Fossil fuel exclusion policies

Explanation

The IsDB has not formally or explicitly adopted any exclusions across its full portfolio on support for fossil fuel operations. Notably, the Bank’s Climate Change Policy (CCP) explicitly rules out the establishment of an exclusion list in the context of fossil fuels.

Relevantly, the Bank’s Sustainable Finance Framework (SFF), which governs the use of proceeds from the issuance of green and sustainability sukuk, does include a set of exclusion criteria.[1] This notably covers up-, mid- and downstream fossil fuel activities but only applies to the subset of projects in the Bank’s portfolio funded through green and sustainability sukuk proceeds.

Beyond this, since 1 January 2024 the IsDB has been applying the Joint MDB methodological principles for Paris alignment, to facilitate the full alignment of all new sovereign operations. These principles provide several guiding safeguards for fossil fuel investments, but only limited full exclusions (as part of the list of activities considered universally not aligned). Moreover, the IsDB has not publicly indicated a timeline for the alignment of non-sovereign operations, rendering it unclear whether the universally not aligned list currently applies across all projects.

Coal  

The Joint MDB list of activities considered universally not aligned (applied to all new sovereign operations of the IsDB) contains limited exclusions on coal. These cover the mining of thermal coal, as well as electricity generation from coal. While this functions as an exclusion on certain coal activities, it falls well short of a full exclusion as it does not cover activities such as the extraction of metallurgical coal. Moreover, in the IsDB’s case, this is not applied to non-sovereign operations.

Beyond this, the IsDB has not established any dedicated exclusions of its own relating to coal operations. That said, it is encouraging that the Bank does not appear to have financed any coal operations since 2019.

Oil and gas 

The IsDB does not have any full exclusions in place to cover any kind of up-, mid-, or downstream oil and gas investments.

Through the application of the Joint MDB methodological principles for Paris alignment (incorporated as part of the Bank’s own internal Paris alignment guidance), the IsDB will apply the BB1 assessment criteria intended to gauge alignment of all new sovereign financing with the mitigation goals of the Paris Agreement. This may prevent prospective oil and gas projects from being permitted in practice, on the basis of failure to meet specific conditions relating to:

1. Consistency with the host country’s Nationally Determined Contribution (NDC)
2. Consistency with the host country’s Long Term Strategy (LTS) or equivalent
3. Consistency with global sectoral decarbonisation pathways
4. Risk of locking in emissive activities and preventing deployment of Paris-aligned activities
5. Economic viability when accounting for transition risks (such as stranded assets).

However, these principles do not include any binding explicit exclusions and as a result leave scope for the IsDB to potentially finance up- through downstream oil and gas activities (provided they meet the conditions set out). Moreover, in line with the Bank’s Paris alignment commitment, they are only applied to direct sovereign investments. This is a notable departure from common practice among peer institutions, which have tended to, at minimum, set out extensive exclusions on upstream activities.[2] It is also inconsistent with the IEA’s Net Zero by 2050 pathway, which suggests no new upstream oil and gas activities (from 2021).

While the BB1 assessment criteria include valuable elements of an effective framework for evaluating fossil fuel investments, in practice these components may not necessarily consistently and effectively capture the associated risks. For example, research shows that current country mitigation ambition for 2030 targets (e.g. NDCs) are not in line with the level of action required to limit warming to 1.5 °C. As such, using national targets (e.g. NDCs) as a reference point for a given project’s alignment with the goals of the Paris Agreement can be misleading. Similarly, Long Term Strategies or equivalently robust national pathways are not universally available across countries.

Supply-side energy efficiency 

Energy efficiency is one of the four pillars of the IsDB’s Energy Policy. The policy explicitly refers to the IsDB supporting downstream oil and gas infrastructure in line with the principles of safety, sustainability, and operational efficiency –implying consideration of prospective supply-side fossil energy efficiency improvements.

However, there is no evidence of any dedicated safeguards, standards or exclusions that prevent supply-side “energy efficiency” investments from contributing to lock-in of emissive assets.

Recommendations:

• In view of evidence that the IsDB has not financed any coal operations since 2019, the Bank should consider formalising this practice by strengthening its current provisions on coal financing through adopting a full exclusion on coal. This should go beyond the Bank’s current application of the Joint MDB list of activities considered universally not aligned (applied to all new sovereign operations of the IsDB) to include any up- through downstream coal activities across both sovereign and non-sovereign operations.
• With a membership comprised entirely of Global South countries, the IsDB is well positioned to demonstrate how to support development while simultaneously meeting climate goals. As part of this, the Bank should reevaluate how it can most effectively contribute (in an appropriate manner) to the global phasing out of fossil fuels. In the first instance, in view of common practice among peer institutions as well as the IEA’s Net Zero by 2050 pathway, the Bank should consider adopting exclusions on upstream oil and gas investments.
• The IsDB should consider adopting explicit criteria for assessing and mitigating potential risks pertaining to locking in emissive infrastructure as a result of supply-side energy efficiency improvements to energy infrastructure. This should include strict, dedicated safeguards for supply-side efficiency improvements to fossil fuel infrastructure, to ensure they contribute to shortening, rather than extending, the lifetime of these assets.  

[1] For further details, see “Promotion of green finance” metric.

[2] See for example policies by the ADB, IDB, and progress by the AfDB in this regard.