Standalone climate strategy and integration of climate in overarching strategy

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Paris alignmentReasoning
Paris alignedAFD has a good climate strategy and climate is well integrated in strategy. However, it does not yet have a public methodology for indirect finance Paris alignment and should publish this as soon as possible.

Explanation

Climate Strategy

The AFD adopted a comprehensive Climate Strategy in 2017 for the period up to 2022 that committed to “100% Paris alignment”. The forthcoming strategy is not yet available.

AFD defines Paris alignment as follows:

  • analysing every project or intervention to see that they are consistent with long-term low-carbon and resilient development in the country where they are implemented.
  • an assessment of the level to which our investments are exposed to climate risks, be they physical or related to low-carbon transition policies.

AFD does not, however, have a portfolio approach to Paris alignment, which would be beneficial going forwards.

In 2020, AFD published its mid-term climate strategy review 2017-2022 where it stated that its Paris alignment methodology includes the principle of ‘do no harm’ to the goals of the Paris Agreement:

  • “the [100% Paris Agreement] approach emphasises the obligation to “do no harm” to the objectives of the Paris Agreement, which has focused the majority of efforts on project analyses.”

The TCFD report of the AFD clearly states the oversight of climate mainstreaming by the Board of Directors and Executive Committee.

Sustainable Development Analysis and Opinion Mechanism (SDAOM)

The AFD uses the SDAOM to test projects for Paris alignment.

The SDAOM looks at six dimensions. One dimension looks at the compatibility with a low carbon pathway and another dimension looks at compatibility with climate change resilience. Each project then gets assessed on its impact for the six sustainable development dimensions, based on a -2 to +3 ranking.

The project team carries out an analysis for each criterion and this is then reviewed by an independent team that provides an opinion on the project (Favourable, Favourable with Recommendations or Reserved). This opinion then goes to decision makers.

If a project is consistent with the objectives of a country’s Nationally Determined Contributions (NDCs) or corresponding national policies, it is at least given a neutral assessment (0) for low carbon pathway compatibility.

Forward-looking objectives

The mid-term climate strategy review 2017-2022 defined future areas for the AFD to expand its work on Paris alignment. Implementation of these areas post 2022 will be critical.

  • In 2021 the annual 50% climate finance target was slightly exceeded. This also covers Proparco, AFD’s private sector lending arm. Going forward the AFD aims to use climate finance as a lever for financing SDGs with the goal of doubling the share of climate finance favourable to biodiversity from 15% in 2018 to 30% by 2025.
  • Strengthening its holistic alignment with the Paris Agreement, e.g., by implementing a methodology roadmap for financial intermediation in 2022 and establishing the carbon footprint of the Group’s portfolios of operations.
  • Improving climate accountability, e.g. by enriching the open data platform and drawing on international standards such as the TCFD recommendations.
  • Contributing to a pro-climate recovery in the context of the Covid-19 pandemic through a “Just Transition” approach.

AFD has also created its own internal “taxonomy for accounting for climate mitigation finance”, finalised in December 2021 heavily relying on the Common Principles for climate mitigation finance tracking adopted by the MDBs and the IDFC members in October 2021. Some important differences which are specific to the AFD include:

  • The requirement to conduct a carbon assessment and demonstrate GHG emission reductions greater than 5000 tCO2eq/year to qualify as a climate finance mitigation project.
  •  Other specific activities may be counted as 100% climate mitigation co-benefits (or up to the % specified in the taxonomy) without a carbon footprint based on sectoral eligibility criteria specific in the taxonomy.
  • Exclusion of the mining sector.
  • It is worth highlighting that, in addition to the latter, AFD follows a more stringent approach for other types of greenfield projects. For example, the Common Principles do not exclude greenfield industrial projects to be categorized as climate finance if these can “demonstrate a substantially lower carbon intensity or energy intensity… against a selected benchmark”. This excludes “components of activities that use fossil fuels”. In the case of AFD these projects are not attributed climate co-benefits.
  • For some types of activities such as solid waste management and electricity transmission and distribution, AFD follows different criteria. For example, for the case of solid waste management the Common Principles follow a granular approach that considers some specific activities such as composting or recycling as contributing to mitigation, whilst the AFD Taxonomy looks at the whole project and counts it as 100% mitigation when a specific threshold for emissions avoided is reached (5,000 tCO2e per year), along with a requirement for there to be energy recovery from biogas.

The AFD taxonomy does not refer to the EU taxonomy because AFD does not operate within the EU and the criteria/guidelines of the EU taxonomy are not always applicable to the context of the developing countries the AFD operates in. However, AFD should follow closely in the ongoing process of the EU Commission to increase the amount of capital flows in sustainable investments abroad via the International Platform on Sustainable Finance through the establishment of “common-ground” taxonomies.

Overarching institutional strategy

Climate change is very well integrated in the AFD’s overall institutional strategy, A World in Common 2018-2022, which reflects the 2017 Climate Strategy. It describes the strategy as 100% Paris Agreement and 100% social link.

 Recommendations:

  • E3G appreciates that AFD does not want to bind itself to disclosing against the EU Taxonomy given that some of the contexts where the AFD Group operates in are not yet in the position to satisfy the Taxonomy’s requirements, which are based on EU legislation. However, E3G suggests the AFD follows the approach proposed by EBRD under which everything classified as substantial contribution under the EU Taxonomy and where AFD’s standard are not higher (e.g. gas finance) is automatically Paris aligned. All other projects must undergo the appraisal process. This approach could also help guide the technical assistance engagements of the AFD in the relevant countries. 
Last Update: November 2022