Climate risk, resilience and adaptation

Quality and scope of project-level climate risk management procedures

The IsDB requires that all projects are screened against physical climate risks as part of the project preparation phase. The Bank’s core physical climate risk management process comprises four phases:

• Climate Risk Screening: First, a screening process assesses overall climate risk exposure and specific key risk areas for the project, based on project category and location. This risk screening is undertaken using the AWARE climate screening tool, for which the Bank has developed a dedicated internal user guide.[1]
• Project Impact Assessment (PIA): If the initial screening determines that a project is exposed to climate risk, this is followed by a PIA. The PIA identifies climate impacts, hazards, and vulnerabilities to inform the risk level of the project. The risk level identified is also used to determine the level of engagement required from the IsDB climate change team (e.g. for high-risk projects, they are required to participate, whereas for low-risk projects, they may not be).
• Adaptation Assessment On the basis of the PIA, an adaptation assessment is subsequently undertaken to identify and evaluate relevant adaptation opportunities and options (considering both efficacy criteria and cost-benefit/cost-effectiveness).
• Implementation: Once adaptation measures have been selected, measures are established to ensure effective implementation, including defining roles and responsibilities, facilitating monitoring and evaluation, and identifying technical support and/or capacity building needs.

To strengthen this process, the IsDB has developed a series of supporting materials and tools.

Central to facilitating the PIA and adaptation assessment stages (2 and 3) of the Bank’s climate risk management process are a series of climate change adaptation sector guidance notes across key sectors (namely: the agriculture, water, transport and energy sectors), developed by the IsDB in cooperation with the World Resources Institute). These guidance notes provide valuable granularity to support effective assessments of specific risks and adaptation options across the sectors covered. However, it is unclear what process and guidance is in place for projects outside these four sectors (e.g. urban development). Moreover, as the guidance notes do not cover the fourth stage of the Bank’s climate risk management process, they do not provide further insight on how technical support and/or capacity building needs identified at this stage are fulfilled. 

More recently (2024) the IsDB has developed an internal Physical Climate Risk Management System (PCRMS) – an online tool that aims to provide actionable information on the exposure and vulnerability of project assets and activities.[2] This includes evaluating project climate sensitivity and risk exposure, as well as adaptation readiness, financing requirements, and performance indicators. The output of the PCRMS is a detailed report providing recommendations for enhancing resilience to climate impacts. There is limited public information available regarding the scope of implementation of the PCRMS and how this is integrated in (or replaces) aspects of the Bank’s pre-existing climate risk management process.

All of the above tools and processes are focused on physical climate risks, with no reference to pertinent transition risks. That said, as part of the IsDB’s commitment for all new direct sovereign operations to be aligned with the Paris Agreement from 1 January 2024, the Bank applies the Joint MDB Methodological Principles for Assessment of Paris Agreement Alignment. As a result, the Bank will consider stranded asset and carbon lock-in risks across all sovereign projects. To facilitate this the IsDB has also notably developed a series of internal guidance documents for Paris alignment assessment which make clear reference to screening projects for transition risks as part of the first building block (BB1) of the joint MDB methodology.[3]

As the Bank’s Paris alignment commitment currently only extends to direct sovereign financing, it does not appear that the Bank has any mandatory transition risk screening processes in place for non-sovereign operations financed through financial intermediaries (FIs).

Adaptation finance and enhancing client climate resilience

“Promoting Member Country (MC) climate change resilience” is a focus of the IsDB’s Climate Change Policy. In line with this, beyond the project-level climate risk management procedures in place, the IsDB’s Climate Action Plan outlines support for targeted activities to support building resilience in MCs through both sector- and policy-level interventions, as well as financial and technical support tailored to adaptation and resilience. Specific interventions in each area include:

• Sector-level interventions: supporting MCs with sector-level climate risk assessments at the country planning stage, early warning and climate information systems, building in resilience co-benefits in projects, and promoting technologies and supporting green infrastructure that enhances resilience.
• Policy-level interventions: supporting the enhancement and implementation of policies and regulations with clear linkages to building resilience (such as Nationally Determined Contributions (NDCs) and National Adaptation Plans (NAPs)), as well as seeking to build capacity among local financial actors supporting climate investments.
• Tailored financial and technical support: leveraging the Bank’s technical assistance approaches (such as the Reverse Linkage programme) to build capacity and overcome constraints (managerial, technical, and institutional) impeding effective project implementation.

While these activities constitute a comprehensive package of measures to support enhancing client climate resilience, the IsDB does not appear to have established any targeted initiatives or platforms focused specifically on any of these areas (either at the country and/or intermediary level). This is notable considering the fourth stage of the Bank’s physical climate risk management process specifically involves the identification of technical support and/or capacity building needs, as well as considering the potential value in supporting intermediaries with appraising transition risks (given the lack of relevant mandatory guidance currently in place for indirect operations).

Notwithstanding these considerations, the IsDB has consistently dedicated a substantive portion of its climate finance towards adaptation. The exact portion has varied year on year, having exceeded parity with mitigation on multiple occasions and most recently being at 30% in 2023.[4]

Recommendations:

• The IsDB should clarify important aspects of its climate risk management process, including:
  • The process and guidance in place for projects outside the four sectors covered by its adaptation guidance notes (e.g. the urban development sector).
  • How the Bank is mandating screening for transition risks across non-sovereign operations financed through financial intermediaries (FIs), given the Bank’s Paris alignment commitment currently only extends to direct sovereign financing.
  • How the technical support and/or capacity building needs identified in the fourth stage of the Bank’s climate risk management process are fulfilled.
• Considering the value in supporting intermediaries with appraising transition risks (given the lack of relevant mandatory guidance currently in place for indirect operations), the IsDB should consider establishing a targeted initiative or platform focused on providing support for enhancing climate risk screening capacities and resilience among non-sovereign clients.

[1] Information received directly from the IsDB.

[2] Information received directly from the IsDB.

[3] Information received directly from the IsDB.

[4] For further details, see “Non-fossil to fossil energy ratios” metric.