Aligning finance with the Paris Agreement: An overview of concepts, approaches, progress and necessary action

‘Paris alignment’ refers to the alignment of public and private financial flows with the objectives of the Paris Agreement on climate change. Article 2.1c of the Paris Agreement defines this alignment as making finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development. Alignment in this way will help to scale up the financial flows needed to strengthen the global response to the threat of climate change.

This paper provides a high-level and accessible overview of the most prominent methods and metrics emerging in the public and private sector to assess Paris alignment of finance flows and guide investment decisions. Sound methods and metrics are crucial to driving systemic change. Yet while there is a proliferation of initiatives on Paris alignment of finance flows, to date there has been little overview, and almost no evaluation, of emerging approaches.

The paper is not an exhaustive and detailed account: rather, it seeks to provide clarity on the concept of Paris alignment with discussion of prominent initiatives from development banks and private finance. It is designed to trigger further research and evaluation. Extensive references are provided for readers who wish to access more detailed information.

Structure of the paper

The paper focuses on reviewing a selection of the most promising methods and metrics for assessing Paris alignment of finance flows, including portfolio allocation.

• Section 1 explains what Paris alignment of finance means from a systems perspective for public and private finance, the role of methods and metrics within that, and the implications of COVID-19.
• Section 2 examines how Paris alignment is defined in the literature in relation to international financial institutions (IFIs) and development banks.
• Section 3 provides a high-level overview of existing approaches to Paris alignment (methods and metrics) being developed by public IFIs, in particular the multilateral development banks.
• Section 4 examines approaches to Paris alignment by the private financial sector and concludes with a short discussion on Paris alignment work within finance ministries.
• Section 5 discusses how to consider Paris alignment methods and metrics as part of coherent sustainable development strategies and the mutually supportive role of the Sustainable Development Goals; this perspective is necessary, particularly for MDBs, to drive systemic change and truly align with the objectives of the Paris Agreement.

This paper was first prepared as a briefing note for Nicholas Stern. It provides an accessible entry point on the issue of on Paris alignment of finance flows. It is not an exhaustive account or detailed analytical piece; future versions will update, expand and deepen the analysis.