Promotion of green finance

Explanation

The AFD Group has set out four commitments that relate to the promotion of green finance in its Climate and Development Strategy 2017 – 2022, which were further enhanced in its midterm review:

1. ensuring the Paris alignment of all AFD activities,
2. increasing the volume of climate finance,
3. contributing to redirecting finance and using investment flows (most notably through new methodologies of financial intermediations and increased private sector mobilisation) and
4. co-built solutions to influence sustainability standards.

The AFD Group’s efforts to redirect financial flows have increased over the past years. In 2018, AFD group mobilised over €2 billion of private finance for projects with climate co-benefits (56% more than in 2017). The largest share of the funds mobilised go to mitigation projects through equity investments.

Green/sustainable bonds and other innovative financial instruments

Since 2014, AFD issues green and sustainability bonds through the SDG Bond Framework. Between this period and 2020, AFD issued four climate bonds, for a total of € 3.25 billion.

AFD has also developed innovative instruments to further increase its private sector mobilization. These new initiatives are central to AFD’s strategies and have become one of the AFD Group’s trademarks.

• The joint AFD-WB ‘Solar Risk Mitigation Initiative’ (SRMI) aimed at facilitating the implementation of private sector solar energy projects in emerging and developing countries through the mobilisation of up to €500 million.
• The joint AFD-WB contingency loans or standby credit (CATDDO) aimed at helping countries accelerate long-term reforms and combine social and climate action.
• The AFD was a founding member of a regional green electricity trading platform that aims to reduce risks for investors through guarantees.

However, albeit the aforementioned progress, AFD experiences some difficulties in developing innovative operations to support the redirection of private financial flows, e.g. due to increased due diligence requirements, riskier profile, amongst others. Nevertheless, E3G recognises the importance of these innovative instruments as they create a ripple effect by encouraging other players to do the same.

Promotion of green finance among financial actors

AFD plays an important role in promoting green finance among financial actors, for example the Bank supports:

• The ‘Transforming Financial Systems for Climate’ (TFSC), a joint AFD-GCF programme aimed at enabling the creation of a market for investments in climate technologies in 17 African countries.
• National authorities in the development of public policies compatible with resilient low-carbon trajectories.
• The mobilization of financial regulators in its countries of operation.
• As chair of the IDFC, AFD group supports countries at the international level through the IDFC accreditation and observer role in the ‘Network of Central Banks and Supervisors for Greening the Financial System’ (NGFS) network.
• AFD also actively promotes the adoption of TCFD in other institutions.

Financial intermediaries

AFD and Proparco developed the Pro Climate approach for supporting Financial Institutions towards Paris alignment:

• Partner financial institutions must develop a climate action plan when credit lines or other investments are granted. In some cases, Proparco and partner financial institutions co-create climate action plans whose implementation can be supported by TA.
  • These plans must include a Monitoring & Evaluation (M&E) plan, comprising key indicators, e.g.: exposure of the FIs portfolio to fossil fuels; increase in the share of climate investments and decrease or increase of brown investments, amongst other.

 According to bank staff, Proparco has been analysing the risk of misalignment with the Paris Agreement of its intermediated operations (financial institutions and investment funds) since 2021. Both methodologies are currently being road-tested and might thus be amended. These are not yet public, but the general approach is detailed below. A positive area in this approach is clear benchmarks that detail when AFD will not provide non-earmarked financing.

Financial institutions: Methodology focuses on non-earmarked credit lines and equity. Proparco analyses the exposure of an intermediary’s loan book to the most emissive sectors (currently defined as coal, oil and gas including electricity generation from fossil sources). There are three levels of exposure:

• Low exposure: Less than 10% of loan book or at least 5% year-on-year decrease for the last 5 years.
• Moderate to high exposure: Between 10 and 50% of loan book and rather stable
  • When this is the case Proparco’s operation should include climate-related conditions (via the Pro climate approach which seeks to mainstream climate change within FIs strategies and operations). More details are required on the Pro climate approach
• High exposure: More than 50% of loan book or an above 5% year-on-year increase
  • Proparco cannot provide non-earmarked financing to the FI.

Investment funds

• Exclusions lists are extended to the investment fund including the fund’s investment thesis (incl. historical investments, pipeline of projects) against a list of sectors at high risk of misalignment.
  • If high risk: Proparco analyses whether the fund’s resources (time, skills) allow for the fund to identify and analyse the risk of misalignment of its prospects.
    • If not, Proparco develops an action plan for the fund and can provide TA for capacity building (advocating for the implementation of its approach for direct operations).

Recommendations:

• To further increase private sector mobilisation and the development of (sustainable) capital markets, AFD could explore options to increase local currency lending to clients. It could look at a similar approach as FMO has done in partnership with ILX management