| Paris alignment | Reasoning |
|---|---|
| Paris aligned | The IDB Group has increased its mobilisation of adaptation finance as a proportion of total climate finance, from 20% in 2018 to 23.9% in 2022, through consistent annual increases in gross figures. However, adaptation finance is still some way short of parity with mitigation finance. In terms of climate risk and resilience, the Bank Group has guaranteed the screening of climate risks across projects through various mechanisms and measures, most notably: the IDB Environmental and Social Policy Framework; the IDB Invest Environmental and Social Sustainability Policy; the specific climate risk assessment methodologies of each financing arm; and the Paris Alignment Implementation Approach (PAIA). It has also increased its efforts to develop its clients’ capacities to address climate risks. |
| Project-level climate risk management procedures | Scope of coverage of project-level climate risk management | Enhancing client climate resilience | Adaptation finance |
| Across the IDB Group several tools are employed to ensure climate risks are screened for and managed at the project level. For the public arm of IDB these include its Environmental and Social Policy Framework and Disaster and Climate Change Risk methodology. IDB Invest has its own corresponding Environmental and Social Sustainability Policy and climate risk assessment methodology. The PAIA also includes climate risk screening provisions that apply across the IDB Group. | The IDB Group screens all projects for climate risks. As part of applying its PAIA, the IDB Group also proactively screens all projects for opportunities to strengthen climate resilience. | In recent years the IDB Group has increased its efforts to develop its clients’ capacities to integrate climate risk, resilience, and adaptation considerations into their operations. | Despite increasing between 2018 and 2022, adaptation finance as a share of total climate finance remains significantly below parity (23.9%), as well as below the proportions achieved by peer institutions, and does not exhibit a steady upwards trend. Dual finance has however risen considerably, outweighing adaptation at 31.4% in 2022. |
Quality and scope of project level climate risk management procedures
The IDB Group has several mechanisms in place to screen for climate risks across its approvals. These include:
IDB Environmental and Social Policy Framework (ESPF): The ESPF was last updated in 2020 and consists of 10 Environmental and Social Policy Standards (ESPS). This framework lays out the Bank’s guidelines and procedures for managing climate, environmental and social risks across its approvals, and also establishes monitoring and reporting procedures. Of these, ESPS 1 notably sets out the requirements for borrowers with regard to environmental and social (E&S) risk assessment, including risks and impacts related to natural hazards and climate change. ESPS 4 addresses the responsibility of the borrower to anticipate and avoid both potential risks and impacts to the relevant communities from project activities, as well as adverse impacts on the project itself from natural hazards and climate change throughout the project cycle. Implementation of E&S management procedures at the project level are ultimately deemed the responsibility of borrowers. However, the IDB commits to enhancing borrowers’ capacity to adequately manage E&S risks, and to help facilitate the application of the 10 ESPSs.
IDB Invest Environmental and Social Sustainability Policy (ESSP): IDB Invest’s ESSP came into effect in 2020. The policy underlines IDB Invest’s commitment to climate change mitigation and adaptation, and to assist clients in identifying and managing both physical and transition climate risks throughout the project cycle. The standards of the ESSP are applied across “all activities undertaken and operations financed” by IDB Invest, with full coverage of direct and indirect financing, and technical assistance operations. The ESSP also requires compliance with the IFC Performance Standards and World Bank Group Environmental, Health and Safety (EHS) Guidelines.
IDB Disaster and Climate Change Risk Assessment Methodology: Since 2018, the IDB has been implementing a methodology to mainstream climate risk considerations into infrastructure projects through: (1) screening; (2) critical assessment; and (3) qualitative and or quantitative analysis. As of 2023, the IDB’s associated corporate results framework indicator showed 100% of its operations to be applying the methodology.
IDB Invest Climate Risk Assessment Methodology: IDB Invest’s Climate Risk Assessment methodology forms part of its environmental and social due diligence process, applied to all direct investments. The methodology involves screening projects for both physical and transition risk to determine exposure and determine vulnerability or transition gaps. Requirements and recommendations are then issued on this basis, along with a tailored technical assistance offering.
Sustainable Debt Framework: IDB Invest has a Sustainable Debt Framework which sets out the specific requirements and the criteria used to assess and certify green bonds, which includes screening projects financed by this type of instrument for climate risks.
Climate Change Division: In 2011 the Bank established its Climate Change Division. Among its responsibilities is guaranteeing the climate risk screening of all IDB projects. Since the implementation of the Bank Group’s PAIA from January 2023, all projects also undergo early screening for opportunities to build climate resilience.
Climate Change in Sector Strategies: In line with the Bank’s efforts to align with the Paris Agreement, it has developed sector-specific strategies which mainstream climate change and include climate risk screening provisions. Furthermore, in March 2023, the IDB Group published a non-exhaustive set of sectoral strategies along with its Paris alignment methodology.
Disaster risk management: The IDB Group has developed disaster risk profiles for 18 countries, and disaster risk reduction profiles in five countries. As part of this work, the Bank has supported the development and updating of the index for national governance and public policy for disaster risk management, as well as provided online training in disaster risk management across the LAC region. Beyond this analytical work and technical support, the IDB also has 17 contingent credit facilities already approved to be made available in response to shocks, totaling up to USD 3.9 billion, with accompanying emergency technical cooperation resources also available.
Adaptation finance and enhancing client climate resilience
The IDB Group has made clear its priority to increase adaptation financing to enhance climate resilience in the LAC region in the face of increasing natural disasters (which have tripled in frequency over the past 50 years). Between 2016 and 2022, the Bank provided over USD 32.9 billion in climate financing in the LAC region. Of these resources, approximately USD 7.7 billion were channeled to climate adaptation and resilience projects, a further USD 5.3 billion to dual (both mitigation and adaptation) projects, and the remainder (approximately USD 19.9 billion) solely to mitigation. Although adaptation finance as a proportion of total IDB Group climate finance previously rose considerably – from 20% in 2018 to 29.2% in 2019 – growth appears to have stagnated over the period 2019–2022. Adaptation financing dipped back to 20.9% during the most affected COVID-19 pandemic year of 2020, rebounded to 29% in 2021, and fell again to 23.9% in 2022.
It should be noted that these figures do not account for dual finance, which has increased considerably over recent years. In 2021, dual finance made up 12% of total climate finance, before rising to outweigh sole adaptation finance at 31.4% in 2022.
IDB funding has been allocated to a variety of adaptation measures including retrofitting and building resilient infrastructure, improving natural resource management, and developing capacities to foster sustainable land use practices. To support its mobilisation efforts, the IDB has secured accreditation and channeled finance from several dedicated funds including the Adaptation Fund, the Green Climate Fund, and the Climate Investment Funds. The IDB is also supporting national adaptation planning and integration of adaptation into NDCs in 13 countries. Relatedly, the IDB is currently supporting different countries in the region such as Argentina, Colombia, Chile, Peru and Uruguay in the development of their Long-Term Adaptation Strategies. The Bank is also supporting sectoral and subnational adaptation planning, such as in the wastewater treatment sector through HydroBID.
The IDB is supporting the use of innovative mechanisms to finance climate resilience measures in member countries. Notably, in December 2024 Barbados successfully completed an unprecedented Debt-for-Climate-Resilience operation to finance climate-resilient water and sewage projects. The IDB supported the operation (alongside other international partners) through providing USD 150 million in guarantees, as well as supporting with the structuring of the deal. As a result, Barbados replaces expensive outstanding debt with a long-tenor, local currency loan at favourable conditions, generating USD 125 million in fiscal headroom to pursue critical resilient infrastructure projects without further increasing its debt burden.
The IDB Group provides support to its intermediary lenders in the identification of adaptation and resilience investment opportunities. In its 2022 report Scaling Adaptation Finance in the Private Sector, IDB Invest explained how it is mainstreaming climate adaptation considerations in its client engagement, for example by supporting the development of strategies by clients to climate risk-proof their businesses. IDB Invest channeled 10% of resources to adaptation finance in 2022. According to Bank officials, IDB Invest is currently engaging with credit rating agencies and other relevant entities to explore ways to better reflect the value of adaptation projects by embedding climate risk in the pricing of relevant assets.
To further develop capacities across its clients, the IDB published a Guidebook for National Development Banks on Climate Risk in 2021. This provides a roadmap for National Development Banks to integrate climate risk into their lending operations, in line with the recommendations of the Taskforce on Climate-related Finance Disclosures.[1] Furthermore, the IDB continues to support the PROADAPT facility, which seeks to enhance both the resilience of regional micro-, small, and medium-sized enterprises (MSMEs), and their ability to capitalise on related business opportunities, in order to increase the private sector’s contribution to regional climate adaptation. Participating MSMEs are supported to identify resilience measures for their businesses, and to recognise market opportunities for providing services and products that will enhance the resilience of other households and businesses.
In September 2024, the IDB signed an agreement with the United Nations Development Programme (UNDP) to facilitate the collection and sharing of critical climate and weather data. This initiative is intended to advance efforts to support climate adaptation and enhance regional climate coordination in the LAC region. Through the agreement, the IDB is able to act as an implementing entity for funds from the Systematic Observations Financing Facility (SOFF), to provide funding and technical assistance for countries to improve weather forecasts, early warning systems and climate information services.
Recommendations:
- The IDB should establish a specific target for adaptation (as a % of total climate finance and in number of projects) en route to eventually achieving parity between mitigation and adaptation spending.
- In line with the public arm of the IDB having published its full disaster and climate risk methodology, IDB Invest should also make its full project level climate risk assessment methodology public (thereby providing greater clarity and transparency than the existing overview note).
[1] Noting that the TCFD has been absorbed into the International Sustainability Standard Board reporting practice. See the “Transparency of climate finance” metric for further detail.