Aligning Financial Intermediary Investments with the Paris Agreement

This research paper proposes a phased, risk-based framework for development finance institutions (DFIs) to align their indirect investments—those channeled through financial intermediaries (FIs)—with the goals of the Paris Agreement. The authors argue that while DFIs have focused on direct project financing, the substantial volume of intermediated lending creates a risk of supporting climate-misaligned activities. The proposed framework relies on four pillars: mitigation, adaptation, governance, and transparency.

• Development finance institutions (DFIs) have historically focused Paris alignment processes on direct financing, leaving a significant gap in their indirect investments through financial intermediaries (FIs). For some institutions, this represents a majority of their commitments; for example, more than 60 percent of all commitments at the International Finance Corporation (IFC) are channeled through intermediaries.
• The authors propose a phased approach to alignment to accommodate varying FI capacities. Phase 1 requires immediate compliance with basic criteria for subprojects using DFI funds, while Phase 2 requires the FI to apply these systems to its entire investment portfolio within a predefined period, which the authors suggest should be a maximum of five years for new investments in 2021.
• The mitigation pillar requires a tiered approach based on sector emissions. FIs must immediately exclude all new coal-related investments. For 'readily decarbonizable' sectors (e.g., power, public transport), Paris-aligned exclusion lists should be used. For sectors that cannot be readily decarbonized (e.g., steel, cement), FIs must apply best available technology (BAT) standards or rigorous sustainability certifications.
• The adaptation pillar requires FIs to manage physical climate risks through a two-step process. In Phase 1, FIs must screen subprojects for high, medium, or low risk; high and medium risk projects require more comprehensive assessments. In Phase 2, FIs must independently conduct these detailed risk assessments and incorporate resilience measures into project design without relying on the DFI.
• The governance pillar focuses on institutional commitment and capacity. FIs must demonstrate high-level support from senior management or the board, commit to a climate finance target, and employ at least one climate expert or a dedicated climate team to assess projects before approval.
• The transparency pillar demands rigorous reporting to ensure accountability. Phase 1 requires annual reporting on portfolio sectoral breakdowns, exposure to exclusion lists, and disaggregated data on subprojects funded by the DFI. Phase 2 expands this to include reporting on the share of climate finance and disclosure according to the Task Force on Climate-Related Financial Disclosures (TCFD) guidelines.
• The authors recommend a risk-based approach to the choice of financial instruments. General purpose loans and equity investments are identified as the highest risk for supporting misaligned activities and should only be offered to FIs that already satisfy Phase 1 criteria and commit to Phase 2. Earmarked credit lines are considered lower risk and can be used if the FI complies with Phase 1 for the specific funds.
• To prevent 'leakage' where green funds indirectly support 'dirty' activities by lowering an FI's overall cost of capital, the authors suggest using Special Purpose Vehicles (SPVs). An SPV provides a clear separation from the FI's balance sheet, offering more protection than standard ring-fencing or earmarking.

APA

Fuchs, S., Kachi, A., Sidner, L., & Westphal, M. (2021). Aligning Financial Intermediary Investments with the Paris Agreement. World Resources Institute. https://files.wri.org/d8/s3fs-public/2021-06/aligning-financial-intermediary-investments-paris-agreement.pdf?VersionId=1eDxt_id2a45lVqizNCH1EdoyAKj1en0

Chicago

Fuchs, Sophie, Aki Kachi, Lauren Sidner, and Michael Westphal. Aligning Financial Intermediary Investments with the Paris Agreement. World Resources Institute, 2021. https://files.wri.org/d8/s3fs-public/2021-06/aligning-financial-intermediary-investments-paris-agreement.pdf?VersionId=1eDxt_id2a45lVqizNCH1EdoyAKj1en0.

Wikipedia

{{cite report |last1=Fuchs |first1=Sophie |last2=Kachi |first2=Aki |last3=Sidner |first3=Lauren |last4=Westphal |first4=Michael |title=Aligning Financial Intermediary Investments with the Paris Agreement |publisher=World Resources Institute |date=June 2021 |url=https://files.wri.org/d8/s3fs-public/2021-06/aligning-financial-intermediary-investments-paris-agreement.pdf?VersionId=1eDxt_id2a45lVqizNCH1EdoyAKj1en0 |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{fuchs2021aligning, author = {Fuchs, Sophie and Kachi, Aki and Sidner, Lauren and Westphal, Michael}, title = {{Aligning Financial Intermediary Investments with the Paris Agreement}}, institution = {World Resources Institute}, year = {2021}, month = jun, url = {https://files.wri.org/d8/s3fs-public/2021-06/aligning-financial-intermediary-investments-paris-agreement.pdf?VersionId=1eDxt_id2a45lVqizNCH1EdoyAKj1en0}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }