Guidelines for development banks to foster and support the alignment of their financial intermediaries

Context : An opportunity for development banks to support the transformation of financial counterparties

In 2017, the Group of Multilateral Development Banks (MDBs) and the International Development Finance Club (IDFC) committed to aligning financial flows with the Paris Agreement, recognizing that development banks together with other development actors have a key role to play in redirecting financial flows in support of the transition towards low-carbon and climate resilient sustainable development.

Since then, most Development Finance Institutions (DFIs) have committed to aligning their activities with the Paris Agreement and have scaled-up both individual and collective efforts on the development of alignment approaches. Initial efforts concentrated on the development of methodologies and tools to assess and manage the alignment of directly funded projects and activities. More recently, institutions and experts have started to develop approaches to assess the alignment of intermediated operations, which represent a significant share of development finance institutions operations.

For example, the group of MDBs released a joint alignment framework for intermediated finance at COP26 focused on the transformation of partner financial intermediaries with a dual focus on:

• “who” by developing credible institutional alignment pathways in line with leading market and regulatory practice.
• “what” by ensuring sub-transactions are consistent with Paris mitigation and adaptation goals.

However, most financial institutions in developing countries have not yet started to integrate climate considerations and are not familiar with the concept of “alignment”. Therefore, DFIs need to integrate alignment considerations in the long-term dialogue with their financial intermediaries – from the due diligence phase through the end of the implementation phase and develop incentives and technical assistance to support them in this journey.

Objectives :

Through a set of interviews, desk research and an expert workshop, this project aims to support the convergence of ambitious emerging DFI practice by:

• Benchmarking and comparing (1) the different emerging alignment assessment frameworks and processes developed by both DFI and commercial financial institutions to assess the alignment of a financial institution and (2) how this issue is integrated in the broader dialogue between the institution and its financial intermediary;
• Developing guidelines for a tailored and ambitious framework for assessing the alignment of financial intermediaries’ strategies and operations with the Paris Agreement, taking into consideration context specificities in DFIs geographies of interventions;
• Proposing guiding principles on how to integrate alignment considerations in the dialogue between the DFI and its financial intermediary and how to set up incentives and technical assistance programs, building on DFIs lessons learned from past experiences;
• Propose guiding principles on how DFIs could engage with national regulators and governments to support the integration of climate alignment considerations into national financial regulation.

Agenda: Release of the report at COP27 (March 2023)