Aligning with the Paris Agreement

Context :

The Paris Agreement has set a renewed context for the financial community, and in particular Development Finance Institutions (DFIs), regarding their contributions to climate action, including:

• Fulfilling a role in meeting goals expressed in Article 2, particularly Article 2.1c on making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.
• Responding to country-driven long-term low carbon and climate-resilient development strategies to be formulated by 2020; 

In this context, the concept of aligning finance with the Paris Agreement has emerged over the past couple of years as the new paradigm for increasing climate action ambition within the financial community. The concept integrates the fact that entire financing and investment portfolios, and not only the portfolio shares comprising projects that are directly beneficial for the climate and traditionally classified as climate finance, need to be made consistent with the Paris Agreement objectives, and its long-term goals.

Despite this rapid and encouraging momentum for the general idea of alignment, a gap remains between understanding definitions of alignment and operationalizing the corresponding objectives. In particular, the path to operationalize climate alignment in practice appears to be a challenge faced as a community by development finance institutions. Common questions include definitions of alignment, what operational practices are implied, how to incorporate alignment into other institutional goals, regulations, and needs, and whether it is possible to establish a common set of approaches for alignment across institutions.

Climate Policy Initiative (CPI) and the Institute for Climate Economics, analysis organizations with deep expertise and networks in finance and policy, propose to conduct a a high-impact project to move the conversation on financial alignment with Paris goals from ambition to operations. The research is conducted in two parts, resulting in a Discussion Paper (Part 1) and a Final Report (Part 2).

Part 1 (led by I4CE) establishes a theoretical and conceptual basis for alignment, analyzing and describing the emerging interpretations of the definitions, principles, and approaches across the financial community, and building on the experience of the Climate Action in Financial Institutions Initiative. Part 2 (led by CPI) seeks to clarify the changes the Paris Agreement implies for the role of development banks and how they may operationalize these changes, through a targeted set of engagements.

The work is funded by the European Climate Foundation and the International Development Finance Club.