Are AFD’s Actions Aligned with the Paris Climate Agreement?

AFD Group has set itself the goal that all of the projects it finances be 100% compatible with the Paris Agreement: a high standard, given that the Group finances some 4,000 projects in more than 100 countries. 

The think tank E3G, which specializes in climate change, conducted an independent study based on 15 evaluation criteria around climate finance, adaptation, mitigation, internal activities and country support. "It is important to go through this exercise because it allows us to know where we stand in relation to our peers and alignment standards," says Estelle Mercier, Deputy Head of AFD's Climate and Nature Unit. “And the more institutions take part, the more influence it will have.”

The hope is that such appraisals will not only give develop banks and other institutions a clearer picture of the impact of their actions. It will also encourage them to raise their standards and improve practices to ensure that any impact on the environment is minimal or beneficial. 

To meet its 100% Paris Agreement commitment, AFD teams analyze the Group's interventions and investments to determine whether they are in line with a low-carbon trajectory and efforts to contain climate change. Since COP21, AFD no longer supports any project that fails to fulfill the two major objectives of the Paris Agreement: reducing greenhouse gas emissions and adapting to the effects of climate change. 

"AFD is really on track to be 100% aligned with the Paris Agreement,” says Laura Sabogal Reyes, Policy Advisor on Sustainable Finance at E3G, and lead on the think tank’s Public Bank Climate Tracker Matrix. “Linking climate action and the Sustainable Development Goals (SDGs) is very important, and AFD's processes are trailblazing in this regard. Its lending and fossil fuel exclusion policies also rank among the best among the financial institutions we have evaluated." 

AFD also supports other institutions on the path to alignment, including through the International Development Finance Club (IDFC) and the Finance in Common summit (FICS), as well as the technical assistance provided to partner countries.

See the full analysis based on 15 criteria 

Of course, there is room for improvement.

Three main recommendations emerge from the E3G study:

Recommendation #1: Supporting partners in their efforts at alignment

AFD Group has just published a position paper on alignment with the Paris Agreement for operations with other financial institutions, with the aim of better supporting them in their own alignment journey. "We are not only interested in the project or the assets we are financing, but also in the institution we are financing,” says Estelle Mercier. “We analyze its strategy, its portfolio and practices, to understand where it is starting and how to accompany it to go in the right direction."

E3G welcomed this approach, and encouraged AFD to continue to support other institutions, particularly multilateral development banks, stressing the use of monitoring mechanisms. “We also encourage AFD to integrate the lessons learned so far in the pilot of its  'pro-climate' approach, which aims to support AFD’s client banks in the transformation and strengthening of their strategic and operational frameworks to better address climate change.”

Key figure : 57% of AFD Group financing in developing countries will support projects with a climate co-benefit in 2021

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Recommendation #2: Define an absolute carbon neutrality target for the entire AFD Group portfolio

AFD assesses greenhouse gas (GHG) emissions from a wide range of sectors, such as agribusiness, industry, transport, energy and construction, and tracks emissions on a project-by-project basis. But for E3G, a wider, portfolio-based target will link AFD’s efforts to achieve 100% alignment to the Paris Agreement, to a specific trajectory. This will in turn help to orient its portfolio. Considering the contexts where AFD is active, this tool could initially take the form of internal targets and monitoring, which would be made public progressively.

“This approach is very quantitative," Estelle Mercier says. “We have discussed this point with E3G so that the importance of this criterion is nuanced, focusing on the analysis of each project's alignment with long-term trajectories and decarbonization”. 

For the second year running, in 2022, AFD has calculated its absolute emissions for all of the projects it finances. “It is an important reference," says Estelle Mercier. “But we cannot be driven by it [alone], because AFD has a mandate to support countries’ development and transitions.”

Gilles Kleitz, AFD’s Executive Director of Sustainable Development Solutions, agrees: "More than an absolute number, we are looking to know, on mitigation topics for example, how many tons of carbon are saved per million euros invested. That's our marker. If we only use absolute figures, we will only finance activities that are already clean and will not have the best transformational impact on the economy of partner countries”.

See also : 5 projets qui font avancer les énergies renouvelables dans le monde

Recommendation #3: Implement a “shadow carbon price”

In contrast to conventional pricing, which indicate only the difference between revenues and the costs of running a company, shadow carbon pricing also takes into account the impact of say, a power plant in terms of any pollutants it may be emitting, and the consequences for the natural environment. 

For E3G, decarbonization trajectories cannot be detached from emissions, and a shadow carbon price allows for a clearer definition of what constitutes a green trajectory, and works to inform decision-making along the way. 

Of course, such pricing is no panacea; it’s simply one of several tools. "We have more confidence in our system for analyzing project alignment with decarbonization and resilience trajectories," says Estelle Mercier. “Quantitative approaches such as shadow carbon pricing are easier to implement, but risk giving incorrect answers, penalizing virtuous projects or even favoring projects that pose lock-in risks [i.e. obliging the institution to commit to projects long-term, even such commitment is unwarranted]."

See also: AFD at COP27: Building Sustainable and Just Development for All

Supporting those who need it most

How to take on board these three major recommendations? Gilles Kleitz says just because some activities may fall short of the ideal, they needn’t be excluded altogether. They can be adapted and improved along the way. “In all our social and climate issues,” he says, “there is a dilemma between a logic of exclusion of activities and clients who are outside the framework on the one hand, and the observation of their desire to progress rapidly on the other.”

In other words, instead of waiting for the perfect partner or project, it’s more useful to finance those doing worthwhile work while striving to address the exigencies of climate change. 

E3G agrees that each country has its own context, and each transition is different: "It's not about sacrificing development at the expense of climate,” reads the report. “On the contrary, the two should be tackled in tandem. It's about creating transition plans that allow countries to move progressively towards decarbonizing their economies.”

Coordination for decarbonized development 

“To achieve this, development finance institutions (and other public banks) need to coordinate, inasmuch as possible, measures such as policy-based lending, technical assistance and financing practices”.

The think tank urges AFD to engage in discussion on these matters with other development finance institutions and civil society organizations. 

Its analysis is “very timely,” says Estelle Mercier. “E3G recognizes that the optimal strategies are not necessarily clear-cut, and that the dialogue must continue. We will of course follow this recommendation.”

See also: 3rd FICS Summit for a Green and Sustainable Recovery

Sharing best practices

One recurring recommendation in the E3G study is to make methodologies public. “AFD has accumulated so much experience and know-how that we encourage it to share them as much as possible with institutions that do not have the same capacities," says Laura Sabogal Reyes. 

On this point too, AFD is making progress. At last year’s COP26, AFD published its first TCFD report (Task Force on Climate-Related Financial Disclosures), demonstrating its efforts at transparency. It’s also an illustration of the priority AFD places on examining the financial risks and opportunities tied to climate change, in terms of its governance, strategy and dialogue with clients and partners.

What's next?

For Estelle Mercier, "beyond the alignment of our operations, the next objective is to accompany other players towards alignment: public banks, private sector, energy actors. We also encourage other IDFC members to take part in the assessment: four members have already been assessed, and five more will be assessed next year.”