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Net-Zero Portfolio Targets for DFIs: Challenges and Solutions

Policy Brief Sam Fankhauser, Sugandha Srivastav, Ingrid Sundvor, Stephanie Hirmer, Gireesh Shrimali

This Policy Brief was first published in https://t20ind.org

This brief explores the practical implications of net-zero portfolio targets for development finance institutions (DFIs). Development finance has a critical role to play in the transition to net-zero emissions, and net-zero portfolio targets are a powerful way to align DFI activities with the objectives of the Paris Agreement. However, there are several practical challenges which prevent their successful adoption. This Policy Brief outlines plausible solutions to move development finance towards net-zero portfolio goals, including: (1) setting context-specific emissions pathways with granular bottom- up data and emphasising climate- development win-wins; (2) dealing with inertia and lumpiness in the portfolio through “when” flexibility (multi- year carbon budgets) and “where” flexibility (sharing of carbon space); (3) encouraging transition projects through future-emissions accounting and transition credits; (4) managing climate- development trade-offs with internal carbon price and ESG standards; and (5) accounting for emissions after project-end with monitoring and legal provisions.