Supporting financial institutions in developing countries in their alignment journey with climate goals

1 March 2023 - Climate Report - By : Alice PAUTHIER / Aki KACHI

How IFIs can start moving from a project, to a counterparty and system level approach

This report builds on previous work developed by the consortium of think tanks gathering Germanwatch, NewClimate Institute and the World Resources Institute, namely ‘Aligning financial intermediary investments with the Paris agreement’. Written in partnership with NewClimate Institute, this report provides practical guidance for International Financial Institutions (IFIs) to support financial institutions’ alignment with the Paris Agreement goals, and contribute to transforming local financial systems. This guidance is developed around three pillars:  


  • developing a harmonised alignment assessment; 
  • supporting the alignment of financial intermediaries; 
  • at the national level, supporting the alignment of financial systems. 


Developing a harmonised alignment assessment  

There are a few IFIs that have developed approaches for assessing their financial intermediaries’ alignment. These approaches however require different data and therefore necessitate different practices from financial intermediaries. Moving forward, it will be key for IFIs to agree on a harmonised alignment assessment framework that will not only be used for their own assessment purposes but can drive real changes of practice.  


Based on a review of existing assessment frameworks and interviews with IFIs and experts from civil society organisations, authors suggest structuring this alignment assessment around: 


  • a quantitative assessment of current operations;  
  • a qualitative assessment of internal processes; and  
  • a qualitative assessment of the forward-looking alignment strategy.


IFIs have the expertise to provide guidance on how to align internal processes with the Paris Agreement objectives over time. To develop comprehensive guidance, IFIs should rely on existing and upcoming international standards such as recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) or guidance on transition plans as well as guiding frameworks from voluntary initiatives on climate mainstreaming. Authors of the report suggest, on that basis, a principle-based step-by-step alignment journey for financial intermediaries.  


Click here to see the step-by-step alignement journey


Supporting the alignment of financial intermediaries 

Introducing new alignment criteria will require IFIs to develop an engagement strategy with their financial intermediaries on climate change and alignment. The report suggests the following guiding principles for IFIs’ engagement strategies:  


  1. `make the case’ of Paris alignment for both development banks and commercial financial institutions; 
  2. ‘lead by example’ and build on their own experience to create a peer-to-peer engagement process on Paris alignment; 
  3. start progressively but systematically; 
  4. develop a pragmatic dialogue on how to align driven by clear actions presented in a harmonised step-by-step journey; 
  5. develop a concrete dialogue on what to align driven by the opportunities of the transition to low-GHG climate-resilient economies for the financial intermediary; 
  6. tailor this engagement process, taking into consideration: 
    1. the countries and sectors in which financial intermediaries are operating,  
    2. the level of alignment of their financial intermediaries and willingness to align, 
    3. the influence financial intermediaries may have on the transition,  
    4. the influence IFIs may have on their financial intermediary.  


In addition, IFIs are uniquely equipped to build the capacity of financial intermediaries and help accelerate their alignment journey. Experts from IFIs, financial intermediaries, and CSOs all agree that tailored technical assistance can have major impact on the transformation of internal practice. Based on lessons learned from existing technical assistance on climate change, interviewed professionals from IFIs and financial intermediaries recommend this technical assistance to be: 


  • offered to institutions who have publicly demonstrated their commitment to advance on the institutional integration of climate considerations at the strategic and operational levels;  
  • tailored to the institution’s needs and developed in line with the institution’s climate strategy, objectives, and targets; 
  • relying on clear and concrete objectives which present how the institution aims to get to the next alignment stage. This should be included in the contract obligation and closely monitored.  


Supporting the alignment of financial systems at the national level  

While providing support to individual financial institutions in their alignment journey is key, voluntary approaches will not be sufficient to align financial systems in developing countries. To ensure impact at scale, these efforts should be complemented by a climate-focused engagement and capacity building strategy to foster the integration of climate considerations into national regulation and supervision. This engagement strategy would contribute to creating an enabling environment, and could be articulated in policy-based loans, including a technical assistance offer to provide support for the following:  


  • strengthening the climate information infrastructure; 
  • setting supervisory expectations and monitoring their implementation; 
  • increasing financial institutions’ awareness on climate risks (signalling, supervisory engagement, research) and identifying and assessing climate-related risks (including by running stress tests); 
  • requiring transition plans and integrating them into the supervisory process. 


Providing support to both individual financial institutions as well as partner country regulators and governments should be as coherent as possible, ideally along the lines of a joint IFI bottom-up and top-down approach. Considering current constraints, it is important that IFIs initiate work on how to best complement each other and prioritise efforts where they have the most added value. Moving forward, IFIs will need the resources and mandate to engage in these different areas of work at scale.  


These efforts are in line with current expert recommendations on the reform of the global financial architecture, which highlighted the importance of strengthening domestic public finance and capital markets that are likely to play an important role in meeting sustainable development financing needs (Songwe, Stern, and Bhattacharya 2022). Capacity is often the main barrier for a green financial sector reform in developing countries and IFIs have a number of tools (policy-based loans, technical assistance, etc.) and resources (internal expertise, research and knowledge products, tools and methodologies, etc.) to build this capacity . The support for the alignment of local financial systems should be more explicitly discussed in current debates on the reform of multilateral development banks and how they may increase the impact of their activities.  


Why is the international financial architecture being reformed? What are the challenges of development finance today? How should they be addressed? In two minutes, Alice Pauthier from I4CE answers these questions and talks about Development finance.




Co-written with 

To learn more
  • 07/02/2024
    Social and Climate Budget Tagging: Insights from Indonesia

    Attention is growing to the need to tackle climate and social issues jointly. Indeed, both climate change and climate policies affect social issues such as poverty, inequality, or access to healthcare. A well-known example is that of carbon pricing, a climate policy which can have regressive effects in some contexts. As another example, climate change induced heatwaves are disproportionately likely to impact poorer individuals who typically have more constrained access to healthcare, physical jobs in outdoor conditions, and through indirectly driving up food prices. To foster an effective and sustainable transition to low-carbon and resilient economies, policymakers need to ensure individuals do not lose more from climate policies than they already lose from the effects of climate change, but instead benefit from them.

  • 07/02/2024
    Approaches to meeting the Paris Agreement goals: options for Public Development Banks

    Options for Public Development Banks. Since the adoption of the Paris Agreement in 2015, several public development banks (PDBs) have responded with structured approaches to align their operations with the Agreement’s expectations (as described in Section 1). However, many PDBs, particularly those in emerging markets and developing economies, are yet to adopt an approach to align with the Paris Agreement (i.e., Paris alignment). As entities whose investment mandates are established by the Parties to the Paris Agreement (i.e., national governments), PDBs have specific obligations derived directly from these Parties’ commitments to act across all policy and regulatory frameworks under their jurisdictions, including for state-owned or state-mandated institutions and agencies. Accordingly, PDBs are expected to operate in a manner that supports the achievement of the Paris goals. More specifically, they are obligated to integrate their activities within the Agreement’s implementation mechanism by providing financial, technical, and capacity building support that is entirely consistent with national low-emission climate-resilient development pathways.

  • 06/13/2024 Blog post Foreword of the week
    After Bonn and towards COP 29: the battle on finance and the role of financing plans for the transition

    Tense climate negotiations just ended in Bonn with limited progress on finance and the revised climate commitments under the Paris Agreement. During the opening ceremony of the sixtieth sessions of the subsidiary bodies (SB 60) of the United Nations Framework Convention on Climate Change (UNFCCC), Simon Stiell –Executive Secretary– highlighted the need to “make serious progress on finance, the great enabler of climate action” and to aim for bolder, broader and inclusive third generation Nationally Determined Contributions (NDCs 3.0) that “can serve as blueprints to propel economies and societies forward and drive more resilience”.

See all publications
Press contact Amélie FRITZ Head of Communication and press relations Email
Subscribe to our mailing list :
I register !
Subscribe to our newsletter
Once a week, receive all the information on climate economics
I register !