| Paris alignment | Reasoning |
|---|---|
| Paris aligned | Climate change (both mitigation and adaptation) is comprehensively integrated into the IDB Group’s 2024 overarching strategy as a dedicated focus area. There is clear reference to the deep interlinkages between climate and development, and that the IDB is aligning all projects with the Paris agreement from 2023 onwards, according to the PAIA. The Climate Change Action Plan 2021–2025 outlines action areas for implementing the joint MDB Paris alignment “building blocks”. While it is less comprehensive in setting out specific institutional level reforms and actions required, it is complemented by the IDB Group’s Paris Alignment Implementation Approach (PAIA) which includes sector-specific guidance on energy, water and sanitation, transportation, agri-food systems, operations with financial institutions, manufacturing industry, buildings, and digital economy. Neither the institutional nor the climate change strategy documents explicitly refer to the principle of “do no harm”. |
| Climate strategy | Overarching strategy |
|---|---|
| The IDB Group Climate Change Action Plan 2021–2025 (CCAP) is broadly compatible with the joint MDB Paris alignment commitment. It outlines action areas for the implementation of the six joint MDB “building blocks” in the IDB context, but lacks detail on the specific institutional level reforms required. The principle of “do no harm” is also absent. However, since the publication of the CCAP, the IDB released its comprehensive PAIA, which provides implementation level detail to accompany the high-level strategic Paris alignment vision of the CCAP. | The IDB Group’s 2024 Institutional Strategy comprehensively integrates climate action, recognising the deep interlinkages with development. Both climate change mitigation and adaptation feature extensively throughout, including explicit reference to Paris alignment of all IDB operations according to its PAIA. The principle of “do no harm” remains absent. To be truly transformational, the IDB’s institutional strategy should explicitly anchor its commitment to supporting net zero emissions across the region by 2050 in a pathway for IDB’s portfolio that is aligned with limiting warming to a maximum of 2 °C (and striving for 1.5 °C). |
Explanation
In 2024, the IDB Group announced three landmark organisational changes, designed to increase the impact of its interventions across its region of operations:
- IDBStrategy+: An updated institutional strategy, setting out the Bank Group’s strategy direction through 2030.
- IDBinvest+: A USD 3.5 billion recapitalisation of IDB Invest, along with a new “Originate-to-Share” business model. In practice, this involves the Bank arm continuing and scaling up “origination” of assets before “sharing” them (such as via securitisation) to crowd in institutional investors that otherwise would not reach these markets. This offers the potential to transfer risk to the private sector and free up capital for further investment.
- IDBLab+: The IDB LAB has been given approval to seek USD 400 million in new funding to become an “innovation hub” for development. This operating model intends to significantly improve the arm’s per dollar mobilisation, scale up its projects, and focus on providing benefits for poor and vulnerable populations.
Overarching strategy
Published in 2024, the “IDB Group Institutional Strategy: Transforming for Scale and Impact” sets out the Bank Group’s strategic direction through 2030, recognising the critical “inflection point” faced by Latin America and the Caribbean (LAC) in contributing to tackling global challenges in the run up to 2030. Navigating this opportunity is recognised as requiring suitable approaches and policies to combat key global challenges, of which climate change, biodiversity loss, and food insecurity are those explicitly named. The deep interlinkages between climate action and development are clearly recognised throughout the strategy, with climate change and environmental degradation explicitly noted as “threats that jeopardize the attainment of development objectives”. Three core objectives are stated:
- Reduce poverty and inequality.
- Address climate change.
- Bolster sustainable regional growth.
For the objective of addressing climate change, the IDB Group commits to three “concrete ambitions” until 2030. These are:
- Zero deforestation in the Amazon.
- Reducing greenhouse gas emissions consistent with achieving net zero emissions across the region by 2050.
- Strengthen adaptation and resilience across the region (in light of the particular vulnerability of the LAC region to climate change, both in the form of direct threats and indirectly to the prospect of sustained growth).
Based on its three core objectives, the IDB Group sets out seven areas of operational focus, one of which is “biodiversity, natural capital, and climate action”. This focus area is to be treated with a particular “dual focus” – meaning it is recognised as both a cross-cutting issue and a priority area in and of itself.[1] In the dedicated section for this operational focus area, the overarching strategy sets out the rationale, objectives, and tools underpinning the strategic approach in this area. The alignment of all IDB Group operations with the Paris Agreement (in accordance with its PAIA) is explicitly referred to as guiding the “green and climate finance” element of the IDB’s approach.
The IDB Group had previously issued a Corporate Results Framework (CRF) as a tool for tracking progress on key aspects of its institutional strategy. Indicatively, the CRF for the period 2020–2023 set a target of at least 65% of new approvals and commitments to include investments supporting climate change mitigation and/or adaptation, up from a baseline of 53% recorded in the period 2016–2018. Moreover, it included a goal for 100% of all IDB projects with moderate or high disaster and climate change risk to be analysed for risks and to identify associated resilience actions by 2023. The IDB vastly exceeded its target for new commitments to include investments supporting climate change mitigation and/or adaptation in 2022, disclosing a 94% total of actual investments vs the targeted 65%.
As part of this 65% target in the CRF, IDB Invest has a lower internal target of 40% which includes the short-term financing often otherwise excluded in accounting by private arms of MDBs. IDB Invest also exceeded its target in 2022, with 61% of new commitments supporting climate change mitigation and/or adaptation. In 2023 IDB Invest released its first Sustainability Report, complementing the report already published annually by the whole IDB Group and covering data from 2022.
As part of the new institutional strategy, the IDB Group replaced its previous CRF with the 2024–2030 Impact Framework. This is intended to sharpen its attention on ensuring concrete development results and effectiveness across its operations, through aligning internal leadership and incentives. As part of this transformation, the strategy identifies priority action and reform areas to build a “culture of impact”. These include a refreshed emphasis on outcome monitoring and evaluation, a focus on capacity-building among clients, improved knowledge sharing and utilisation, and better aligning internal governance and staff incentives with delivering development impact.[2]
The resultant new Impact Framework is made up of (1) a “Mission Scorecard” covering regional development indicators; (2) “Portfolio Results” measuring the IDB Group’s contribution to regional challenges; and (3) “Performance Targets” assessing the Bank Group’s performance against its own commitments and targets.
The “Mission Scorecard” includes five climate-specific regional indicators (including on forest coverage, ecosystems, natural disasters, and gross emissions). The “Portfolio Results” includes indicators on disaster risk management, enhanced climate resilience, and emissions avoided (as well as on renewable energy generation). Finally, the “Performance Targets” set out the 2020–2023 baseline and 2030 targets for indicators such as green and climate finance as a proportion of IDB Group operations, total climate finance for adaptation, and proportion of projects building climate resilience.
Standalone climate strategy
In the IDB Group Climate Change Action Plan (CCAP) 2021–2025, climate change is described as threatening “the achievement of social and economic results across Latin America and the Caribbean (LAC)”. As part of the Bank’s strategy to tackle climate change, and also in response to the uncertainty around the COVID-19 crisis, the IDB Group focuses on demand-driven approaches, while engaging with country partners through climate specialists. However, this can risk the IDB missing opportunities to link demand-driven partner engagement with ambitious supply-side incentives for climate lending. Indicatively, as noted under the “Non-fossil to fossil energy ratios and climate finance” metric, the previous climate finance target of 30% of all approvals has been adopted as a floor across all institutions (rather than as a goal). Not setting an aspirational target to increase climate finance as a proportion of approvals beyond current levels risks limiting the IDB’s ambition and removes an otherwise valuable supply-side incentive for climate lending.[3]
In view of the 2017 joint IDFC–MDB commitment to align financial flows with the goals of the Paris Agreement (and the subsequent COP24 announcement of the joint MDB framework in 2018), the CCAP is centered around the six-building-block structure of the joint MDB alignment process. However, while the plan does outline action areas for the implementation of the building blocks in the IDB context, it does not go as far as detailing specific reforms across the institution that would be needed for a thorough alignment.
Since the CCAP was published, the IDB has developed its framework to screen its operations for Paris alignment in a country context, operational as of January 2023.[4] This framework (comprising a core methodological guidance document and individual technical guidance documents across key sectors) provides granular, concrete, implementation level guidance for the Paris alignment of IDB operations, to accompany the high-level principles and vision of the CCAP. Of particular note is the IDB’s commitment to actively identify “climate transition gaps” – defined as “key technical, policy, and market barriers and needs to support PA-aligned pathways” – to be tackled by financial, policy, and technical support. This represents a best practice approach to be replicated by other institutions. At the strategic level, the framework also explicitly sets out and commits the IDB Group to supporting efforts in line with the temperature goal of the Paris Agreement.
It is worth noting that the IDB’s Environmental and Social Policy Framework, published in 2020, refers explicitly to a commitment to the principle of “do no harm”. Beyond this, it commits to pursuing a principle of “do good beyond do no harm”, under which sustainable development benefits are actively maximised. Accordingly, the IDB requires borrowers to report on how potential harms will be avoided and to consider and report on how project design can enhance social and environmental benefits. This represents best practice among the MDBs as it actively encourages climate-positive investments. However, although this represents a welcome incorporation of the “do no harm” principle in IDB operations – reference to the principle remains absent from the key overarching strategy and standalone climate strategy documents, somewhat undermining its significance. It is however worth noting that the “climate transition gaps” concept of the PAIA is consummate with seeking to actively “do good beyond do no harm”, representing a promising first step in this direction.
Recommendations:
- The IDB should further develop both its climate and overarching strategies to include a roadmap towards a specific temperature target (e.g., well below 2 °C and ideally below 1.5 °C, as set out in the Bank’s Paris alignment framework) and to feature actionable steps for implementation. Any associated models and assumptions should be disclosed.
- The IDB should explicitly integrate a principle of “do good beyond do no harm” in both its overarching strategy, and its Climate Change Action Plan.
[1] The others two areas accorded this dual focus out of the seven total are: (1) gender equality and inclusion of diverse population groups; and (2) institution capacity, rule of law, and citizen security.
[2] It is particularly welcome to see aspects of the vision put forward by Ilan Goldfajn in his early communications as President being concretely operationalised in this regard.
[3] See the “Non-fossil to fossil energy ratios and climate finance” metric for further details.
[4] This alignment target will only apply to any projects receiving eligibility after this point, not involving any retrospective alignment of existing operations. The IDB published its methodology for Paris Alignment in March 2023, which was operational since 1 January of the same year for all Bank employees.