Reconciling development and the fight against Climate Change

RECONCILING

development and the fight against

Climate Change

Action plAn

2012 2016

Agence française de développement

contents

EXECUTIVE SUMMARY

04

I. climate change, a full-fledged aspect of development

07

Interlinked challenges Sizeable financial commitments to the climate A defining context for development finance

08 09 10

II. The three pillars of the 2012-2016 "climate change-Development" strategy

11

A firm commitment to the fight against climate change A systematic measurement of the impact of funding on climate change A policy of selecting projects according to their climate impacts

12 16 17

III. An operational and partnership-based approach

19

Operations tailored to geographical areas Implementation of innovative financial instruments Developing new modes of action and partnerships

20 23 25

The challenges of the implementation of this climate change-development strategy

27

APPENDIX

28

Impact measurement and accounting methods for "climate" commitments

29

executive summArY

The fight against climate change is inextricably linked to economic and social development as the acceleration of climate change will seriously hamper development.

Today, countries’ development paths go hand in hand with a rapid increase in the consumption of natural resources and fossil fuels. The adoption of drastic objectives to reduce greenhouse gas emissions by developed countries and of low fossil-fuel modes of development by developing countries, particularly emerging countries, has become a major stake for both the global fight against climate change and the sustainable development of countries. At the same time, it is vital to support the poorest and most fragile countries so that they can adapt their economies to the inevitable and already present effects of this climate change.

International negotiations on climate change should lead to reciprocal commitments to reduce or alter greenhouse gas emission trajectories that will profoundly restructure countries’ development policies. They should also lead to the implementation of sizeable resources earmarked for actions to fight against climate change in developing countries, such as the Green climate Fund.

4

With over EUR 7 billion of financing allocated between 2009 and 2011, representing an average of over 10% of international public climate finance, AFD is today a major and innovative actor in "climate" finance at the international level, both in terms of quantity and quality, particularly for the financing methods and instruments that are used. Thanks to the critical mass of its operations, its flexible and comprehensive tools, its knowledge of the field and its recognized experience, AFD enjoys major comparative advantages to continue and scale up its action both for the implementation of France’s climate change commitments towards developing countries and for the implementation of resources or international and European mandates for the “climate".

In this context, AFD is launching an ambitious strategy and action plan for 2012-2016* based on three core pillars. The operational application of these pillars is tailored to the geographical areas of operation : > An objective of a sustainable financial commitment to the climate representing 50% of AFD’s allocations to developing countries and 30% of the allocations of proparco, its private sector financing arm; > A systematic measurement of the carbon footprint of funded projects using a robust and transparent methodology; > A policy of selecting projects according to their climate impacts, taking into account the level of development of the countries in question.

This strategy, which aims to provide a structure, is built on the results of the action conducted by AFD Group for several years now on the issue of climate change. However, it must be considered as an evolutionary stage, intended to thoroughly examine complex issues and integrate major challenges. These include the harmonization and enhancement of climate impact measurement and monitoring methods, finding practices and innovations that can transform development methods, or a greater involvement of the private sector and of countries’ financial actors in the international climate finance architecture. In this respect, AFD intends to pursue and strengthen its partnership-based approach for exchanges and dialogue with all the stakeholders who contribute to efforts to the fight against climate change.

* This strategy was adopted by the Board of Governors of Agence Française de Développement (AFD) in November 2011.

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1

climAte cHAnge, a FULL-FLedGed aspect oF deVeLopMent

1 climAte cHAnge,

a FULL-FLedGed aspect oF deVeLopMent

{ interlinKed cHAllenges Three fundamental development challenges de facto underpin climate change issues.

Increasing insecurity over access and fossil fuel prices

requires a fundamental shift towards a more energy-efficient and low-carbon development model

8

• The long-term sustainability of energy generation and consumption patterns of economies in an environment where increasing insecurity over access and fossil fuel prices requires a fundamental shift towards a more energy-efficient and low-carbon economic development model. This shift, with its major economic and social effects, is core to the 21st development century strategic challenges for the vast majority of countries on the planet. It touches on a wide range of economic sectors (power generation, energy efficiency in transportation, buildings, industries…) and actors (governments, public services, local authorities, private enterprises…).

• Giving a value to “climate" and environmental services provided by countries’ natural resources. Indeed, the economy continues to largely ignore the environmental externalities of production activities for all goods and services. The principle of paying for the GHG sequestration services provided by forests and soils in particular is today widely accepted. Although putting it into operation proves complex, this arrangement should increase the economic value of these natural resources by changing management practices and developing these resources.

R E c o n c I l I n G D E v E lo p M E n T &

The cost of the effects of climate change could

undermine the progress achieved in terms of economic and social development

T h E F I G h T A G A I n S T c l I M AT E c h A n G E

• considering the vulnerability of communities, goods and ecosystems to the effects of climate change. The most vulnerable communities in Africa, Asia, Latin America and the small island States are already suffering the effects of climate change.

They are also the least prepared to face extreme climate events, rainfall fluctuations or the impact that the latter can have on food prices. In the medium-long term, the cost of the effects of climate change could weigh heavily on global growth and undermine the progress achieved in terms of economic and social development in a number of the countries where AFD operates. Against this background, the cost of reducing greenhouse gas emissions is deemed much lower than the cost from the negative impacts of climate change.

The issue of adapting economies and land use planning policies is crucial here. Beyond the issue of how to finance this, it poses the twofold problem of identifying these effects and their long-term consequences and that of defining decision-making tools for economic actors (governments, local authorities, companies…), including risk management tools.

These three elements constitute major threats to countries’ economic and social development in a relatively short timeframe (20 to 30 years). However, they also provide new economic opportunities and sources of competitiveness (green jobs, new industries…). In this context, it would appear legitimate, natural and necessary for a development finance institution such as AFD to participate in the implementation of these three aspects of the link between climate change and development.

finAnciAl commitments { siZeABle to tHe climAte Global climate change negotiations should lead to

Negotiations have resulted in a goal of USD 100

billion per year by

2020

> Reciprocal commitments from developed countries to reduce their emissions and from developing countries to alter their "emission" trajectories that can overhaul countries’ development policies. Despite their shortcomings, the Cancún and Durban climate agreements strengthened the "early" attention given to this aspect by some emerging countries (China, Indonesia, Mexico, South Africa…) and poorer countries (Gabon, Mauritius, Vietnam…). > The mobilization of significant funds earmarked to finance actions to fight climate change in developing countries. Such funding may well equal or exceed official development assistance (ODA) amounts. Negotiations have resulted in a goal of USD 100 billion per year by 2020. Further negotiations will define how this financing will be deployed, in particular via the creation of a Green Climate Fund, and how the fund will be replenished, notably through "innovative" resources.

9

> Increased flows of "climate" finance. Although there is currently no recognized authority for "climate" finance accounting, nor a standardized accounting method for "climate" project accounting, governments, international and national Development Finance Institutions, international organizations and research institutes now regularly publish this type of information. This information confirms the existence of increasing and already sizeable public and private financial flows on these issues (probably over USD 100 billion per year), the bulk of which come from development banks’ own resources for public financing. There are, in addition, an increasing number of initiatives at the multilateral, regional, bilateral and national levels for funds earmarked for "climate" finance, which are intended to have a "catalytic" effect and have various targets. They demonstrate how this issue attracts international and national funding.

defining context for { Adevelopment finance Against this background, development financiers, and AFD in particular, are facing both local challenges – in a context of changing demand – and international issues of positioning.

The link between climate change and development

still needs to be argued

in a context whereby international climate negotiations

tend to separate these topics

For AFD, as for a number of other International Development Finance Institutions, this issue of positioning with respect to the implementation of "climate" finance is first an opportunity for new activities to support countries’ development and investment programs, but is especially an issue of integrating climate change-development. Indeed, the link between climate change and development, albeit intrinsic (there are no "climate" projects as such, but only development projects with or without co-benefits for the climate), still needs to be argued in a context whereby international climate negotiations tend to separate these topics.

Moreover, as a result, demand should evolve in developing countries due to the constraints of development policy commitments to change "emission" trajectories and the need to adapt economies to both physical and economic changes. The issue is therefore to anticipate developments in opportunities for operations for International Finance Institutions, and for AFD in particular, in developing countries. This comes with major challenges in terms of supporting low-carbon development policies in emerging countries which are strong or potentially strong GHG emitters, as well as policies to help the poorest access energy in an economically and environmentally sustainable way and the adaptation policies of the most vulnerable countries to the impacts of climate change in Africa and the small island States.

There are therefore many major implications for International Financial Institutions and AFD in particular. They concern both their policies to finance sustainable development for countries and the planet and their practices from a technical point of view and in terms of cooperation and partnerships, with the prospect of potentially major consequences on development aid practices.

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2

tHe tHree pillArs

oF the 2012-2016 "cLiMate chanGe-deVeLopMent" strateGY

2 tHe tHree pillArs

oF the 2012-2016 "cLiMate chanGe-deVeLopMent" strateGY Building on its experience, the initial results and its comparative advantages, whilst being aware of the scale of the technical challenges which still need to be met, under its 20122016 Action Plan1, AFD is planning to maintain its ambitious position as a financier of the international fight against climate change. AFD sees this positioning as part of a renewed climate-oriented identity that integrates climate change and development in an operational manner, without sacrificing either objective for the sake of the other, and builds on the many synergies between these two imperatives.

In this context, AFD is implementing a strategy and action plan for 2012-2016 based on three core pillars.

firm commitment to tHe figHt { AAgAinst climAte cHAnge For the period 2012-2016, AFD has committed to the target of allocating funding to the fight against climate change

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50%

of AFD’s annual allocations in the developing countries where it operates

30%

of the annual allocations of proparco, its private sector financing arm

1 - This Action Plan was adopted by AFD’s Board of Governors in November 2011.

R E c o n c I l I n G D E v E lo p M E n T &

For the period 2009-2011, AFD Group’s "climate" finance

reached over EUR 7 billion

T h E F I G h T A G A I n S T c l I M AT E c h A n G E

AFD is the main actor in the implementation of France’s bilateral financial commitments towards developing countries for the fight against climate change. AFD’s commitments to the fight against climate change are growing rapidly, positioning France today as a major supporter of the fight against climate change in developing countries, alongside Japan and Germany for example. AFD, as an International Financial Institution, is also a major actor in the mobilization of resources and international and European mandates for the fight against climate change and in the implementation of activities which meet the highest international standards in this respect.

For the period 2009-2011, the financing allocated by AFD and Proparco to development projects and programs that have a co-benefit for the fight against climate change reached over EUR 7 billion. This high level of commitment means that AFD is a major "climate" actor, with around 10% of international public "climate" finance for developing countries2.

Running total AFD Group climate allocations since 2007 EUR M

Number of projects

10 000 340 8 000

284

290

239

6 000

240 190

171

4 000

140 99

2 000

90 50 -

40 2007

2008

2009

2010

2011

Total allocations to climate change mitigation projects since 2007 (in EUR M) Total allocations to climate change adaptation projects since 2007 (in EUR M) Total number of "climate" projects financed

This commitment is both realistic, as it is built on results from recent years and the outlook for the coming years, and ambitious since it implies that AFD’s investment practices for energy, transportation and other sectors will increasingly take account of the benefits for the fight against climate change and that new practices will emerge in sectors such as agriculture or in city policies. This commitment fully integrates into AFD’s development assistance objectives and does not compete with its poverty reduction or social development efforts. Finally, these objectives require AFD to include climate-related operations in its multi-year horizon aligning them with the construction of countries’ "climate" policies and international climate architecture.

2 - The Landscape of Climate Finance – Climate Policy Initiative – 2011 / BFI and climate finance – UNEP/SEI – 2010.

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financing mitigation % 100 90 80

100

70

90

60

80

50

70

40

60

30

50

20

40

10

30

0

French Overseas Provinces Multi-country Mediterranean French Overseas Latin America Provinces Asia Multi-country Africa Mediterranean Latin America Asia Africa

20 2007

10

2008

2009

2010

2011

2007-2011

0

%

2007

100

100

90

90

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0

0 2007

2008

2009

2010

2011

2007-2011

Carbon Fund Carbon Fund Capacity Building Capacity Building Waste Management Waste Management Water Water Sequestration in Forest Sequestration in Forest and Agriculture and Agriculture Fuel Switch Fuel Switch Energy Efficiency Energy Efficiency UrbanTransport UrbanTransport Budgetary Support Budgetary Support Financial Intermediation Financial Intermediation Renewable Energy Renewable Energy

2008 20072009 2008 2010 2009 2011 2010 2007-2011 2011

2007-2011

The bulk of funding allocations for projects which contribute to mitigating greenhouse gas emissions concern renewable energy and energy efficiency (including via the allocation of credit lines which aim to promote these two sectors) with, moreover, major operations for low-carbon urban transportation projects. Over the period 2007-2011, financing for mitigation focused on emerging economies, first in Asia, then gradually in Latin America, at the same time as the extension of AFD’s mandate for operations in this region.

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R E c o n c I l I n G D E v E lo p M E n T &

T h E F I G h T A G A I n S T c l I M AT E c h A n G E

financing adaptation % 100 100 Knowledge Management Knowledge Management Insurance MecanismInsurance Mecanism Infrastructure and Urban Development Infrastructure and Urban Development Agriculture and Natural Resources Agriculture and Natural Resources Water Resources Water Resources

80 80 60 60 40 40 20 20 0

2007 0

2008 2007

2009 2008

2010 2009

2011 2010

2007-2011 2011 2007-2011

% 100

French Overseas Provinces French Overseas Provinces Multi-country

90 100 80

90

70

80

60

70

50

60

40

50

30

40

20

30

10

20

0

10 0 2007

Multi-country Maghreb and Middle-East Maghreb and Middle-East The Caribbean Asia

The Caribbean

Asia Latin America Latin America Sub-Saharan Africa Sub-Saharan Africa

2008 2007

2009 2008

2010 2009

2011 2010

2007-2011 2011

2007-2011

The bulk of AFD’s commitments for adaptation concern projects that help preserve water resources. A significant number of projects are implemented in the agriculture and natural resources sector, but for more limited individual amounts. Allocations for adaptation are mainly earmarked for Africa (sub-Saharan Africa and the Mediterranean/Middle East), which is the most vulnerable to climate change.

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meAsurement { AofsYstemAtic tHe impAct of funding on climAte cHAnge For the period 2012-2016, AFD pledges to systematically measure the "climate" impact of the projects it finances

AFD pledges to systematically measure the carbon footprint of the projects it finances using a robust and transparent method. AFD’s operational procedure manual includes this provision and provides for a carbon footprint estimate as early as possible during the funding appraisal phase.

AFD plays a pioneering role among international financial institutions and development banks for these carbon footprint measurement issues and receives a number of requests for cooperation from other financial institutions in both developed and developing countries. It also seeks to better evaluate the impact of its climate change adaptation efforts and to be accountable for them. Beyond this, AFD is aware that this is only the first stage and aims to pursue its efforts, jointly with its partners and the scientific community, to harmonize practices and develop indicators and measurements to allow a more comprehensive and thorough assessment of sometimes complex impacts, which serves as a tool for decision-making and evaluating the effectiveness of its action.

Since 2007, AFD has defined and developed a method and a robust instrument to quantify the greenhouse gas emissions and emission reductions of the projects it contributes to financing. They allow the expected mitigation impact in the fight against climate change to be ascertained (see AFD’s impact measurement and accounting methods for climate commitments in the Appendix).

AFD is one of the first donors to have taken this step. Discussions with its partners and the research of the scientific community have gradually made this tool more reliable.

This carbon footprint measurement is made right from the identification of the financing and is gradually honed during the appraisal process. In addition to being a tool which helps take account of “climate" issues during AFD’s funding appraisal process and for its accountability towards its shareholders and stakeholders, it is also used to make a robust classification of AFD Group’s climate change mitigation projects.

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R E c o n c I l I n G D E v E lo p M E n T &

Funding allocated by AFD between 2009 and 2011

will reduce or avoid 14 million metric tons of CO2e emissions per year

over the next 20 years

T h E F I G h T A G A I n S T c l I M AT E c h A n G E

Funding allocated by AFD between 2009 and 2011 will allow projects to be implemented that will reduce or avoid emissions equal to 14 million metric tons of CO2 equivalent per year over the next 20 years and will have significant impacts on adaptation for communities and economies. In addition to these measurable impacts, there is the positive impact of AFD’s "climate" projects for which the direct carbon footprint cannot be measured (budget support to governments or local authorities and capacity building activities).

AFD has also adopted a classification method for its financing, which helps economies adapt to climate change impacts, and is testing a method to assess the vulnerability of the projects it finances to climate change impacts. The aim is to provide an appropriate response during the project appraisal and cycle.

Beyond the interest of these procedures and methods for the evaluation of the impact of the projects it finances, by developing and sharing these accounting methods, AFD also contributes to the international community’s efforts to standardize measurement and reporting tools for "climate" activities.

of selecting projects According { AtopolicY tHeir climAte impActs For the period 2012-2016, AFD pledges to consider the impacts that projects have on climate change in its funding appraisal and evaluation criteria This concern is combined with multi-criteria project analysis based on the standard analytical areas (poverty reduction, local employment, profitability, environmental and social impacts…).

The approach aims to ensure a dual consistency between AFD’s proactive stance in the fight against climate change and countries’ objectives to fight climate change. This approach also takes into account AFD Group’s core mission to support economic and social development and reduce poverty. It is tailored to countries’ different development levels and is in line with AFD’s mandate.

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For this, AFD Group has developed a project selectivity matrix which aims to ensure that it : > does not fund highly emissive3 projects in emerging countries; > does not fund strongly emissive projects in middle-income countries, particularly Mediterranean countries, unless such a project is part of a national and sectoral GhG emission mitigation policy.

This selectivity policy does not apply to the least developed countries, particularly those in sub-Saharan Africa (with the exception of South Africa, Mauritius and the Seychelles), or to post-crisis countries, given their low level of global GHG emissions and their need to catch up in terms of energy and economic infrastructure in order to ensure their growth. However, AFD will not provide concessional financing to strongly emissive projects in these countries, unless such a country includes the "climate" aspect in its development policy and in its sectoral policies and action plans.

Least developed or crisis countries

Middle-income countries

Emerging countries

AFD Group funding possible.

AFD Group funding possible.

AFD Group funding possible.

AFD Group funding possible.

AFD Group funding possible.

Possible if not concessional funding. concessional funding possible if, and only if, the country has a climate policy.

Funding possible. If the funding is concessional the country must have a climate policy

No funding unless the country has a climate policy.

No AFD Group funding.

Mitigation project (< -10ktCO2e p.a.)

Or project with low impact (between -10ktCO2e p.a. and 10ktCO2e p.a.)

Emissive project (between 10ktCO2e p.a. and 1MtCO2e p.a.)

Strongly emissive project (>1MtCO2e p.a.)

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3 - Over a million metric tons of CO2 equivalent emissions per year.

3

An operAtionAl

and partnership-based approach

3 An operAtionAl and partnership-based approach tAilored { operAtions to geogrApHicAl AreAs In emerging countries in Asia and latin America, which pose the most challenges in terms of greenhouse gas emissions in developing countries, AFD’s "climate" operations mainly focus on renewable energy and energy efficiency in sectors such as urban transportation, local governments, forestry and agriculture.

AFD’s "green and inclusive growth" mandate in these emerging countries has allowed it to meet their high expectations for climate change technology and innovation transfers and thus contribute to the policies implemented by these countries to curb the environmental footprint of rapid growth.

For 2012-2016: In emerging countries in Asia and latin America AFD’s climate action will primarily be dedicated to supporting the implementation of low-carbon development policies. The aim, in line with the Group’s specific objectives and strategies in these geographical areas, is to achieve an average level of operations whereby around 70% of annual allocations have co-benefits for the fight against climate change. AFD’s operations will mainly use non-concessional or semi-commercial investment loan instruments (energy, transportation, cities…) and budget support lending ("national climate change plans", nAMAs, sustainable city development policies…). It will also mobilize expert technical assistance via its internal resources, those of the French GEF and European facilities, as well as international and national funding.

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R e c o n c i l i n g D e v e l o p me n t &

t h e F ig h t agai n st C l imate C h a n ge

In the Mediterranean, "climate" projects also provide many opportunities to build defining elements for its sustainable development (low-carbon energy, sustainable cities and transportation, water management…).

For 2012-2016: In Mediterranean Basin countries In Mediterranean Basin countries, AFD’s climate actions will have a thematic focus on energy, urban transportation and water. In the medium term, and to the extent that these countries assimilate their recent upheavals, a target level of operations in the region whereby around 50% of annual allocations have co-benefits for the fight against climate change may be envisaged. With regard to investment needs, AFD will mainly operate via concessional and non-concessional investment loans and will gradually be providing budget support for sectoral, regional or national policies.

In sub-Saharan Africa, "climate" operations will develop the continent’s natural resources and renewable energy potential and participate in the adaptation of these countries’ economies and societies to climate change impacts (dams, geothermal energy, access to electricity, forestry, water, agriculture…).

For 2012-2016: In sub-Saharan Africa and the least developed countries The main focus will be to reduce their vulnerability to climate change and give an economic value to the "climate" services provided by their forests and agriculture. AFD will also seek to promote actions that help develop sub-Saharan Africa’s major sources of renewable energy in order to reconcile access to energy for all with less dependence on fossil fuels. In the medium term, a level of around 30% of annual allocations for the "climate" may be reached. In view of the nature of the requirements in terms of adaptation and for the forestry sector, AFD will operate via concessional and highly concessional investment loans and by mobilizing grants (internal, French GEF, Europe…) to support innovative, cross-cutting regional programs and those that address both poverty and climate concerns.

Renewable energy projects may draw a wider range of funding instruments.

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For 2012-2016: In the French overseas provinces Actions will aim to support environmental policies, especially those determined by the so-called "Grenelle de lâ&#x20AC;&#x2122;Environnement".

AFD will operate through its funding to local governments, the private sector and its social-housing subsidiaries.

Afd group objectives for annual financial commitments which have positive impacts on the climate

70%

annual allocations in Latin America

50%

annual allocations in the Mediterranean

30%

annual allocations in sub-Saharan Africa

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70%

annual allocations in Asia

R e c o n c i l i n g D e v e l o p me n t &

t h e F ig h t agai n st C l imate C h a n ge

of innovative { Implementation financial instruments Private companies and SMEs in developing countries are able

to make energy upgrades

Provide assistance and budget support to countries that integrate

the climate into their development strategies

AFD has a wide range of financial instruments: mainly concessional and non-concessional investment loans, but also, depending on the type of investment, budget support, guarantees, equity investments, as well as grant investments and technical assistance, in line with the Group’s mandates and overall operational strategies in this regard. It also mobilizes resources from European and international mandates and places strong emphasis on cofinancing with other national and international financiers.

One of AFD’s first innovative operations was to develop private sector involvement in the fight against climate change, either directly or via credit lines to banks, for example in Africa, India, Indonesia and Turkey. This is a first step allowing greater private sector involvement to be tested, which can have a positive impact on transforming these countries’ economies. This is the case, for example, when companies and SMEs in developing countries are able to make energy upgrades, which not only make them more competitive, but are also vitally important for the fight against climate change. It also contributes to developing renewable energy. More recently, AFD Group has developed multi-investor structured instruments (debt funds, venture capital funds…) for private sector players in the sectors of renewable energy, energy efficiency, forestry… A lot of work still needs to be done in order to scale up and remove the barriers to full-fledged private sector involvement in the fight against climate change. Consequently, AFD aims to continue and scale up the development of these instruments by extending them to guarantees, insurance mechanisms… and by supporting countries’ national climate finance mechanisms (South Africa…).

AFD’s second innovative approach involves assistance, budget support and technical assistance to countries that decide to adopt nationwide plans to integrate the climate into their development strategy: financing for "Climate Plans" or national low-carbon development policies or policies to reduce vulnerability to climate change impacts anticipate one of the operational arrangements that have emerged from international negotiations.

This operating method helps meet the challenge of transforming countries’ economic models. Indeed, cross-cutting policy discussions with partner countries lead to reflection and support which go beyond sectoral optimization and thus to inter-sectoral analyses and decision-making which structure the economy.

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AFD has gained experience in supporting the institutional process and high-level interministerial discussions, which are essential to this paradigm shift. Together with other bilateral and multilateral partners, AFD has helped fund national climate plans in Indonesia (2008, 2009, 2010), Vietnam (2010, 2011 and 2012), Mauritius (2009) and Mexico (2009 and 2010). It is also discussing with countries such as Kenya and the Philippines.

AFD capitalizes on these practices and instruments in order to develop other forms of operation further upstream (technical assistance) for sub-Saharan African countries, and further downstream for sectoral policies and future NAMAs (Jordan, Turkey), as well as for climate and sustainable development policies for cities (Brazil, South Africa, Turkey), or energy conglomerates (notably in Colombia). Here again, discussions and exchanges with AFD’s partners who are involved in similar approaches will be essential in identifying and defining good practices and standards to enhance both the effectiveness of these promising approaches and supervision.

For 2012-2016: Support for national and regional public policies, private sector involvement and support for innovation AFD will be structuring and scaling up its operations to support countries’ national and regional climate change policies and climatefriendly sectoral policies, via budget support and technical assistance for the most advanced countries, as well as for those with less institutional capacity, particularly in Africa. The experience AFD has been developing for several years with subnational entities (States, regions, municipalities and associations of municipalities) and public economic actors (public enterprises and government agencies) will be used to support innovative climate approaches implemented at these different levels.

AFD will also focus on developing tools to leverage and drive private sector involvement: guarantees, risk sharing, credit lines… in connection with current international thinking on mobilizing the private sector in the fight against climate change.

Finally, AFD has implemented specific financial tools which aim to promote innovation and risk-taking on these "climate change-development" issues by a wide range of project initiators (nGos, research institutes, local companies, corporate foundations…). The specific instruments and capacity of the French Global Environment Facility (French GEF) will also be mobilized for this purpose.

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R E c o n c I l I n G D E v E lo p M E n T &

T h E F I G h T A G A I n S T c l I M AT E c h A n G E

neW modes of Action { developing And pArtnersHips

Give an important role to

national Development Finance Institutions

In view of the challenges and financial amounts that need to be implemented rapidly and massively, the future of international climate financial architecture will, beyond traditional international development assistance actors, clearly need to rely on all professional, financial and technical actors working at the international level and in countries. It is particularly essential to recognize and give an increasingly important role to national Development Finance Institutions, which are both powerful and legitimate actors for a coherent implementation of the climate and development agenda of countries and the international community. As a result, this new paradigm will compel actors to make significant coordination efforts and will bring about a real and inevitable change in the objective of countries and their institutions taking the driverâ&#x20AC;&#x2122;s seat for their own "climate changedevelopment" policies.

In this respect, AFD aims to strengthen partnerships with an increasing number of both traditional and new actors in the financing and implementation of "climate change-development" policies.

AFD will first strengthen its relations with development banks from developing countries countries, as can be seen with its status of founding member of the International Development Finance club (IDFc) (IDFc), a group created in 2011, which gathers 19 international, national and regional development banks, mainly from developing countries. AFD aims to have operational relationships with these partner institutions via cofinancing and staff exchanges, and also to contribute to the integration of these banks into the international framework for climate change-development finance where their role is clearly indispensable and essential.

AFD will also continue to reinforce its strategic operational partnerships with the most active international development banks and financial institutions in the fight against climate change, such as KfW, JICA and the EIB, and to scale up its exchanges and synergies with multilateral and regional international financial institutions: IDB, WB, IFC, EBRD, AfDB, AsDB, BOAD, CAFâ&#x20AC;Ś particularly for experience sharing or reflection on the instruments and methods for climate finance implementation and accounting.

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AFD is involved in the

construction of a European architecture for development and climate finance

Finally, AFD will specifically seek to be involved in the construction of a European architecture for visible and coherent development and climate finance, particularly via tools for collaboration and the implementation of financing with the European Commission and other European financial institutions. AFD is actively participating in the construction of European operational arrangements for climate finance in developing countries, with the aim of ensuring effectiveness and developing European action to fight against climate change.

AFD will seek to continue its dynamic cooperation with the United Nations Agencies which are actively working on this issue, particularly UNDP, UNEP, as well as the major actors in international cooperation, such as GIZ, USAID, AUSAIDâ&#x20AC;Ś AFD also pledges to pursue and enhance its dialogue with civil society and non-governmental organizations.

Finally, AFD will seek to enhance its communication on its operations and â&#x20AC;&#x153;climate" activity and to develop its research and intellectual production activity on this topic and thus participate on the international effort towards accountability, capitalization and the dissemination of good practices.

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â&#x153;? tHe cHAllenges

oF the iMpLeMentation oF this cLiMate chanGe-deVeLopMent strateGY

While this commitment requires significant structural efforts on the part of AFD for the period 2012-2016, the challenges to be met for the implementation of this climate change-development strategy are not, however, purely operational, organizational and internal to AFD. They are also closely linked to trends in the debates on climate change and to the establishment of an institutional framework which will result from negotiations.

This will obviously firstly concern the pace and dynamics of the negotiations, particularly in developed and emerging countries, which keep the climate change issue at the top of countriesâ&#x20AC;&#x2122; political and economic agendas.

The Green Climate Fund must become

an instrument to make "climate" and development assistance policies consistent

This will also concern the coordination that will be established between climate change and development and which, from an institutional and operational perspective, should reaffirm the intrinsic link between these two aspects, otherwise there is a risk of competing agendas jeopardizing the quality of actions in countries. It will be particularly important to take this aspect into account for the Green Climate Fund, which may become both an instrument to make climate change and development assistance policies consistent or, on the contrary, create major difficulties for coordination between policies and actors in countries.

In a more targeted way, this will also concern the current difficulties to establish effective interlinked carbon markets ensuring satisfactory environmental integrity and a coherent and predictable framework conducive to private investment.

Finally, there are still significant technical challenges, such as that of making the concept of climate change adaptation operational in an environment where information, decision-making tools and the definition of the relevant policies are still very much in their infancy. This will also concern the ability to get everyone to accept a wide range of instruments and types of possible action for the fight against climate change and, more specifically, loans as a major and economically effective tool to finance economic investment when the financial capacity of countries and counterparts allows this.

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AppEnDIX impAct meAsurement

and accoUntinG Methods For "cLiMate" coMMitMents

R E c o n c I l I n G D E v E lo p M E n T &

T h E F I G h T A G A I n S T c l I M AT E c h A n G E

AppEnDIX

impAct meAsurement and accoUntinG Methods For "cLiMate" coMMitMents

In a context of an increasing demand from the civil society as well as from the international community for transparency from donors on their activities related to the fight against climate change, the AFD Group has committed to provide systematic information on the "climate" impact of the projects it finances. AFD especially developed for this purpose a methodology and a procedure for calculating the carbon footprint of its projects integrated into their appraisal process. Besides, AFD elaborated a clear and transparent methodology aiming at inventorying its climate related commitments.

The financial contributions to projects having a positive impact on climate are called "climate" funding. This AFD Group "climate" finance accounting methodology is compatible, although more restrictive, with the main accounting methodologies that currently exist within the international community (including Rio marker or positive lists of "climate" projects...). It has the advantage of relying, for a majority of these funding, on a robust and quantified justification of the expected effects on climate change of the projects.

This document details the methodology adopted by the AFD Group.

For more information, please refer to our website http://climat.afd.fr

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measurement 1 { Impact of projects

4 - "The AFD Carbon Footprint Tool for projects, Userâ&#x20AC;&#x2122;s Guide and Methodology", April 2011.

Since 2011 a carbon footprint calculation is systematically performed during appraisal of all AFD groupâ&#x20AC;&#x2122;s projects (whose carbon footprint is considered to be measurable and significant). It provides quantitative information on the climate impact of the project and identifies areas for optimization of the latter under preparation. This calculation is based on a methodology developed by the Group, consistent with those of a growing number of donors and downloadable from the climate portal of the AFD website4.

This methodology outlines the principles and scope of the carbon footprinting exercise, and defines baselines against which to evaluate projects to determine the emissions generated or reduced during the life of a project. AFD methodology is based on several simple principles : - The measurement relates to the potential emission or emission reduction of the project / investment financed or cofinanced by AFD. It is made ex ante, that is to say at the project design stage and at the AFD fund granting stage; - The calculations relate to GHG emissions, generated, reduced or avoided by the project (both during the construction and operation phases) throughout their lifetime; - In order to be able to aggregate figures and compare projects, the calculation results are communicated in the form of average annual emissions over the lifetime of projects, including those of the infrastructure construction phase (if any); - The methodology and the measurement tool put in place allow a fine and precise calculation of the carbon footprint of the project. However, the main interest of this carbon footprinting consisting to have a regular and operational information, the procedure provides a standardized estimation of the order of magnitude of the generated, reduced or avoided emissions by a project, taking only into account the main sources of emissions; - The main sources of emissions considered in the calculation are direct and indirect project emissions (scope 1 and 2 as defined by the GHG protocol, and scope 3 when possible), including upstream emissions (for instance extraction and production of inputs) and downstream (for instance use of products); - The carbon footprint calculation is based on a comparison of emissions from the project with emissions that would occur in a baseline considered as the "without project" scenario.

5 - Difference in emissions between the project and the without project situation is called "reduced emissions" and the difference between the project and an alternative scenario to the project is called "avoided emissions".

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How to define the baseline?

The Group AFD considers the "without project" situation as the baseline to calculate the carbon footprint of projects (rather than an alternative to the project). However, this baseline can be dynamic (taking account changes over time such as for transportation projects).

An exception is made for the particular case of renewable energy as the selected reference situation is the countryâ&#x20AC;&#x2122;s energy mix (which makes possible to value avoided emissions5 due to the installation of production capacities from renewable energy sources).

R e c o n c i l i n g D e v e l o p me n t &

6 - Information produced by the IPCC, the International Energy Agency, ADEME...

t h e F ig h t agai n st C l imate C h a n ge

For the realization of this carbon footprinting, AFD has defined an internal procedure to ensure a systematization of this calculation and has elaborated a tool for estimating the carbon footprint of projects. This tool allows rapid and accurate measurements by using robust calculation methodologies by project type from available databases and reflecting the state of the art of scientific knowledge on GHG emissions6.

This impact measurement provides a better understanding of a development project by: - Providing quantitative evidence on the impacts of the project in terms of GHG emissions, allowing a clear understanding of the link between development and climate; - Explaining the main sources of GHG emissions from a project, enabling to identify areas of potential emission reductions; - Setting up an alert and providing quantitative elements (GHG emissions are an estimation useful to measure the consumption of fossil fuels) on the risk of the projectâ&#x20AC;&#x2122;s energy dependence (dependence on a resource that can be impacted in terms of price and availability) and a risk of environmental extra cost (price per emitted carbon ton depending on current and future legislation in a context of a common global international management); - Providing quantitative elements essential to the assessment of the "climate efficiency" of a project. If necessary, this quantitative analysis can be completed by other qualitative elements; - Finally, this impact calculation is a tool of accountability for AFD activity that is essential to its credibility as a major player in the international climate finance architecture.

This systematic carbon footprint calculation applies to all investment projects whose scope is limited, that is to say to the vast majority of AFD funding. It does not, however, apply easily to global sectoral or territorial budget support combining investment programs, reforms and capacity building for which impact measurement are needed and rely on more complex economic modeling tools and externalities. AFD finances operational research programs on this topic, in cooperation with several countries.

On adaptation, there is no simple indicator to measure the impacts of adaptation projects in the sense where these impacts depend on the type of project and the vulnerability that is "treated" (for example, m3 of water savings in the case of a water network rehabilitation project, number of people benefiting from a drainage system protecting them against floods, number of hectares cultivated with agro-ecological techniques...). As there isnâ&#x20AC;&#x2122;t any international systematic methodology on impact monitoring available to date, an in-depth work on indicators remains to be done. AFD is working with other financial institutions and research centers, NGOs and think tanks to get forward on these issues.

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Classification of AFD { 2 climate finance "Climate" projects AFD calls "climate" project a development project with positive co-benefits for climate, that is to say, contributing to (i) climate change mitigation (reducing emissions of greenhouse gases emissions or increasing carbon sequestration), to (ii) adaptation to climate change impacts or (iii) having a positive impact on including climate issues into national, sectoral or territorial policies, as well as capacity building.

2.1 Mitigation projects The accounting method adopted by AFD first relies on a systematic quantification (when possible) of the carbon footprint of all projects included in its portfolio, which represents a more accurate and robust method than a classification based solely on a typology of climate positive actions or projects.

Mitigation projects AFD Group describes as a mitigation project a development project whose emission reductions in greenhouse gas emissions that it generates are greater than emissions it produces during its lifetime.

Thanks to the systematic measurement of the projects carbon footprint, a classification procedure was adopted based on the following criteria: - Projects that reduce GHG emissions are reported as mitigation projects and thus called "climate" projects.

- Other projects are described as "neutral" (from -10 to +10 ktCO2e/year) or "emissive" (when they generate more than 10 ktCO2e/year).

Note that in this context, and considering the carbon footprint calculation methodology adopted by AFD, only projects leading to a potential reduction in net GHG emissions are qualified "climate" projects. Projects improving the carbon intensity of an activity, through the introduction of a less carbon intensive technology, but resulting in a net increase in GHG emissions between the situations before and after the project, are not qualified as "climate" projects and accounted as so (they are called "clean technology projects").

In the case of lines of credit or investment programs for refinancing "climate" activities of financial institutions or local investment funds, a carbon footprint calculation is not always possible at the moment when the funds are granted. However, a carbon footprint calculation is carried out systematically when these lines of credit are disbursed. In this context, only guarantee lines, banking refinancing and investment programs exclusively dedicated to refinancing projects in areas leading to reductions in GHG emissions are recognized as contributing to mitigation (mostly renewable energy and energy efficiency). In these cases, AFD imposes a reporting on the carbon footprint of funded projects to classify the line of credit as mitigation finance (AFD carbon footprinting methodology and tool are most often transferred to the funded or refinanced banks or investment funds).

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R e c o n c i l i n g D e v e l o p me n t &

t h e F ig h t agai n st C l imate C h a n ge

2.2 Adaptation projects There is currently no precise definition or international standard of what an adaptation project is, even less for an adaptation project financing. Funds are being established to finance adaptation measures while only general definitions have been developed so far.

The operational work of classification of adaptation projects adopted by AFD aims to fuel the international discussion on this issue. Moreover, such a classification is needed to help expand the financing of adaptation actions.

Adaptation projects AFD calls "adaptation" project a development project that helps reduce the vulnerability of goods, people or ecosystems to the impacts of climate change.

The AFD Group adds criteria and specifications to ensure that a project really contributes reduce vulnerability vis-Ă -vis a proven risk or increase the resilience of communities or the economy vis-Ă -vis the risk compared to a baseline (business as usual) which is the situation before project that is to say, not taking into account possible effects of climate change in its size or geographic location.

Unlike mitigation, there is no one single quantified indicator to measure the impact of actions funded by the AFD Group in terms of adaptation to climate change. Thus AFD has decided to adopt the option of crossing of different criteria: (i) existing vulnerabilities on the geography involved and (ii) the type of action based on the vulnerability that it can help reduce or resilience it induces among populations. Hence, two guidebooks have been developed as reference : - A grid presenting vulnerabilities per country. This grid is based on data available internationally (IPCC, UNFCCC, UNDP, WB) or locally and reliably used to list and prioritize the types of climate vulnerability by country or area.

- A grid presenting adaptation benefits from different types of interventions. This grid, which relies on a positive list of actions, allows a targeted and limited recognition to the part of the project which can have an effective role in terms of adaptation according to the type and level of vulnerability concerned (water stress, precipitation, sea level rise ...).

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The intersection of information provided by these two grids (vulnerability by region and project technical characteristics) allows in theory to ensure that the project will actually contribute to reducing a vulnerability identified in the project area. However, this classification is based on knowledge related to project impact on vulnerability to climate change and the availability of reliable data on the vulnerability of countries and geographical areas.

To date, this type of data is still patchy, widely estimated and lack details.

Moreover, AFD seeks to take into account where possible and appropriate, the fact that the project / program is part of a broader strategy of adaptation to climate change, that is to say development strategies integrating adaptation into sectoral and regional strategies.

This classification is therefore intended to evolve progressively in precision to become more robust.

These classification grids are constantly improving as and to the advancement of knowledge in the field. They are available on AFD web site, under the climate section.

Finally, unlike mitigation projects, for which all AFD funding is accounted as climate commitments, for adaptation project, only the component which contributes to reducing the identified vulnerability (in some cases it is the entire project) is recognized as AFD commitment to climate action.

2.3 Budget support to national climate policies and capacity building In the case where it is impossible to asses ex ante a "climate" impact, by convention AFD qualifies as "climate" finance a budget support dedicated to the implementation of a national policy or a national/local plan on climate change relying on a performance monitoring system (MRV). Also by convention, AFD classifies as "climate" its financial support to future sectoral NAMAS, recognized as such by the country and the international community.

In the same spirit, by convention AFD classifies as "climate" funding its financing dedicated to capacity building and technical assistance related to the fight against climate change (definition of national or local climate strategies) or in sectors contributing to reduce GHG emissions (renewable energy, energy efficiency, carbon sequestration in soils and forests, clean urban transport, etcâ&#x20AC;Ś).

Furthermore, AFD is developing a classification grid on sectoral or territorial budget support not specifically dedicated to climate change but which may have effects on the topic (energy sector aid, budget support to sustainable urban development programs...).

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Agence Française de Développement (AFD) is a public development finance institution that has been working to fight poverty and foster economic growth in developing countries and the French overseas provinces for seventy years. It executes the policy defined by the French Government.

AFD is present on four continents where it has an international network of seventy agencies and representation offices, including nine in the French overseas provinces and one in Brussels. It finances and supports projects that improve people’s living conditions, promote economic growth and protect the planet, such as schooling for children, maternal health, support for farmers and small businesses, water supply, tropical forest preservation, and the fight against climate change.

In 2011, AFD approved nearly €6.9 billion to finance activities in developing countries and the French overseas provinces. The funds will help get 4 million children into primary school and 2 million into secondary school; they will also improve drinking water supply for 1.53 million people. Energy efficiency projects financed by AFD in 2011 will save nearly 3.8 million tons of carbon dioxide emissions annually.

Agence française de développement (Afd) 5, rue roland barthes - 75598 paris cedex 12 France tél. : + 33 1 53 44 31 31

www.afd.fr Creation : Arc en Ciel - November 2012 • Credit photo : Thinkstock