Non-fossil to fossil energy ratio and scaling up climate investment in all sectors

Explanation 

Among MDBs, the IDB Group possesses one of the highest and best ratios of finance flows toward renewables and clean energy projects relative to fossil fuels. In the fiscal period 2019–22, for every USD 1 the IDB Group provided to fossil fuels, USD 9.21 went to clean energy, USD 6.68 went to transmission and distribution (which cannot typically be attributed to any one energy type), and USD 3.93 went to other energy projects (e.g. mixed energy, nuclear, and biomass projects).

The public arm of the IDB has virtually stopped financing midstream fossil fuels, with the only remnant across its operations being the connections of stoves to gas in neighborhood improvement programs.[2] Moreover, the IDB Group as a whole has adopted its Paris Alignment Energy Sector Guidance, which establishes transition criteria for midstream and downstream fossil fuels. However, despite this notable progress, the IDB Group has yet to commit to a timeline for fully phasing out fossil fuel finance.

Climate finance as a percentage of the IDB Group’s annual approvals has increased from its initially low level of 16% in 2015, the year of the Paris Agreement.[3] It reached 29% in 2017 and then in 2019, though reduced again to below 20% in 2020 as the Bank Group prioritised COVID-19 response. Since then, the figure has risen year on year, to 34% in 2022, and 46% in 2023.

The IDB Group has set both a target of USD 24 billion in climate finance over 2022–2025, and a commitment for 30% of approvals (as an annual floor) to be categorised as climate finance in the period 2020–2023. , the IDB has missed the opportunity to link demand-driven partner engagement with ambitious supply-side quotas for project lending by eschewing an aspirational target to increase climate finance as a proportion of approvals beyond current levels. The IDB risks falling behind other MDBs that are putting forward more ambitious goals, e.g. the Asian Development Bank and the Asian Infrastructure Investment Bank.

Although only 19.9% of approvals were categorised as climate finance in 2020, if COVID-19 related investments are excluded from total spending then the IDB’s climate finance in that year did exceed the 30% threshold. The climate finance approvals target has since been consistently exceeded.  

In terms of the absolute climate finance target, climate finance approvals totalled USD 5.56 billion in 2021 – short of the USD 6 billion that the IDB will need annually in the period 2022–2025 to meet the USD 24 billion target. In 2022, the figure rose to USD 6.97 billion and in 2023, to USD 7.55 billion. It is worth highlighting that each of these figures have represented record annual levels of climate finance for the bank.

At COP28, the IDB Group announced its intention to triple direct and mobilised climate financing for the LAC region over the next decade to USD 150 billion, which is in line with the G20 recommendation that MDBs should triple their climate finance. Subsequently, at COP29 the IDB announced a target to reach 50% in green and climate finance, with IDB Invest targeting 60% (including mobilised private capital). Together, the IDB and IDB Invest expect to deliver a combined USD 11.3 billion in annual climate finance by 2030, mobilising a further USD 6.6 billion. These projections align with the Bank’s commitments under the new Impact Framework, including delivering USD 25 billion in adaptation finance between 2024 and 2030 (representing 50% of the IDB’s total climate finance target for this period). 

The IDB Group’s commitment to supporting the acceleration of the energy transition in the LAC region is evidenced by IDB Invest’s recent pilot to structure innovative financial instruments to monetise “the displacement of greenhouse gas emissions (GHG) when closing thermoelectric coal plants early and replacing them with clean energy projects”. Another example of this commitment is that in 2021, IDB Invest established a strategic partnership with ENGIE Energia Chile (a subsidiary of the ENGIE Group) to structure a deal aimed at accelerating the decarbonisation of the country’s electricity grid.

IDB Invest has also developed the “Green Transmission Line (GTL) Standard” for the purpose of identifying projects that contribute to the decarbonisation of country energy matrices. This standard provides “green” certification to projects financed by IDB Invest based on a methodology accounting for: (1) the percentage of renewable energy transported; (2) the percentage of loss reduction in the incoming power system; (3) increased system resilience; (4) compliance with IDB Invest’s Environmental and Social Sustainability Policy (ESSP); and (5) any actions going beyond those required by the ESSP. Recognising the role of investments in contributing to the decarbonisation of energy grids, and seeking to evaluate and certify those that do, represents best practice among MDBs. 

Recommendations: 

• To be Paris aligned under this metric, the IDB must reduce fossil fuel lending to zero, and maintain this for a minimum three-year period. Recent annual figures show fossil fuel lending at a low level (relative to financing for clean energy) in 2019, before increasing in 2020 and subsequently falling dramatically to its lowest recorded level in 2021. The latest available figures show fossil fuel lending slightly increasing in 2022 back to a level comparable to 2019. When considered alongside the IDB’s already high relative level of financing for clean and other energy, as well as the exceptional pressures of 2020 with regard to the COVID-19 recovery, this suggests that a full phase-out (including an exclusion extended to downstream oil and gas) is attainable.
• IDB Invest should consider replicating its early coal retirement transaction in Chile across the region to help accelerate the transition away from coal-based energy. It should focus on scalable opportunities which significantly bring forward retirement dates, and ensure it avoids compensation schemes that create perverse incentives for asset owners to delay retirement or increase emissions output. As part of this, the Bank should seek to engage with other MDBs who are actively testing solutions for supporting coal retirement, such as notably the Asian Development Bank through its Energy Transition Mechanism (ETM), to allow it to identify and disseminate learnings and best practice.  

[1] These calculations are derived from the transaction level dataset compiled by Oil Change International for the Public Finance for Energy Database. For further details, please see information regarding the data source and calculation methodology.

[2] Discussions with the IDB indicate the Bank’s intention to progressively exclude fossil fuel support from future operations. E3G welcomes this intention and looks forward to this direction being reflected in the updated energy lending figures of the Bank as and when they become available.

[3] While a useful indicative reference point, this figure should not be directly compared with later years, due to subsequent changes in the methodologies for tracking climate finance.