Global development banks sign off on Paris-aligned lending rules

New development financing has been ruled out for coal and peat.

Climate change from drought to green growth

Ten leading multilateral development banks (MDB) have agreed on joint principles to align new financing with the climate mitigation and adaptation goals set out in the Paris agreement.

The MDBs will be responsible for their own compliance with the new rules, based on a two-step framework that will consider whether financed activities fall under a list of green or prohibited activities and are aligned with a country’s stated climate goals.

The principles have been signed by the African Development Bank, Asian Development Bank, Asian Infrastructure Investment Bank, Council of Europe Development Bank, European Bank for Reconstruction and Development, European Investment Bank, Inter-American Development Bank Group, Islamic Development Bank, New Development Bank, and the World Bank Group.

Signatories have committed to no longer finance thermal coal mining and power generation, as well peat extraction and power generation.

A taxonomy of green activities identified by the MDBs to underpin the principles will cover 11 sectors, including energy, buildings, transport, waste and water management, and electrification.

Activities that are not considered explicitly green or prohibited – such as nuclear and gas-fired energy, which have been excluded under both lists – will be assessed individually by MDBs against a country’s climate strategies.

The MDB green taxonomy is activity-focused and does not include a universal lifecycle emissions threshold such as the 100g CO2e/kWh limit pioneered by the EU and adopted in other taxonomy jurisdictions such as ASEAN, Thailand, Hong Kong and Russia.

MDBs are still allowed to finance non-prohibited activities that harm climate objectives as long as the risks are “are adequately managed and mitigated”.

Financing institutions have the flexibility of using additional criteria to assess an activity if a “national strategy compatible with the goals of the Paris Alignment does not yet exist”. These include assessing the probability of “locking-in” carbon and whether an activity would prevent other opportunities for transition.

MDBs that have signed the principles will be required to assess four activity areas for compliance: direct investment lending, policy-based lending, intermediated financing and general corporate purpose finance.

The group has not identified a deadline for reporting progress. MDBs are allowed to “develop their own methodological guidance and toolkits to be applied according to their internal processes and procedures to determine whether an operation is ‘aligned’ or ‘not aligned’”.

The World Bank has been contacted for clarifications with regards to enforcement of the principles, the deadline for compliance, and the possibility of penalties and corrective actions.

The principles have been developed through various pilot projects by the MDBs over the past two years and are the culmination of a broader push to align funding flows with climate objectives as per an agreement signed in 2018.

The announcement comes as the Principles for Responsible Investment (PRI) called for a review of existing MDB mandates and operating models as part of a study into challenges within the global multilateral financing architecture.

The PRI has suggested that the World Bank should adopt “tackling the planetary crisis as a core institutional priority”, alongside its two existing objectives of ending extreme poverty and boosting shared prosperity.