CAFI: How to improve transparency in climate reporting by the financial services industry

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Two men working at a solar power station. Photo: © Sonpichit Salangsing/Shutterstock

Larry Fink, CEO of the world’s largest money manager, BlackRock, writes an annual letter to CEOs of public companies. He created a stir in 2018 when he talked about A Sense of Purpose. Mr. Fink wrote, “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.” This brought investors’ attention to the fact that they can no longer ignore the risk of climate change in their portfolios.

Over the last decade, climate change has become a key development priority of our time. As part of the World Bank Group, the International Finance Corporation (IFC) is determined to limit the impact of such change. The Bank Group estimates that without effective action, more violent storms, droughts, rising sea levels and other climate-related events could push 100 million people into poverty by 2030.

IFC’s Financial Institutions Group (FIG) is committed to supporting financial institutions (FIs) to grow their portfolios of climate friendly investments. We are scaling up climate finance with our client FIs through an array of financial instruments that provide resources to their clients to invest in climate friendly projects. Our recent capital increase mandates that we ramp up this financing to tackle climate change. Such investments must constitute an average of 35 percent of our portfolio of new lending between 2020-2025.

IFC is not alone. Other development banks, private sector companies and fund managers have also increased their green investments and commitments with announcements such as the following:

  • JPMorgan Chase & Co.: Commits to sourcing renewable energy for 100 percent of its global power needs by 2020 and to facilitate $200 billion in clean financing by 2025.

  • Citibank: Promises to devote $100 billion to environmental finance.

  • Goldman Sachs: Will deploy $150 billion in financing and investment toward clean energy by 2025.

  • HSBC: Pledges to provide $100 billion in sustainable financing and investment by 2025.

Sounds like significant amounts of capital have been committed to fighting climate change, doesn’t it? Yet what do these substantial financial commitments all mean? How do we know the real climate impact of these investments?

Measuring and quantifying the impact of these investments is increasingly important to: a. monitor our progress towards the goals set out by the Paris Agreement, and b. to ensure there is no hint of “green washing,” a term for when an investment or project is “misleadingly labeled as green, or climate friendly.” The development finance community has a role to play in ensuring that the financial services industry can measure the climate impact of the projects they finance.

One of the obstacles of investing in climate finance is that most of the impact reporting by companies has focused on what non-investor stakeholders (e.g., governments, NGOs, and the like) want. There has been far less focus on providing the data that investors find useful. Working within the development finance community and as one of the largest impact investors in emerging markets, IFC has developed a number of new financial products and services that support low-carbon infrastructure development, green bonds and social bonds.

IFC’s thought leadership has resulted in or contributed to the launch of new market standards, such as the Green Bond Principles, which are the voluntary process guidelines that recommend transparency and disclosure and promote integrity in the issuance of a green bond. Similarly, IFC launched the Operating Principles for Impact Management at the joint World Bank Group-IMF 2019 Spring meetings with 60 global institutions, who collectively manage over $350 billion in assets, committing to them. IFC has recognized that the need to accurately measure climate impact is a critical component to ensuring the robust and sustainable growth of climate finance.

In graduate school, I spent a lot of time learning technical concepts, but extracurricular activities kept me equally busy. While working alongside my school’s Sustainability Officer, we launched the world’s largest CO2 emissions-tracking portal of the time. We made its Greenhouse Gas (GHG) dashboard publicly available. An article about it appeared on Forbes.com, but more importantly, this dashboard helped educate a broad community. Anyone interested in learning about the climate impact of the university’s portfolio could access the dashboard. Such experiences shaped my thinking about the power of data—especially, how it can inform the community and other stakeholders.

Inspired by these experiences, we at IFC have developed a first-of-its-kind leading impact monitoring and reporting tool for climate impact data. We built and now operate it through the collaborative effort of various teams. The online platform is known as the Climate Assessment for Financial Institutions, or “CAFI” tool. It is accessible to staff and external clients and enables us to check whether a project is climate friendly or not and then to quantify the development impact of the project.

CAFI now covers seven categories, defined as renewable energy, energy efficiency, special climate, green buildings, transport, water efficiency and adaptation. It is a user-friendly tool which offers analytics functionality, in addition to portfolio-monitoring. It is available in five languages, including Chinese, English, French, Russian, and Spanish. We are also planning to add two additional languages—Arabic and Bahasa. CAFI is constantly being modernized, creating new climate categories that can be measured, expanding the tool’s scope. For example, we are in the process of adding Green Buildings and Climate Smart Agriculture categories.

CAFI follows methodology and approaches that are publicly available and harmonized across multilateral development banks. It has been in operation for six years. To ensure its robustness, IFC hired an external auditor last year to review the Tool. CAFI received the “reasonable assurance” certificate, a robust approval of its methodology and accuracy.

"Measuring climate impacts will require teaching more stakeholders the terms and concepts they need to participate in and contribute toward our overall objectives of climate mitigation and resilience."
Gursimran Rooprai's picture
Gursimran Rooprai
Analyst on the Climate Finance team in IFC’s Financial Institutions Group.

To ensure our FI clients capture high-quality data, we train their staff to use CAFI. This helps clients actively manage their portfolios. A total of 74 client FIs in 37 countries are already using CAFI. Altogether, they have reported $3.9 billion in disbursed loans from more than 1,200 projects through the Tool. Our clients’ portfolios reported within CAFI have resulted in a cumulative GHG reduction of 7.1 million tons of CO2e p.a. (the equivalent of taking more than 1.5 million passenger vehicles off the road). CAFI has helped us and our clients capture the impressive climate impact their lending portfolios have achieved.

“Leadership and learning are indispensable to each other,” John F. Kennedy once said. To educate is to lead. Measuring climate impacts will require teaching more stakeholders the terms and concepts they need to participate in and contribute toward our overall objectives of climate mitigation and resilience. IFC is sharing CAFI beyond our own clients—with other multilateral development banks, international financial institutions, private institutions, fund managers—anyone who invests at scale in climate friendly projects. Join us in the effort to expand and apply the Tool. Contact Gursimran Rooprai, [email protected], to do so.

Authors

Gursimran Rooprai

Analyst on the Climate Finance team in IFC’s Financial Institutions Group

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