IMF Staff Co-Publish Paper on Climate Alignment for the Financial Sector

September 14, 2023

Washington, DC: Staff from the International Monetary Fund (IMF), World Bank, and the OECD have today published a new report to compare methods for ensuring financial sector activities work for, not against, the Paris Agreement. The report, which also received input from BIS staff, aims to help policymakers, regulators and private sector entities improve sustainable finance ‘alignment approaches’, by identifying core design and implementation elements that could provide a minimum baseline of comparability across approaches.

Scaling up private finance to support the transition to net zero means providing investors with the means to identify low-carbon and transitional investments and assess the impact of low-carbon investment strategies to reduce greenhouse gas emissions discharged in the real economy.

These frameworks use various tools (such as taxonomies, scoring methodologies, disclosure, and transition-planning frameworks) and share common features: science-based transparency, benchmarking for capital allocation purposes, transition planning and investment decision-making, and anti-greenwashing functions.

Yet, many countries – especially emerging and developing economies – do not have robust frameworks in place, and some also lack the data and indicators that would underpin it. Where frameworks and data do exist, they are rarely interoperable, making it hard for investors to compare climate-related risks and financing needs and opportunities across markets.

The lack of comparability and interoperability across countries and regions exacerbates data inconsistencies, leading to market fragmentation, and higher transaction costs. It also impairs efforts to accurately assess whether financing contributes to achieve, or undermines, the goals of the Paris Agreement, ultimately missing the alignment objective.

By unpacking different alignment approaches the new report aims to increase the understanding of how and when they link together. It provides technical suggestions on how to approach the design and implementation of alignment approaches.

The report also provides technical guidance for policymakers on identifying and prioritizing climate financing needs, including in hard-to-abate sectors, and for investors on due diligence related to other environmental and social objectives, including climate consistency in supply chains.

In addition, as many non-financial and financial corporates have started to develop plans that demonstrate how they will achieve their climate-related goals, the paper presents tools to improve the credibility, accountability, and uptake of transition planning. This process encompasses carbon-intensive activities and projects that need to undergo significant decarbonization or be phased out.

Lead author Charlotte Gardes-Landolfini of the IMF said: “Alignment approaches can inform the design (and reporting for accountability) of credible and comparable transition plans by investors or other firms upstream. Combining backward- and forward-looking approaches could also be conducive to covering the whole-of-economy climate transition, including carbon-intensive sectors and EMDE-based issuers, where much of the potential for financing of decarbonization processes remains untapped”.

Lead author Fiona Stewart of the World Bank said: “As a global public good, climate change mitigation requires an unprecedented level of cross-country policy cooperation and coordination. This paper will help scale up climate finance by contributing to the design of a transition finance framework applicable to emerging markets and developing economies.”

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