Promotion of green finance
This page is part of the E3G Public Bank Climate Tracker Matrix, our tool to help you assess the Paris alignment of public banks, MDBs and DFIs.
Within this metric, E3G used the definition of green finance from the OECD, which defines “green finance” as a broad term that can refer to “financial investments flowing into sustainable development projects and initiatives, environmental products, and policies that encourage the development of a more sustainable economy. Green finance includes climate finance but is not limited to it”. One of the instruments that was explored in more detail were green bonds, and how each institution was supporting and issuing green bonds, as well as supporting countries in including this instrument as part of their efforts to green the financial system.
In addition, this metric looked at support for and promotion of green finance in banks, local and national institutions, insurers and regulators. For ‘Not Aligned’ there was a lack of promotion or isolated initiatives which did not address the underlying changes needed in the economy and financial system to increase the uptake of green finance. For ‘Some Progress’, the institution shown a limited amount of this activity, but not enough to be aligned with Paris Agreement commitments. For ‘Paris-Aligned’, there was support to the country to shift the financial flows into a low-carbon resilient investment, including support to financial regulators, central banks, and local and national institutions. Achieving Article 2.1c of the Paris Agreement and aligning financial flows with climate targets requires not only efforts by financial institutions but also the engagement of standard setters, international organizations, and data providers. To be ‘Transformational’ the institution was driving systemic change through a comprehensive strategy on green finance as well as thought leadership in some areas to address the underlying issues in the financial system.
Regarding innovative financial instruments, E3G has defined ‘innovative’ to mean the use of an instrument in a new context rather than only the creation of new instruments. E3G assessed the available data on mobilisation of private finance, where data was available, and the different instruments used. It is notable that the MDB Joint Report on climate co-financing from the private sector utilises a different methodology than the OECD, e.g. OECD defines indirect mobilisation as catalysation, but in the MDB method indirect mobilisation is simply private co-finance that is not directly mobilized. To be ‘Paris-Aligned’ the institution was mobilising private sector finance at scale in comparison to peers, based on available sources.
Evolution of this indicator
Future iterations of this methodology could include pioneering initiatives to support countries on the implementation of TCFD recommendations as this could have major implications for financial stability, help them to implement a coherent framework to manage the risks and identify new opportunities. Moreover, future iterations of this indicator could assess whether green bonds are a suitable indicator for green finance development, for example, where there are limited green bond markets in a particular region of operation.
The analysis was limited by the fact that guarantee instruments are not included within the OECD-DAC data. Moreover, the MDB Joint Report on climate co-financing from the private sector uses a different methodology than the OECD, limiting the extent to which a comparison could be drawn across the different institutions. Further sources of data would need to be explored in further research.
Achieving the goals of the Paris Agreement requires greening financial markets and building green finance ecosystems. DFIs should work to pioneer green financial products in countries where these markets are undeveloped, while engaging with private investors, banks, and insurers as well as public institutions and regulators to promote green finance policies and practices. All public banks should seek to follow the recommendations of the TCFD on climate-related disclosure, while also working actively to promote these disclosure standards among market participants and regulators. Additionally, public banks should engage with market participants and financial intermediaries to ensure that finance is not directed to high-carbon or climate-vulnerable infrastructure.