Explore the focus areas associated to each of the five voluntary Principles for Mainstreaming Climate Action below to discover recommended resources related to your area of work.
Principle 1: COMMIT to climate strategies
Why? It encourages a coherent and systematic approach to climate mainstreaming and serves as a foundation and catalyst for a range of operational responses.
How? Based on backward- and forward-looking impact, risk, and alignment assessments, a financial institution can identify climate-related strategic priorities and set specific commitments, targets or goals typically embedded within a stand-alone climate change strategy or within broader sustainability or transversal strategy documents. To avoid staff working in silos, climate-related strategic priorities, commitments, plans and targets should be developed together with the institution’s other strategic objectives, endorsed and promoted by the institution’s leaders and integrated in its main strategy.
Why? It enables a financial institution to ensure that climate change is taken into consideration by operational teams across all economic sectors, countries, and business lines. Actions can then be prioritized in those areas with particularly high positive and negative climate impacts, those exposed to climate risks, or where there are business development opportunities.
How? The transition to a low-GHG climate resilient development will have different implications across sectors and countries. Institutions will likely need to conduct forward-looking economic and financial analyses and define investment priorities (and exclusions) in terms of countries, sectors, and business lines. Once identified, these investment priorities will need to be included and contextualized within the respective sector-, country- and business line-related strategies.
Why? It can support institutions in prioritizing activities contributing to the transition to low-GHG and climate resilient economies across the business cycle.
How? These targets can take different forms, including a total volume of investments or a percentage of activities contributing to the transition to low-GHG and climate resilient economies. Some financial institutions are starting to also develop targets related to the real-world impacts and outcomes of their investments and financing.
Why? It can help institutions send a clear message to all internal and external stakeholders on the activities that will no longer be financed by the institution, or those that are seen as needing to “transition” to low-carbon, climate resilient business models.
How? These targets can take different forms, such as deadlines after which institutions will stop investing in – or have fully divested from – specific types of assets. In most cases, these targets are related to reporting regulations in specific countries or developed as part of strategies to manage financial risks related to climate change, or to “align” with climate goals. A growing number of financial institutions now also set targets related to their engagement strategies with clients and counterparts.
Why? The Paris Agreement set the objective of “making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development”. Echoing this international objective, financial institutions are increasingly and voluntarily setting targets to assess and improve the consistency of their activities with climate objectives. Some jurisdictions are establishing reporting requirements on the level of alignment of institutions with climate objectives.
How? These targets vary depending on the focus of the alignment commitment and the underlying approach and methodologies adopted to assess consistency with climate objectives. Some institutions have adopted an approach aiming to ensure that each operation is consistent with a low-GHG and climate-resilient trajectory. Other are adopting a portfolio-level perspective, comparing the climate performance of entire portfolios with a low-GHG and climate-resilient trajectory. This is an area where further technical development is underway, particularly in terms of adaptation and resilience.
- Developing institutional architecture, internal guidance and processes to support the implementation of strategic climate goals
Why? It can provide the substantial political and technical support that is needed for the development, implementation and update of an institution’s climate strategy.
How? Many institutions have created a crosscutting climate support unit or team to facilitate the uptake of the climate issue, trigger coordination and dialogue, provide technical capacity and support, and to channel any concessional funding coming from international climate funds. Its form and institutional position often depends on the individual financial institution, but they often report to high-level management and integrated into existing transversal operational support functions.
Why? It can support the acculturation of internal operational teams to this new way of conducting activities. This can also facilitate the buy-in and support of high-level management over the lifetime of the climate strategy.
How? In line with the institution’s climate strategic priorities and targets, institutions will likely need to review, adapt and in some instances create new KPIs and incentives. Bonuses and other financial incentives are used by some financial institutions over the short-term to support the acculturation of operational teams to climate-related activities. A growing number of institutions are also integrating climate change indicators and performance metrics into remuneration policies to ensure long-term buy-in for the institution’s climate objectives.
Why? It ensures that all teams and functions within the organization have the necessary background, knowledge, expertise, and resources to perform the functions demanded of them to implement the institution’s climate strategy.
How? Needs for capacity building will vary from one institution to another and between the different departments of institutions. Capacity building activities may be developed to raise awareness on the basics of climate change and the institution’s climate strategy within all functions of the institution. Financial institutions also develop tailored trainings for the departments that will need to use specific tools, develop new expertise etc. These programs may be developed by climate/sustainability teams or by external partners.
Principle 2: MANAGE climate risks
Why? It is increasingly seen as necessary for financial institutions to assess their exposure to climate-related transition risks. These assessments are in most cases conducted on a voluntary basis as part of sound market practice; however, regulators and supervisory authorities are introducing requirements to measure, report and manage climate-related risks.
How? Financial institutions have developed approaches, tools and methodologies to assess their exposure to future climate-related transition risk relying on forward-looking scenario analysis. This is predominately based in part on the recommendations of the Task-force on Climate-related Financial Disclosures. Approaches, tools and methodologies have been developed for different types of institutions, with some assessments conducted at the portfolio level, the project level, the asset level, the counterparty level or the country level.
Why? It is increasingly seen as necessary for financial institutions to identify their exposure to physical climate risks. These assessments are in most cases conducted on a voluntary basis as part of sound market practice; however, regulators and supervisory authorities are introducing requirements to measure, report and manage climate-related risks.
How? Financial institutions have developed approaches, tools and methodologies to assess their exposure to future physical climate risk relying on forward-looking scenario analysis. This is predominately based in part on the Recommendations of the Task-force on Climate-related Financial Disclosure. Approaches, tools and methodologies have been developed for different types of institutions, with some assessments conducted at the portfolio level, the project level, the asset level, the counterparty level or the country level.
Why? It is increasingly seen as necessary for financial institutions to identify their exposure to climate-related liability risks. In most cases these assessments are conducted on a voluntary basis as part of sound market practice; however, regulators and supervisory authorities are introducing requirements to measure, report and manage climate-related risks.
How? To date, progress in this area remains exploratory. Financial institutions have started to develop initial approaches, tools and methodologies to assess their exposure to litigation or legal climate risk. This is predominately based in part on the Recommendations of the Task-force on Climate-related Financial Disclosure.
Why? In addition to assessing climate-related risks, financial institutions must also determine how to best integrate both qualitative and quantitative results into existing financial and non-financial risk management processes. This is a necessary step to ensure that assessments inform both strategic and operational decisions on the financial risk exposure related to climate change.
How? The Task-force on Climate-related Financial Disclosures provided guidance to help institutions include climate considerations in risk management processes. Often building on these principles, financial institutions are developing varying approaches to integrate these risks into broader risk management practice. To date, financial institutions looking at this issue have principally conducted pilot climate risk assessments and analyzed outcomes to identify their level of exposure and the assets and activities that are most at risk. They developed risk management processes on that basis.
Principle 3: PROMOTE climate smart objectives
Why? Many financial institutions are developing and using a variety of targeted financial instruments to finance climate-related activities and investments to seek out new investment opportunities.
How? While “green bonds” are the climate-related products the most well-known, institutions have also developed climate-related loans or intermediated debt financing products. These products typically use climate-related eligibility criteria. This in turn implies that institutions assess investments against these criteria – as well as develop a system for ex-ante assessment, monitoring, reporting and verifying to ensure that criteria are met. Additionally, institutions may use a robust external auditing of climate-related criteria, such as via second party opinions.
Why? It helps to promote the demand for climate-related products and services, as well as creates opportunities for growth and returns for the financial institution.
How? Financial institutions use a variety of approaches to identify new market opportunities. In some cases, this may be linked to the development of tailored climate-related products and services designed to create opportunities and support growth in specific market segments. Financial institutions may engage directly with their clients and counterparties on potential opportunities for business development related to the low-GHG resilient transition.
Why? Public climate finance includes the climate funds such as the Green Climate Fund, the Adaptation Fund or the Green Environmental Facility as well as the climate activities of international finance institutions. These resources can help institutions to both seek out new investment opportunities and increase the impact of their investments by developing and/or financing transformational projects and programs.
How? To access climate finance of IFIs, financial institutions may contact IFIs on a bilateral basis or aim to benefit from financing through a facility. To access climate finance from climate funds, they can either submit funding proposals through an accredited entity or gain “direct access” by becoming an accredited entity to these funds. The requirements and criteria as well as reporting requirements vary.
Why? The blending of public and private funds can help overcome a range of investment barriers (e.g., market or political) as well as reduce the risk often perceived by private financial institutions around climate-related investments. This can improve access to capital and the terms of finance in countries, sectors and technologies often seen high-risk.
How? A range of different tools may be used depending on the level of maturity of markets and technologies and the specific market barriers projects and companies may face. These include instruments such as guarantees, insurance, currency hedging, technical assistance grants and first loss capital from development agencies. Different combinations of these forms of concessional funds and instruments are typically used by development banks and philanthropic sources to “crowd in” or “leverage” commercial investment in both developed and developing countries.
- Ensuring that climate considerations are taken into account in decision making and due diligence across all products and services
Why? As the transition to a low-carbon and climate-resilient economy is expected to require actions affecting all sectors of the economy, an institution may need to ensure that climate considerations are considered across all products and services.
How? Climate and sectoral strategies as well as screening criteria are often used to make all activities either consistent with, or contributing to, an institution’s priorities and targets on climate change. The deployment of screening criteria may require training capacity and awareness-building among staff – as well as the provision of additional operational resources so that criteria are used appropriately and effectively.
- Engaging with clients on climate change risks and opportunities and alignment with the Paris Agreement
Why? It can help foster the transition of clients and counterparties, and thus indirectly mitigate climate-related financial risks and ensure consistency with the climate objectives.
How? Outcomes of alignment and climate risks assessments can help an institution identify activities that are not “aligned” with climate objectives or that may be exposed to climate-related financial risks, today or in the future. Engaging with these clients or associated counterparties can help foster the alignment of their portfolio and reduce their exposure to climate-related risk. Within the financial sector, initiatives such as Climate Action 100+ are developing common approaches for institutions to engage with them.
Why? Institutions are establishing exclusion and divestment approaches for activities, technologies or sectors that are seen as inconsistent with their climate-related strategies and goals as in some instances, it can reduce adverse impact on the transition to low-GHG and climate-resilient economies and/or exposure to climate-related financial risk.
How? Criteria for exclusion or divestment rely on the identification of activities and technologies that are inconsistent with climate transition scenarios. Assets and companies that surpass a defined level of exposure to these activities or technologies are excluded or subject to divestment. Today, discussions focus on how to ensure an impactful contribution to decreasing emissions or increasing resilience in the real economy by the strategic use of divestment and exclusion on one hand, and engagement with companies and counterparties on the other hand.
Principle 4: IMPROVE climate performance
- Measuring and tracking the volume or share of activities and investments reducing greenhouse gas emissions
Why? It provides information on and helps to monitor the volume or relative share of activities contributing to the mitigation objective of the Paris Agreement. This tracking can also be used to report on the contribution to international climate finance goals, particularly among development banks.
How? Institutions often use taxonomies or positive lists of activities that reduce GHG emissions to classify projects or assets held in their portfolios. This is the case of the group of multilateral development banks (MDBs) and the International Development Finance Club (IDFC), which developed Common Principles for Climate Mitigation Finance Tracking. Other regional or national taxonomies such as the EU taxonomy help to classify companies held in portfolios, and in turn measure the volume of investments contributing to the mitigation objective.
- Measuring and tracking the volume or share of activities and investments building climate resilience
Why? It provides information on and helps to monitor the volume of activities contributing to the adaptation objective of the Paris Agreement. This tracking can also be used to report on the contribution to international climate finance goals, particularly among development banks.
How? Many institutions rely on a context- and location-specific approach to track adaptation finance. This is for example the case of the group of multilateral development banks (MDBs) and the International Development Finance Club (IDFC), which have developed Common Principles for Climate Change Adaptation Finance Tracking. Other regional or national taxonomies such as the EU taxonomy also help to measure the volume of investments significantly contributing to the adaptation objective relying on this approach.
Why? Impact can be defined as changes in the real economy that have a direct or indirect effect on climate change mitigation or adaptation. Measuring it provides transparency on and can assist in increasing the real-world contribution of climate-related finance and investment.
How? The impact of mitigation activities is often quantified using GHG emissions metrics, however complementary metrics are also often seen as necessary. Metrics for measuring impact for adaptation activities are often context-specific and fit-for-purpose to accommodate the wide range of activities that may contribute to the adaptation of economies and societies. Institutions may distinguish the impact of counterparties and underlying assets financed, and the direct impact stemming from its own choices and means of intervention.
- Assessing the alignment of all activities and investments against national and international climate goals
Why? It helps financial institutions to monitor the alignment of their activities today and understand how they may need to evolve in the future to be consistent and contribute to the goals of the Paris Agreement – including the mitigation goal, the adaptation goal, and the goal of making finance flows consistent with a low-GHG climate-resilient development pathway.
How? A range of methodologies are currently being developed to assess alignment with climate goals. At the portfolio level, tools exist to help institutions measure the alignment of their portfolios with a given temperature trajectory. At the activity or project level, screening processes have been developed relying on taxonomies and decision trees to assess consistency with the three climate goals. At the entity level, a few financial institutions have started to assess their counterparts’ consistency or preparedness for the transition.
Why? It helps to identify activities and investments that will have to transition or might become ‘stranded” assets in the future.
How? Taxonomies and positive lists can help identify companies, assets and activities that are currently unaligned; have a possibility to transition and become aligned; or pose a risk of “significant harm” vis-à-vis climate goals and have a strong risk of becoming stranded assets. Methodologies assessing a portfolio alignment with low-carbon trajectory can identify assets of a portfolio that are not aligned or compatible with a chosen transition scenario. Further methodological developments are however underway to improve these approaches.
 Source: 2dii – Climate impact, What it is and how to achieve it? https://2degrees-investing.org/wp-content/uploads/2018/12/Final-draft_Climate-actions-impact.pdf
Principle 5: ACCOUNT for your climate action
Why? It is increasingly seen as standard practice, may be requested by financial regulators, and provides information to shareholders, clients and counterparties on the institution’s exposure to climate risks.
How? The Taskforce on Climate-related Financial Disclosures provided recommendations and guidance on how to disclose an institution’s climate change financial risk exposure. This has been used by a number of financial institutions to develop and release TCFD reports on a voluntary basis.
Why? It is increasingly seen as standard practice, may be requested by financial regulators, and provides information to shareholders, clients and counterparties on the strategic and risk management decisions on managing those risks.
How? The Taskforce on Climate-related Financial Disclosures provided recommendations and guidance on how to disclose an institution’s climate-related financial risk management strategy. A number of financial institutions have already released TCFD reports on a voluntary basis.
Why? It provides information to shareholders, clients and counterparties on the volume of activities specifically contributing to climate objectives. International development finance institutions are already asked to report on this as part of North-South climate finance reporting. As a growing number of countries and regions are developing taxonomies for climate-related activities, mandatory reporting for all financial institutions could accelerate in the coming years.
How? Institutions may publicly disclose the results of the tracking of the volume or share of climate-related activities and investments. Institutions may choose to report results of this measurement individually or within groups or initiatives of financial institutions – such as the Multilateral Development Banks (MDBs) or the International Development Finance Club (IDFC). In the case of mandatory reporting, a specific taxonomy may be required as a reference and specific requirements may be asked by the regulator.
Why? It provides information to clients and counterparties on the volume of activities with adverse climate impacts. In jurisdictions such as in the European Union, this is asked as part of reporting requirements on adverse sustainability impacts.
How? Institutions may publicly disclose the results of the measurement of the volume of activities with adverse climate impacts. Institutions may choose to report results of this measurement individually or within groups or initiatives of financial institutions. In the case of mandatory reporting, a specific taxonomy may need to be used as a reference and specific requirements may be asked by the regulator.
Why? It may be requested by financial regulators and provides information to shareholders, clients and counterparties on the real-world contribution of the institution’s investments to climate objectives.
How? Institutions may complement their reporting on the volume or share of climate-related activities and investments with reporting on the impacts of these activities. Institutions may choose to report results of this measurement individually as part of their individual annual reports and/or within groups or initiatives of financial institutions. In the case of mandatory reporting, specific methodological requirements may be asked by the regulator.
Why? It provides information to stakeholders, clients and counterparties on the consistency and contribution of the institution’s activities to low-carbon climate-resilient scenarios. Disclosure on alignment may become increasingly expected as many financial institutions have announced voluntary commitments to align with climate goals with an expectation that they will publicly disclose progress. Furthermore, regulators may request disclosure on this issue and the TCFD has begun work on this issue.
How? Financial institutions may publicly disclose the results of their alignment assessment with international climate goals. They may choose to report these results individually as part of their individual annual reports and/or within groups or initiatives of financial institutions. In the case of mandatory reporting, specific requirements may be asked by the regulator. Considering the heterogeneity of methodologies and their level of maturity, jurisdictions do not require institution to rely on specific methodologies yet.