A key step to reining in climate change is shifting how trillions of dollars are invested, moving finance out of carbon-intensive, business-as-usual investments that can lock in greenhouse gas emissions for decades to come and moving it into low-carbon growth.
Knowing where the money is flowing is critical for reaching areas of opportunity and need, because what gets measured gets managed.
This week, more than two dozen of the world’s largest development finance institutions – including multilateral development banks like the World Bank Group and regional and national development banks like Agence Française de Développment – agreed to a common set of principles that each will use to consistently track financial commitments that help reduce the drivers of climate change.
Tracking climate mitigation finance is the first step. The group is also developing principles for tracking adaptation finance and the ability to leverage finance, with frameworks possible mid-year.
“Common methodologies will build trust that climate finance is flowing," said World Bank Group Vice President and Special Envoy for Climate Change Rachel Kyte. "Our ability as multilateral, national and bilateral development institutions to tell a shared story will provide an essential piece of the climate finance jigsaw puzzle. That puzzle needs to be solved in the next few weeks. It’s important for the climate conference in Paris, of course, but for Addis Ababa and finance for development, as well.”
Common principles for tracking
The development finance institutions have been tracking climate finance for only a few years, and their methods have varied, making global public finance numbers difficult to compare. Some methods left out segments; others led to double counting of resources.
To help create a more accurate map of climate finance flows and assessment of the volume, the multilateral development banks (MBDs) began jointly reporting on climate finance about four years ago and have been fine-tuning their harmonized framework. Together, the African Development Bank (AfDB), Asian Development Bank (ADB), European Bank for Reconstruction and Development (EBRD), European Investment Bank (EIB), Inter-American Development Bank (IDB), and the World Bank Group (WBG) reported nearly US$75 billion in climate finance in fiscal years 2011 to 2013.
Separately, the International Development Finance Club (IDFC) developed a process for its 22 national, regional and international development finance institutions, which include Development Bank of Latin America (CAF), Japan International Cooperation Agency (JICA) and Germany’s KfW. Together, the IDFC members reported US$87 billion in climate finance in 2013.
Over the past year, these two groups have worked together to develop the principles, guidelines and definitions in the Common Principles for Climate Mitigation Finance Tracking that were agreed to at the Climate Finance Forum in Paris this week.
The principles set common definitions and guidelines for tracking climate finance, but they leave the implementation, reporting, and quality control to each institution.
An activity is classified as related to climate change mitigation under the common principles if it promotes “efforts to reduce or limit greenhouse gas emissions or enhance greenhouse gas sequestration.”
The guidelines then list activities that can be counted as climate finance in nine categories: renewable energy; lower-carbon and efficient energy generation; energy efficiency; agriculture, forestry and land-use; water and wastewater; transportation; low-carbon technologies; non-energy greenhouse gas reductions such cleaner industrial production and carbon capture and storage; and cross-cutting issues such as support for the development of carbon markets, policies and regulations, and emissions monitoring systems.
Finance is counted at the stage when the project is approved and the finance committed. The principles also provide guidance for disaggregating climate finance from other activities. For example, in a project costing US$100 million where only about US$15 million might be documented for energy efficiency, only the US$15 million would be reported.
The guidelines encourage banks to be conservative in their reporting when the data or separation is unclear.
Adaptation, leverage and mainstreaming
The common principles cover only mitigation activities at this point. The MDBs and IDFC are also working on common frameworks expected this summer for tracking adaptation finance.
While investment in mitigation can be counted through savings in greenhouse gas emissions, tracking adaptation requires more context and analysis of how each project is connected to vulnerability. The groups are discussing potential indicators that could streamline the process.
The MDBs are also working on a framework for calculating leverage across different financial instruments – the amount of additional finance, often from the private sector, that development banks are able to bring into programs by adding their support or offering guarantees.
Looking farther ahead, several of the development finance institutions that met in Paris are looking at ways to share best practices for mainstreaming climate finance within development finance operations, as the World Bank Group is doing today. Sharing best practices will help the development finance community at large to be better equipped and deploy new ideas to move progressively towards greener and climate friendly investments that support better development results.