Greenhouse gas accounting at project and portfolio level

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Paris AlignmentReasoning
Some progressAFD monitors the GHG emissions of a wide range of sectors, most specifically agri-food, forestry, industry, transport, energy, water and sanitation, buildings and waste. It publishes an estimate of the aggregated absolute (and relative) emissions (as well as the specific mitigation contribution, i.e. avoided emissions) of its annual approvals (including scopes 1, 2 and 3 when significant). It is worth highlighting AFD has also made available on its website an interactive map of all its projects with corresponding information sheets. However, these do not consistently include GHG impacts on a project-to-project basis. As such E3G recommends this good practice is further enhanced by making consistently publicly available the information on ex-ante and ex-post GHG emissions produced by all the Bank’s investments on a project-to-project basis.
 
Additionally, E3G recommends the implementation of a portfolio level target as this will allow the attachment of its process of 100% alignment to the Paris Agreement to a specific trajectory and it will enable the corresponding steering of its portfolio. This tool could initially take the form of internal targets and monitoring which should be made public within a predetermined timeline. In the case of projects where baselines are used it is recommended AFD follows the EIB guidance to guarantee the baseline is fit-for-purpose. In case AFD decides against the recommendation to establish a portfolio level target, E3G invites AFD to engage in a discussion with other DFIs, MDBs and civil society organizations (CSOs) regarding its rationale.
Year startedInclusion threshold
(CO2e/ year)
Sectors coveredTarget
2007All projects unless measurement is not possible.All new projects are screened.No target for AFD. Net zero target by 2050 for Proparco.

Explanation

AFD requires emissions measurements for all projects, using a Carbon Footprint Tool. This determines the climate impact of projects by calculating the project’s carbon footprint and by comparing it to the baseline (business-as-usual) scenario. The mid-term review of the climate strategy states that “A carbon footprint measurement is required for all projects, unless it can be demonstrated that it cannot be measured. In general, AFD considers that a project has a climate/mitigation co-benefit when the reduction in emissions is greater than 5,000 tCO2 equiv./year. For small projects, particularly in Overseas France, this threshold may be lowered.”

Despite this project-level accounting, AFD does not yet have a portfolio-based target. However, by 2022 part of the AFD Group aims to assess future emissions from its annual project portfolio. Proparco has signed up to “transition our investment portfolios to net zero GHG emissions by 2050 at the latest” and “at the portfolio level, adopt approaches that will gradually decrease aggregated GHG emissions to net zero by 2050 at the latest” in the EDFI Climate and Energy Statement. Relatedly, in 2020 AFD launched an analysis of best practices in carbon accounting performed by different development banks, e.g. KfW Germany, FMO Netherlands and the World Bank, amongst others. The outcome of this should be made public.

AFD has stated to E3G that a portfolio-based emission target is not an ideal tool for its operations, citing instead a preferred focus on trajectories being consistent with decarbonization and on new physical assets (rather than the existing assets) as more significant. Moreover, AFD emphasized that especially as a result of the geographies where it is active, support for development projects in sectors that are harder to decarbonize, such as industry (cement production for instance) or agriculture, could potentially distort any portfolio-level accounting. Relatedly, AFD views judging its own alignment as a function of the emissions it finances as misleading, given the fact it only represents a portion of total investment in these areas and is more influential through other avenues such as policy dialogue.

Rather than having a portfolio-based emissions target then, AFD follows an approach built on its Paris Alignment methodology, which consists of:

  1. Building a GHG emission reduction target for scope 1 and 2 (which should be approved during the first semester of 2023) covering internal AFD Group activities (not financed projects)
  2. Tracking the GHG emissions of new projects (done since 2021)
  3. Supporting partner countries in defining their commitment and emission reduction targets (through the 2050 Facility)
  4. Financing projects aligned with the NDCs and strategies of partner countries that are themselves Paris aligned
  5. Deploying stringent exclusion lists, which notably include fossil fuel projects
  6. Using an internal taxonomy to define climate mitigation co-benefits clearly and precisely

In this way, E3G considers that although project and sectoral level emissions assessment is valuable, aggregation also plays a key role in providing an understanding of the overall direction and allocation of financing. An aggregate target would be a useful supplement to the more granular carbon footprint measuring already taking place.

Moreover, whilst it is indeed the case that it is countries which are the owners of their GHG emissions – public banks are critical in fostering decarbonisation through their role in de-risking and crowding-in of other sources of finance, e.g. private. AFDs extensive work on its Technical Assistance facilities is exemplary in this regard, as would be a greater emphasis on policy-based lending to encourage and support countries in their decarbonization pathways

E3G recognizes the efforts of AFD to mitigate the emissions of projects. However, it considers 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. As such E3G recommends the adoption of a portfolio level greenhouse gas emission reduction target, as it represents a key component to achieve 100% Paris alignment. Foremostly, setting a 2050 target, alongside interim targets (at least one at 2030) is a minimum first step for such a measure. Being fully informed about the aggregate climate exposure of financing requires undertaking measurements and monitoring of overall portfolio alignment. Adopting targets and acquiring an overview of the overall emissions horizon are both essential components to this process.

Other public banks are taking meaningful steps in this direction, toward Paris aligned portfolio-based targets. For example, FMO has committed to a 1.5C portfolio target, whilst the Association of European Development Finance Institutions (EDFI), has similarly announced that all 15 of its member public banks will be fully aligned for new financing by 2022, with net-zero portfolios by 2050.

Recommendation:

  • AFD should establish a portfolio level target as a key component of its goal to align fully with the Paris Agreement. This tool could initially take the form of internal targets and monitoring which should be made public within a predetermined timeline. This tool would be complementary to AFD’s good practice of publishing the aggregated absolute (and relative) emissions (as well as the specific mitigation contribution, i.e. avoided emissions) of its annual approvals (including scopes 1, 2 and 3 when significant). It is worth mentioning AFD has made available on its website an interactive map of all its projects with corresponding information sheets. However, these do not consistently include GHG impacts on a project-to-project basis. As such E3G recommends this good practice is further enhanced by making publicly available the information on ex-ante and ex-post GHG emissions produced by all the Bank’s investments on a project-to-project basis. Furthermore, in the case of projects where baselines are used it is recommended AFD follows the European Investment Bank’s (EIB) guidance to guarantee the baseline is fit-for-purpose. In case AFD decides against the recommendation to establish a portfolio level target, E3G invites AFD to engage in a discussion with other DFIs, MDBs and civil society organizations (CSOs) regarding its rationale.

Last Update: November 2022