Climate risk, resilience and adaptation

Explanation

The EIB has developed a comprehensive climate and transition risk screening approach at project and counterparty level. This is grounded in the application of the Climate Risk Assessment system and climate screening tools, launched in 2019. At the counterparty level, the adoption of the PATH framework in 2021 (and the ADAPT platform for counterparties within the EU) has complemented this approach by providing a comprehensive means for assessing and contributing to the enhancement of client climate resilience.

Quality and scope of project level climate risk management procedures

The EIB screens all its direct lending operations for climate risks, to follow through on the commitment made to “only support projects which are aligned to a pathway to low-carbon and climate-resilient development”. To operationalise this commitment, the EIB introduced a climate risk tool – the Climate Risk Assessment (CRA) system – in 2019. This system provides a systematic assessment of the physical climate and transition risks associated with investment loans, to ensure that all projects supported by the EIB are adapted to current weather variability and future climate changes.

The initial risk assessment under the CRA system is based on country‐ and sector‐specific Climate Risk Country Scores. These are elaborated in-house, modelling both physical and transition risk for all countries where the EIB Group operates. The EIB expects to continuously adapt and fine-tune the risk scores based on evolving climate data and literature. However, it is unclear when and how regularly this will be done. Additionally, while this approach is welcome, the lack of public availability of the CRA system’s methodology raises concerns about transparency,

Following a systems approach, the EIB consequently estimates the residual physical climate risks of each project. Residual risks are defined as “the risk that an investment loan may still be affected by climate change after adaptation measures have been incorporated”. The estimated range includes low, medium, high, or unacceptable. A project will be rated with low residual physical climate risk if:  

1. The initial vulnerabilities identified for the project have been reduced through adaptation measures.
2. The analysis of physical climate risk and possible adaptation solutions is carried out in accordance with EIB acceptable practices.
3. The MDBs’ three steps for tracking adaptation finance are met.

While the thresholds and conditions determining whether a project is rated as having medium, high, or unacceptable residual risk are not explicitly outlined in the Framework and Principles for Climate Resilience Metrics in Finance Operations to which the EIB subscribes, or in other publicly available documents, the Bank has demonstrated best practice by undertaking retrospective screening of projects approved prior to 2019 to map portfolio level climate risk.

In addition to the CRA system, the EIB has implemented additional steps to form a low-carbon transition screening framework that ensures transition risk is addressed. Following the CRA system, a shadow carbon price is applied to all projects to inform an economic assessment of the project that aims to account for the negative externality of emissions.[1] Pursuant to this, and as part of the sustainability due diligence process, the EIB undertakes an economic appraisal of investment projects. This appraisal also considers the resources used by the project (human, technological or natural), and the value generated for society. 

The transition framework is completed by the application of the EIB’s Environmental and Social Sustainability Framework and the EIB’s eligibility, excluded activities and excluded sectors list, which set the standards that must be met for potential projects to receive EIB financing. The EIB argues that through this framework, high-emitting projects with large exposure to transition risks are effectively excluded.

Quality and scope of client level climate risk management procedures

According to the Climate Bank Roadmap (CBR), climate risk screening tools have been developed for each of the EIB’s five credit segments, and the EIB’s equity portfolio at the counterparty level. The methodology assesses a counterparty’s exposure to physical and transition risks, as well as its mitigation/adaptation capabilities. On this basis, it provides a risk score (1–5) that allows the EIB to categorise counterparties according to their climate risk exposure. However, no information is made available regarding the criteria for the 1–5 risk score.

The 2023 Report  to the Task Force on Climate-related Financial Disclosures (TCFD) outlines how the EIB’s corporate credit segment assesses the physical risk to counterparties on the basis of the Climate Risk Country Scores as part of a rigorous methodology. A similar procedure is also undertaken to assess transition risks.

The EIB states that in future, counterparty scores could be used as a basis for strategic decisions and as input for internal rating models and downstream processes. This latter use of the data would be cutting edge and represent best practice among MDBs. However, no timeline for when such an approach will be implemented has been shared by the EIB.  

According to the 2023 CBR Progress Report, work to integrate climate-related risk into portfolio level risk management frameworks is underway. This includes improvements to the EIB Group climate risk reporting framework, the adoption of new climate-related financial indicators, and reputational risk indicators for the Group Risk Appetite Framework. As yet, there are no concrete details regarding what these improvements will amount to in practice. Furthermore, while the EIB states in its CBR Progress Report to have conducted an assessment of its climate risk policies, the results of this are not publicly available.

While the climate risk screening tool is being used for portfolio monitoring and internal reporting and disclosures, the EIB only reports publicly on aggregate project and portfolio climate risk. This is done based on aggregated project and counterparty risk assessments as part of its TCFD reporting and the EIB’s annual sustainability reports. The Bank’s public reporting reveals that in 2022, 99% of direct lending operations were assessed for climate risk. Of these, 81% were assessed as low residual risk, 18% as medium residual risk and 1% as not sensitive to climate change. An explanation for the remaining 1% of operations not being assessed is not provided. At portfolio level, 89% (up from 81% in 2021) of the EIB’s overall portfolio was covered by climate risk screening tools, with 21% of the portfolio rated as medium or high risk for physical risks.

Since 2022, the EIB has implemented the Paris Alignment of Counterparties (PATH) Framework. This framework complements the Bank’s existing climate risk screening tools and serves as a mechanism for the EIB to encourage and/or support climate resilience planning by counterparties.

The PATH framework applies to medium-sized or large corporates and significant financial intermediaries (but not sovereign and sub-sovereign, as well as small company counterparties). The EIB requires counterparties exceeding a certain threshold in physical and transition risk assessments to assess and disclose their approach to managing these risks. Vulnerable counterparties must submit a resilience plan that integrates climate risks into their business strategy and outlines corresponding risk management measures.

High-emitting counterparties are required to submit a decarbonisation plan, which includes a mid-term quantitative emission reduction target tailored to the project’s context and geography, as well as options to achieve carbon neutrality by mid-century. In line with the PATH framework, these plans are intended for public disclosure, ensuring transparency and accountability in the counterparty’s mitigation capabilities.

If the EIB deems the plans submitted by counterparties unsatisfactory, they are required to publish an updated alignment strategy within 12 months of signing the financing contract with EIB. Failure to do so constitutes a breach of contract. The Bank notably commits to actively supporting counterparties in the development and updating of their transition pathways and Paris alignment strategies through technical assistance globally. This includes assistance for material physical risk identification and appropriate risk management system development. Such assistance is particularly significant for counterparties operating in climate-vulnerable regions.

Similarly to direct investments, the EIB’s environmental and social safeguards serve as an extra layer of protection, with specific requirements in place for counterparties and financial intermediaries (FIs). This includes compliance with both national legislation and the 2022 Environmental and Social Standards (ESS). According to Standard 11 of the ESS, the EIB mandates FIs to identify, assess and monitor environmental and social risks in subprojects. If a subproject is deemed to pose a high risk (determined by national and/or EU Law requirements, by the host country authorities and/or by FIs on a case-by-case basis), the FI must seek approval from the Bank, which will collaborate with the FI to identify and implement mitigating measures.

Adaptation finance and enhancing client climate resilience

The EIB continues to dedicate a relatively low share of their climate finance towards adaptation. Over recent years, adaptation finance levels (as a share of total climate finance) have consistently been under 10% (7.5% in 2018, 4.4% in 2019, 9.8% in 2020, 5.0% in 2021, 5.4% in 2022 and 6.4% in 2023), with the 11%[2] of 2024 representing the highest ratio to date. However, in absolute terms EIB adaptation finance has notably increased tenfold between 2018 and 2024 (from USD 0.43 billion to 4.6 billion), as part of the EIB’s broader rapid scale up of climate finance. Moreover, in 2024 the ratio of climate finance going towards adaptation is greater for operations outside the EU, representing 18% of climate finance commitments and going up 32% for operations outside the EU and European Free-Trade area (EFTA).[3]  Nonetheless, the share of climate finance dedicated towards adaptation remains insufficient, as the EIB’s management itself has acknowledged.

Of the adaptation funding allocated between 2015 and 2020, water and waste management accounted for nearly half. Agriculture and forestry, electricity, gas, steam and air conditioning supply, and professional, scientific and technical activities jointly represented over a quarter of funding. No more recent figures are currently publicly available to verify if and how this sectoral distribution has changed in recent years.

In 2021, the EIB committed to several measures for its business model, capacity and engagement to boost climate adaptation financing. These include implementing the first EIB Climate Adaptation Plan; enhancing the EIB’s engagements in adaptation through improved knowledge, skills, and partnerships; and strengthening the provision of technical assistance and advisory services. The Bank also committed to measure the impact of adaptation finance through new indicators. These indicators will track how EIB finance has reduced populations’ exposure to climate-related hazards and prevented losses due to climate change. Additionally, they will assess the contribution of EIB advisory and technical assistance in developing bankable projects and enhancing public- and private-sector capacity.

In its 2021 Climate Adaptation Plan, the EIB committed to grow the share of its climate finance going towards adaptation to 15% by 2025. Key areas of investment identified for adaptation action include:

• water scarcity and flooding
• urban and regional development
• food systems, forests and ecosystems
• health, education and public research
• innovation, disaster risk management
• gender-responsive adaptation financing.

Investment decisions will further be guided by National Adaptation Plans (NAPs), National Recovery and Resilience Plans (in the EU), Nationally Determined Contributions (NDCs), and Adaptation Communications submitted by parties to the Paris Agreement. A stated objective of the Climate Adaptation Plan is to “support national, regional and local authorities in further developing adaptation strategies at all levels and enhancing their framework for monitoring and reporting”. This is stated as including dialogues to “examine how best to target EIB support towards the priority areas identified in the country specific adaptation strategies” and advisory services to “support clients in their adaptation planning processes”. It is unclear whether the EIB is also offering technical support to countries for ensuring national adaptation plans are sufficiently robust and comprehensive to address the adverse impacts of climate change.

In terms of dedicated initiatives, in 2021 the Bank signed a partnership with the Global Centre on Adaptation (GCA) to collaborate on accelerating climate change adaptation action. Focus areas for this partnership include financing, knowledge support, capacity building on adaptation best practices, and data sharing. An outcome of this agreement is the development of knowledge on public–private partnerships (PPP) for climate resilient infrastructure. This partnership will also include cooperation under the African Development Bank’s (AfDB) Africa Adaptation Acceleration Programme (AAAP), where the EIB aims to finance projects falling under the AAAP’s pillars.

The EIB is also a member of the Adaptation and Resilience Investors Collaborative (ARIC), a partnership of development finance institutions working on accelerating and scaling up private investment in climate adaptation and resilience in developing countries. Moreover, the Bank is working on de-risking investments in innovative adaptation solutions alongside the private sector, including through its membership of the Climate Resilience and Adaptation Finance Technology Transfer Facility, a private sector fund dedicated to climate change resilience in developing countries.

To enhance client climate resilience, the EIB has developed a dedicated advisory service (beyond the PATH framework mentioned in the previous section). The Climate Adaptation Investment Advisory (ADAPT) Platform was introduced in 2022 to assist counterparties in developing climate strategies. This platform offers technical and financial advisory services to public and private project promoters within the EU for managing physical climate risk and enhancing resilience. Eligible recipients include public authorities, corporates and public sector entities, and financial institutions. While this is undoubtedly a positive initiative, coverage is notably currently limited to counterparties within the EU. As a next step, the EU should consider expanding these services overseas to contribute to the greening of the financial markets in the developing countries where it operates.

Recommendations:

• As the EIB Climate Adaptation Plan itself states, adaptation investment needs in the EU alone are estimated to range between EUR 35 billion and 500 billion annually. The EIB invested EUR 4.6 billion in adaptation in 2024. The Bank should therefore rapidly scale up climate adaptation finance and aim to go beyond its target of 15% of climate finance by 2025. 
• The current sectoral distribution of adaptation funding within the EIB’s portfolio is unknown. The EIB may consider publishing an updated evaluation of its support for climate change adaptation for the period after 2020.
• The EIB should consider expanding its comprehensive climate risk technical assistance tools, such as those offered within the ADAPT platform, to counterparties outside the EU who might benefit from this support.

The EIB’s climate risk assessment methodology lacks clarity on how medium, high, or unacceptable ratings are assigned. This lack of clarity also extends to how the 1–5 risk exposure score is established. Consequently, the EIB should consider making its climate risk assessment methodology publicly available to strengthen accountability and build trust. Additionally, the EIB should establish a clear timeline for regularly adapting and fine-tuning risk scores based on evolving climate data.

[1] For more information, see the “Shadow carbon pricing” metric.

[2] Information obtained directly from the Bank.

[3] Information obtained directly from the Bank.