European DFIs announce new initiatives on climate action and inclusive finance for African private sector in bid to align capital flows with the Sustainable Development Goals and Paris Agreement on climate
With joint ambitions to phase out fossil-fuels financing and the launch of a coalition to support micro-, small and medium-sized enterprises (MSMEs) in Africa, the European Development Finance Institutions (EDFI) take important steps to support a sustainable and inclusive recovery, in line with their mandates to aligning capital flows with UN Sustainable Development Goals (SDGs) and the Paris Agreement. EDFI announced the commitments at the Finance in Common Summit – the first meeting of its kind, (virtually) taking place on the 12th of November and bringing together 450 Public Development Banks (PDBs) from around the world.
Financial institutions have proven that they can be a catalyst for positive change. The need for our DFIs to act collectively and with strength has never been greater than at this moment when we need to ensure a sustainable and inclusive recovery from the Covid-19 pandemic”, says Bruno Wenn, Chair of the European Development Finance Institutions (EDFI). “We want to set an example for other investors in developing countries – especially with regard to climate and inclusive finance”. To that aim, EDFI commits to the alignment of all new financing with the objectives of the Paris Agreement by 2022 and the transition of investment portfolios to net-zero GHG emissions by 2050 the latest. European DFIs will immediately cease new coal and fuel oil financing and will limit other fossil fuel financing to Paris-aligned projects until generally excluding them by 2030 at the latest. Over the past five years, EDFIs have already committed €8 billion to climate finance in low- and middle-income countries.
USD4 billion for smaller businesses in Africa
At an event hosted during the Finance in Common Summit, EDFI also joined forces with a coalition of financial institutions to boost an inclusive recovery for the private sector in Africa, in particular targeting micro-, small- and medium-sized enterprises (MSMEs). This sector remains the lifeblood of emerging and frontier economies, even after having been hit hard by the Covid-19 crisis and facing major setbacks causing unemployment, inequality and poverty across the continent. European DFIs and other international and regional finance institutions (therefore intend to dedicate at least USD4 billion by the end of 2021 through a wide range of financial instruments and in partnership with local financial intermediaries – including microfinance institutions – in order to help MSMEs in Africa to recover from the crisis and secure employment for vulnerable populations.
In addition to financial solutions, European DFIs stressed the importance of supporting clients with technical assistance and advisory solutions where needed, to enhance development impact and contributions towards achieving the UN SDGs. European DFIs have already provided significant emergency technical assistance to more than 150 projects since the start of the Covid-19 pandemic. This has included supporting the provision of personal protection equipment and helping to avoid disruptions in food, water and agricultural supply chains. Such programs will be further developed and more systematically implemented. Since March, European DFIs, together with partner institutions such as FinDev Canada and US DFC, have stepped up coordination efforts in relation to their crisis response, for example by agreeing on a set of principles for Covid-19 technical assistance, emphasizing the importance of transparency, flexibility and accountability.
The whole approach underpins the efforts of European DFIs to play a counter-cyclical role in response to the crisis in developing countries, and especially in Africa. Currently one-third of the EUR46 billion portfolio, managed by European DFIs, is invested in sub-Saharan Africa.
The European DFIs have also recently committed to track progress of investee companies’ impact on the key SDGs to which private sector enterprises contribute, including employment, gender equality, climate action, and resource mobilisation. They will use harmonised metrics for this reporting to demonstrate the opportunity offered to private impact investors.