IDFC to provide more than US$100 billion for climate finance in 2018

30th November 2017 Jack Aldane

Having taken over from KfW as chair of the International Development Finance Club (IDFC) in October and fresh from issuing its second green bond, the Agence Française de Développement (AFD) is taking a lead role in galvanising development banks to mobilise more climate finance. Jack Aldane met with AFD’s CEO Rémy Rioux to discuss the bank’s new role in implementing the Paris climate agreement

You recently became chair of the International Development Finance Club. How do you intend to nurture a spirit of coalition towards climate action among national institutions?

If development banks are connected to the international community and aware of the global agenda, then they are able to disseminate these signals deeply in their respective national fabrics and their regional environment. This is the message we are going to bring on 12 December at the One Planet Summit in Paris at the initiative of President Emmanuel Macron, the UN Secretary General and the World Bank.

IDFC is a global player in development finance. Our combined portfolio totals more than US$3 trillion in assets, with yearly financing approvals of US$630 billion per year. IDFC members provided nearly US$100 billion for green and climate finance in 2016, two thirds of which flow from developing countries to other emerging economies. Our preliminary estimates going forward suggest a sharp increase in green and climate finance for 2016 and 2017.

Two years following the adoption of the Paris Agreement, we aim to take this spirit of coalition one step further to accelerate climate action, along with the MDBs. IDFC is a new force, alongside the United Nations and the multilateral development banks, to finance development and climate.

Next year AFD will be the world’s first development bank to have the mandate to put the COP21 agreement into action. How is your strategy setting an example for those who will follow AFD?

Indeed, the French government’s climate plan made Agence Française de Développement (AFD) the first development bank to have the explicit mandate to implement the Paris Agreement.  Our strategy is to become fully compatible with that agreement – 100 percent compatible. We will focus on financing and advising on low-carbon and resilient development pathways, bridging national circumstances and needs, with the global challenge of tackling climate change.

First, we aim to gather more partners and mobilise more funding for climate, including adaptation finance. Our accreditation to the Green Climate Fund will be key in this endeavor.

Second, we facilitate coherence between international commitments and domestic action. France is heading towards carbon neutrality by 2050. We are active in the French Overseas. These territories are at the cutting edge of climate issues, in terms of biodiversity, adaptation, and regional cooperation in the three Oceans – the Pacific, the Indian, and the Caribbean.

Third, climate action requires innovation. The green bonds market is booming. AFD was the first French public institution to issue climate bonds in 2014. With €750 million raised a couple of weeks ago on the markets (AFD’s second climate bond), we have witnessed a strong appetite from investors for sustainable and responsible financing.

At IDFC’s Climate Finance Forum in Frankfurt last month, Ingrid-Gabriela Hoven, director general of BMZ, said figures from the European Union suggest US withdrawal from COP21 has so far had minimal effect on global investments in climate goals. How important is participation from the US at this stage, in your view?

The United States is the second largest emitter of greenhouse gases, at 18 percent of the world’s total, just behind China, and is also the largest contributor to the Green Climate Fund. Their withdrawal at the federal level is obviously a worrying signal. However, COP23 delivered a clear message: the Paris Agreement is irreversible. The coming years will be decisive. A method has been defined to make at COP24 in 2018 the first global assessment of the climate commitments made by countries, way ahead of the first global stock take of 2023. Next year will be a first test to see where we stand collectively with the 1.5°C to 2°C objective, and it will be yet another opportunity to accelerate action.

President Macron and Chancellor Merkel have shown the European leadership during this COP, for example ensuring the International Panel on Climate Change (IPCC) is fully financed until the publication of its seventh report for the stock take. Much of the future of the planet also depends on the actions from emerging economies. Their contribution will be overwhelming in order to get towards zero emissions in the second half of the century, as the Paris Agreement indicates. They are increasingly aware of that and are being proactive. In China, the last congress of the CPC indicated that the climate fight is a response to a so-called “unbalanced development model”, which it said is “in contradiction with the desire for a better life”. India, for its part, federates initiatives for renewable energies within the International Solar Alliance. A lot of climate action is happening and this is positive.

You’re someone who worked as part of the French presidency at COP21 which led to the Paris agreement. How did you feel when you heard the US had withdrawn from the agreement?

Like all those who were working close to Laurent Fabius, president of COP21, I am concerned and saddened by this decision, but I remain resolutely optimistic. I was in charge of climate finance in the negotiation, from 2014 and throughout the year 2015. We ensured ambitious enough commitments were made to increase climate finance – keeping up with the objective of US$100 billion per year in 2020 – so that our colleagues in developing countries could sign the agreement with confidence. And we pushed hard for all segments or financial markets (insurers, investors, rating agencies, supervisors, bankers, etc.) to take climate risks into account. Since the announcement of President Trump, we have kept in touch with our American colleagues and with all the stakeholders in the United States who are mobilised for the fight against climate change.

As for the American people, they reacted to the announcement of President Trump in a striking way: “We are still in!” The coalition led by Michael Bloomberg and Governor Jerry Brown brings together some 2,500 actors, including cities, states, NGOs, universities and businesses. It aims to keep US commitments despite disengagement at the federal level. This is a tremendous sign that new coalitions can emerge and drive climate action. The Paris Agreement is a game changer. Commitment to climate action has become irreversible. We have no other option.

There is currently a lack of financing aimed at climate adaptation in developing countries, such as infrastructure that can withstand extreme weather events. What do you think is causing investment in this area to lag behind currently?

We need to integrate climate risk in our financial assessments and more generally in the design of development policies and programmes. There is also a need to identify business models that attract private sector investment, for mitigation as well as for adaptation projects. Climate finance flows reached US$410 billion on average in 2015-2016. A third is of public origin. Multilateral development finance institutions have provided 29 percent more finance for adaptation on average during 2015 to 2016 over 2014. There are two takeaways from these figures. Number one: more needs to be done, especially on climate finance for adaptation, including from public sources. Number two: every actor needs to do more and better, public as well private finance. Forging new coalitions will be key to leverage the necessary know-how and resources for low-carbon and resilient development pathways.

The Climate Action in Financial Institutions initiative aims to contribute to the objective of making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development, as per the Article 2 of the Paris Agreement. It recently opened up its database as a measure to boost knowledge sharing and transparency around climate finance. Transparency is of course needed, but how is the content of this database going to positively influence investment?

Along with other financial partners, several IDFC members have successfully advocated Five Principles for Mainstreaming Climate Action within the financial community. More than 30 financial institutions worldwide, including multilateral and private financial institutions, have joined the initiative since its launch at COP21. Many more are expected to join the coalition ahead of the One Planet Summit.

At COP23 in Bonn recently, AFD heard from its partners on the SUNREF initiative. What have they been telling you about the challenges they currently face?

COP23 was an opportunity for AFD to present the SUNREF Initiative. SUNREF is AFD’s green finance label. It offers its partners an integrated approach allowing the private sector to gain easier access to green finance, and local banks – public or private – seeking to develop their green finance portfolios to have access to structured financing, capacity building, and to credit risk sharing via guarantee mechanisms. It has proven an efficient and innovative tool in mobilising private and public local financial institutions to fight against climate change. SUNREF is active in Africa, Asia, and the Middle East. It totals 42 implemented projects, 70 partner banks, with €2.5 billion commitments since 2006.

On the sidelines of the COP 23, partner financial institutions have raised the main challenges they are facing. They include increasing awareness on climate finance issues within the financial sector; supporting the transformation of financial actors through capacity building programmes, for example, financial analysis of green projects, risk assessment methods; promoting systemic approaches that mobilise public authorities, the private sector and financial players. These transformations cannot be implemented without adequate financial instruments: long term credit lines, risk sharing mechanisms and performance based incentives complete the toolkit to mainstream green finance within financial systems.

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