100% Paris-aligned? Assessing methodologies of Multilateral Development Banks.
Over a year ago, several multilateral development banks’ (MDBs) declared their investments aligned with the Paris climate goals. Germanwatch has analysed in depth MDBs’ recent Paris alignment methodologies. Read here whether they keep their promise to ensure that 100% of investments are Paris-aligned.
The MDBs have committed to align all their financing with the goals of the Paris Agreement. They channel an annual average of over USD?100?billion in development finance to client countries and play a pioneering role in the financial sector. Other financial institutions, companies, and governments often follow the MDBs in setting standards. Therefore, MDBs should pursue the highest standards in their Paris-alignment approaches.
The year 2023 was critical in the MDBs’ progress, as several of them reached self-set deadlines for implementing the alignment of new operations with the Paris Agreement. In June 2023, the joint MDB working group published the Joint MDB Methodological Principles for Assessment of Paris Agreement Alignment. These principles set out a common basis for assessing whether new MDB operations are aligned with Paris goals. Also in 2023, four MDBs published individual versions of the joint principles – the European Bank for Reconstruction and Development (EBRD), Inter-American Development Bank (IDB), the World Bank, and the Asian Infrastructure and Investment Bank (AIIB).
Our new paper ‘Multilateral Development Banks’ Paris Alignment Methodologies: Best Practice and Suggestions for Improvement’ takes a detailed look at the scope, quality, stringency and transparency of these methodologies. It highlights best practice and scope for improvement and gives concrete recommendations for revising the methodologies. Here are some key findings and recommendations (read the paper for the full analysis).
MDBs should broaden the scope of application of the methodologies
The MDBs’ Paris alignment methodologies do not foresee a comprehensive Paris alignment assessment of all potentially non-aligned operations. Instead, MDBs apply a list of operations which are considered universally aligned with the Paris mitigation goals, meaning that operations on that list do not undergo a detailed assessment for alignment with the Paris mitigation goals. This list is problematic because it contains potentially non-aligned activities.
For example, the preface to the ‘universally-aligned list’ determines that activities will not be considered universally aligned if their economic feasibility depends on external fossil fuel exploitation, processing, and transport activities. However, even if an investment’s economic feasibility does not depend on fossil fuels, it might still encourage their use, counter to achieving the Paris goals. For example, transmission and port infrastructure (which are considered universally aligned) could inadvertently support fossil fuels even if not depending on them economically. Other items on the list are equally questionable, for example, the upgrading of roads (considered universally aligned) might induce deforestation and substantial emissions increases and lead to illegal roads being built.
The MDBs should thus improve the ‘universally-aligned list’ by either strengthening its preface, or by removing items that can indirectly increase emissions. Our paper makes specific suggestions to that end.
MDBs should more systematically seek opportunities for climate action through methodologies
Trillions of US dollars in financial support for highly transformative climate action are needed if the world is to seize its last chance to achieve the Paris goals. Thus, MDBs should use their Paris alignment methodologies to generate positive and transformative climate impacts wherever possible. However, only the IDB’s methodology includes a clear commitment on proactively seeking opportunities for climate action in operations design as part of its upstream dialogue with clients – albeit without defining clear steps for how to do so. The AIIB commits to an opportunity-driven approach for building the resilience of its operations’ wider system. Overall, there is, however, much scope for improvement in providing clear guidance on how to integrate an opportunity-driven approach in MDBs’ Paris alignment assessments of individual operations. It is important that MDBs make sure to go beyond a ‘do-no-harm’ approach towards ‘doing good’ and advance on the Paris goals.
MDBs should avoid operations that potentially increase climate vulnerabilities
The joint methodological principles have no specific requirement that only operations that do not exacerbate existing vulnerabilities be considered Paris-aligned. The principles refer to this important step only vaguely in their approach for policy-based lending operations. Only the EBRD methodology requires that, to be considered Paris-aligned, an operation may not undermine resilience in the context in which it operates. This is a requirement that all MDBs should adopt.
In addition, the joint principles require that MDBs identify and assess only physical climate risks. However, the MDBs should also consider intangible climate risks, such as potential loss of cultural artifacts and places, or the loss of sense of identity and security.
MDBs should apply the counterparty-based approach to all their counterparties
Some MDBs channel substantial portions of their finance to financial intermediaries (FIs), especially for private-sector clients. At the same time, they also lend directly to corporate counterparties. This means that for MDB finance to be aligned with the Paris goals, MDBs should ensure that finance flowing to financial intermediaries and corporate counterparties is also aligned.
领英推荐
Ring-fencing of investments (i.e. limiting the use of proceeds to Paris-aligned purposes) is not always possible, for example in the case of equity investments. In these cases, the joint MDB principles and most individual MDBs’ methodologies apply the ‘counterparty-based approach’, i.e. they oblige their counterparties to align with the Paris Agreement. But there is a problem: Even if ring-fencing is possible, these investments bolster the counterparty’s balance sheet and might thus indirectly support non-aligned investments. Thus far, only the EBRD requires all its FIs (but not all other corporate counterparties) to commit to Paris alignment. It is important that all MDBs oblige all their counterparties to align with the Paris Agreement to prevent MDB money from contributing to climate-problematic activities. In addition, all MDBs should ensure to monitor counterparties’ Paris alignment implementation and apply clear negative consequences when compliance is lacking.
During the counterparties’ transition period, the ring-fencing approach is still important and should include a full test for 1.5°C compatibility and for responsiveness to climate vulnerabilities.
All MDBs should publish their full Paris alignment assessments
Neither the MDB joint methodological principles nor the individual MDB Paris alignment methodologies include a commitment to publish the results or the full Paris alignment assessments of operations. In practice, most banks publish some kind of information on results or assessment, at least for some projects. However, the kind of information provided varies greatly across banks. Currently, only the IDB public sector arm publishes a quite extensive documentation of its Paris alignment assessments – that is, for the projects that are covered by the methodology.
MDBs should commit to full transparency regarding their Paris alignment assessments to enable independent verification and accountability. Mere summaries will not provide meaningful details. Moreover, all MDBs, including the IDB, should specifically include this commitment in their Paris alignment methodologies. In addition, the methodologies should also provide for regular participatory reviews of the methodologies, stakeholder participation in project assessments, and recourse options on the grounds of a project’s non-alignment.
MDBs have emphasised that their methodologies are ‘work in progress’ and will be updated. Our paper provides MDBs with specific suggestions for revising their Paris alignment methodologies. Jointly with their learnings from the first year of practical implementation, all insights should be fed into a revision process for the individual methodologies but also the joint MDB principles for Paris alignment. The latter is all the more important since ensuring consistency of standards across the MDBs is a clear demand by partner countries and shareholders and a declared objective by the MDBs themselves.
We thank our colleagues for input and comments: