital mobilisation.
About EDFI & the Harmonisation Initiative
EDFI – the Association of European Development Finance Institutions – was established in 1992 to support and promote the work of bilateral Development Finance Institutions (DFIs). With a combined portfolio of €44 billion, including over €10 billion of climate finance, EDFI’s 15 member institutions share a vision of a world where the private sector offers people in low- and middle-income countries opportunities for decent work and improved lives, and where private investment flows are aligned with the Sustainable Development Goals and the Paris Climate Agreement. EDFI’s mission is to promote the joint interests of its members, inform policy, and drive innovation in industry standards.
The harmonisation of standards and practices among members is central to the collaboration among EDFI’s member institutions. By aligning the ways in which European DFIs measure the development impact of their operations and setting standards for responsible financing, DFIs operate more efficiently, clients are better served, and institutions are able to more effectively achieve their development missions. Since 2019, the EDFI Harmonisation Initiative on Impact Measurement and Responsible Financing has made significant progress in reaching alignment among EDFI members, setting an example for investors in emerging and developing economies.