Tag Archives: climate finance

World Bank “knows very little about potential environmental or social impacts of its financial market lending”

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By Maria José Romero

The International Finance Corporation (IFC), the largest global development institution focused exclusively on the private sector in developing countries, “knows very little about potential environmental or social impacts of its financial markets lending” and cannot even claim that it meets a “do no harm” requirement. This is an alarming finding just released by the Compliance Advisor/Ombudsman (CAO) – the IFC’s arm length watchdog – from an audit into environmental and social (E&S) outcomes of a sample of IFC’s financial intermediary (FI) lending between 2006 and 2011. This echoes concerns raised consistently by civil society organisations, including in a recent Eurodad report.

The IFC had a total portfolio of $ 45 billion at the end of its last financial year (June 2012) and its FI activities constitute over 40 per cent of its portfolio, a proportion that is growing steadily. From 2007 to 2011 the IFC’s FI portfolio commitments grew from $3.62 billion to $8.18 billion. These are private sector projects in developing countries and emerging markets through third-party entities, such as banks, insurance companies, leasing companies, microfinance institutions and private equity funds.

IFC corporate message vs reality

The IFC claims to be the global leader in “sustainable banking and in other areas such as E&S standard-setting for the private sector.” For instance, the IFC Performance Standards are the basis of the Equator Principles, which are an independently managed financial industry benchmark for assessing and managing E&S risk in project finance.

Even more, the IFC’s corporate message also implies that its “E&S requirements have an impact beyond doing no harm,” and concrete steps have been already taken in this direction. While the 2006 Policy and Performance Standards can be summarised as “avoid adverse impacts” or “do no harm”, the revised 2012 Sustainability Framework has expanded the IFC’s specific E&S objectives to having a “positive development outcome.”

However, during the CAO’ audit, the team in charge “identified a tension between trying to increase investment and imposing the appropriate E&S provisions.” More generally, the CAO also finds that the “IFC’s E&S processes and results do not fully correspond to [the] IFC’s overall corporate message.” In fact, as the CAO report highlights, the IFC addresses E&S impacts in three ways but “none of these approaches systematically tracks or measures E&S impact at the subclient level” and the IFC conducts “no assessment of whether the E&S requirements are successful in doing no harm.” Another challenge for the future is that “they also do not measure the expanded objectives of the 2012 Sustainability Framework,” that aims to ensure a positive development outcome.

As a result of this lack of systematic measurement tools, the CAO says, damningly,  that the “IFC knows very little about potential environmental or social impacts of its FM [financial market] lending.”

Compliance with IFC’s E&S requirements: Striking figures

The CAO report finds that 10 per cent of the sample was not compliant with the IFC’s environmental and social requirements, and a further 25 per cent were only partially compliant or there was uncertainty. The CAO was “surprised” to find cases where failure to comply with the requirements included in legal agreements between the IFC and the FI, “did not cause the IFC to refuse additional IFC financing” to the client. In fact, according to the CAO report “there were no examples in the CAO sample of IFC directly using the provisions to exit a facility, even though in a few cases, a client’s noncompliance had proved intractable.” In one specific case, for instance, “national authorities removed a FI subclient’s license to operate due to a major pollution incident, but the IFC client had failed to undertake the required due diligence.”

The CAO emphasises how the requirements focus on the client developing a social and environmental management system (SEMS), rather than actual social and environmental outcomes. This requirement creates the risk of a reporting and compliance orientation on the part of the client. The SEMS “can become merely an end in itself (a box-ticking exercise) rather a means of enhancing environmental and social performance outcomes on the ground.”

The report puts forward a further two striking figures:

  • “around 30 per cent of investments in [the] CAO’s sample were not regarded by the CAO panel as to have “improved” outcomes as a result of the application of IFC’s E&S  requirements at the client level”.
  • “the proportion of cases of non-improved performance was around 60 per cent at the subclient level, which is where IFC seeks to really have an impact.”

These figures challenge the IFC’s additionality argument when it comes to lending through FI. Generally speaking, the CAO concludes that the “IFC does not currently have the tools to measure E&S additionality” other than for specific focused products.

Harmonisation amongst the DFIs

As the IFC usually co-invest with some of the other development finance institutions (DFIs), the CAO panel also discusses the issue of alignment of development finance institutions (DFI) E&S requirements. Some of these institutions include Deutsche Investitions-und Entwicklungsgesellshaft (DEG), the European Bank for Reconstruction and Development (EBRD), and Nederlandse Financierings-Maatschappij voor Ontwikkelingslanden N.V. (FMO).  In this regard, the CAO report concludes, in line with the recent Eurodad report Private profit for public good?, that there is currently no harmonised approach amongst the DFIs in terms of measuring development impact.

Particularly, the CAO finds that “the differing E&S requirements of the various development finance institutions places a burden on IFC’s clients  and fails  to take advantage of potential opportunities to increase the efficiency and leverage of the DFIs, individually and collectively, effectively wasting development resources.”

What about transparency?

As the CAO report clearly mentions, “disclosure of investment information is a central tenet of the accountability of publicly funded multilateral finance institutions.” The IFC’s Policy on Disclosure of Information states that “there is a presumption in favour of disclosure”, but the “IFC does not disclose to the public financial business, proprietary or other nonpublic information” with the argument that “to do so would be contrary to the legitimate expectations of its clients.”

The CAO is aware of the challenge when working through intermediaries, because in fact it means that “there is no information publicly available about the end use of IFC’s funds.” The IFC discloses information about its client (that is, the financial intermediary), but depending on the type of client and investment, there were parts of the CAO sample portfolio where “IFC itself did not have the information on the end use of funds available, other than on an aggregated level collected by the client.”

Recommendations and reactions

While the CAO does not enumerate recommendations, throughout the audit it makes suggestions for improvement, including “requiring clients to report and disclose [environmental and social] performance and to engage third-party assurers to provide an independent check” and helping clients to implement a “more fundamental change management process”. It also suggests harmonisation of the environmental and social standards of different private sector lending institutions.

The IFC response, in its turn, does not make any commitment to change its practices or policies to address the CAO’s findings, instead championing the finding that 90 per cent of IFC FI clients are in compliance with the performance standards. In relation to sub-client social and environmental impacts, the IFC staff said: “We do not consider this necessary or efficient as our intent is to have our partner FIs manage this.”

As a result, civil society organisations, including Oxfam International and the Bretton Woods Project  launched a joint press release , calling for a “fundamental overhaul of the way the IFC does FI lending.” According to Peter Chowla, Coordinator of the UK-based Bretton Woods Project, a World Bank watchdog, “despite its mission to reduce global poverty, it seems as if the IFC is choosing to remain ignorant. This report questions the basis on which the IFC is currently lending to financial institutions and whether this lending really achieves good value in use of public resources.”

Additional information:

* Read media briefing note

* Read Eurodad report Cashing on climate finance?, which found important gaps in the knowledge of how money is leveraged through financial intermediaries. According to the report, FIs and existing investment instruments are very limited when it comes to targeting Low Income Countries and supporting small and medium enterprises in sectors which are particularly vulnerable to climate change.

Bias to report: World Bank releases new Global Financial Development tome

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By Jesse Griffiths

Normally, I enjoy reading flagship annual reports from august international institutions; they can provide useful overviews and normally have one or two nuggets. The World Bank’s new Global Financial Development Report 2013, however, left me hoping they don’t issue any more of these.

Not just because we already have enough flagships – even for a report junky like me.  It’s worth quoting from the comprehensive study of World Bank research undertaken by a team of (self-styled) ‘academic superstars’ led by Princeton Professor Angus Deaton:

“The large number of flagship reports makes it virtually impossible for [World Bank] management to exert sufficient quality control precisely where it is most needed.”

“We believe that the Bank produces too many of these reports.”

(Side note: This was released in 2006 – and the evaluators complained that it had been seven long years since the previous evaluation – surely it’s time for an update?)

No, what really left me tearing my hair out were too many attempts to draw one-sided conclusions about the highly contested issue of the role of the state in finance.

Here’s an obvious example that others have highlighted.  The report finds that:

 “Lending by state-owned banks is less procyclical than lending by private banks, and some state banks played a countercyclical role during the global financial crisis”

This is an interesting finding, but clearly one the authors feel uncomfortable with [though they all work for a state-owned Bank themselves, of course].  So they do some interesting contortions – highlighting past poor performance of state banks as the reason their role should not be emphasised:

“…the track record of state banks in credit allocation remains generally unimpressive, undermining the benefits of using state banks as a countercyclical tool.”

It seems to me that private banks have had a pretty disastrous recent track record in credit allocation, and have behaved in an incredibly procyclical manner, so we should be far more interested in this finding that the report authors are. Previous Eurodad research has highlighted how the rapid growth in lending by development finance insitutions, including the World Bank’s International Finance Corporation, was in part justified by the need to step in when private credit dried up. Surely a better conclusion to draw is that we need to urgently study the successful state banks, and see what can be learned?

This is just one example. There are plenty of others, leading some to be far less charitable about the report: University of London banking expert, Paulo Dos Santos called it a “rearguard action seeking to defend old policy shibboleths”. Perhaps it’s time for another group of academic superstars to do a thorough evaluation of this report…

Investing in financial intermediaries: a way to fill the gaps in public climate finance?

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By Diana Hulova,

Large amounts of money are needed to address the impacts of climate change. If we succeed in limiting global warming to 2°C, this will still require as much as USD 275 billon. A new report released by Eurodad calls into question the latest desperate initiative of donors to fill the gaps in public climate finance: investing in the private sector with the aim of leveraging additional funds.

Rich countries promised to mobilise resources to help developing countries deal with climate challenges. However, they are failing to meet their commitments. According to the World Resource Institute’s preliminary analysis of the Copenhagen’s Fast Start pledges, not more than half of the USD 30 billion pledged to be provided between 2010-2012 has been accounted for, and it is not yet clear how much of this money has been or will be delivered.

The report published by Eurodad focuses on financial intermediaries, one of the main tools to leverage private funds. According to many Development Finance Institutions (DFIs), financial intermediaries, such as banks, insurance companies or private equity funds have the ability to use public money to overcome the barriers to private investments in developing countries and leverage substantial amounts of private money. For instance, the public money that is invested in a local bank should make the institution stronger and more profitable, hence attracting more private capital.

The report questions the ability of financial intermediaries to raise several times more money than originally invested, as claimed by DFIs. It also raises serious concerns about the climate effectiveness of these tools.

Donor governments committed, under the principle of common but differentiated responsibility, to help developing countries shoulder the costs of addressing climate challenges. It seems logical, that the most vulnerable sectors and countries are prioritised. However, the report finds that financial intermediaries are likely to by-pass small and local businesses in low-income countries, where the help is most needed. After assessing the portfolios of several DFIs, Eurodad concludes that almost no money reaches low-income countries or smallholders. The real problem is that most of the investment instruments are much more likely to reach large multinational companies rather than SMEs. The fact that the average size of loans provided by the IMF is above EUR 15 million only confirms this.

Monitoring the impact and holding intermediaries accountable for their use of funds are also major challenges. DFIs usually rely on financial intermediaries’ self-reporting and very little information is available on the use of taxpayer’s money. The transparency of investments is further diminished by the fact that many of the financial intermediaries are registered in tax havens and do not comply with adequate transparency and accountability requirements.

Given these gaps and the lack of clarity with regards to the climate impacts of investing in financial intermediaries, donor governments should think twice before relying on intermediaries. Private climate finance should by no means dilute the rich country’s commitments to help developing countries respond to climate challenges.

Download the report “Cashing in on climate change?”

PRESS RELEASE: Cashing in on climate change? New report lifts the lid on how rich nations use financial intermediaries to dodge climate change commitments to world’s poor

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BRUSSELS, 19 April, 2012: A new Eurodad report reveals how rich nations are using a complex web of private funds and financial intermediaries to wiggle out of pledges to provide $100 billion a year to help developing countries cope with the devastating effects of climate change.

“Overreliance on the private sector could spell disaster for the world’s poorest,” said Javier Pereira, who authored the report for Eurodad, the European Network on Debt and Development. “Leveraging money through financial intermediaries cannot be used as a substitute for providing sufficient public resources directly to countries who, through no fault of their own, are suffering most from global warming,” he added.

A commitment by the world’s richest nations, and biggest polluters, to mobilise $100 billion a year by 2020 was one of the few concrete achievements of the Copenhagen Climate Change summit in December 2009. Governments, however, have failed to meet their interim commitments and are now looking to use much smaller amounts of their own money in order to leverage private funding to make up the bulk of the $100billion.

The idea is that development banks and financial institutions, such as the European Investment Bank and the International Finance Corporation, use public money to invest in financial intermediaries working in developing countries to attract private investors. By investing in an African bank, for instance, they believe they can trigger flows up to ten times higher than the initial investment.

While Eurodad’s report acknowledges that supporting private-sector investments can have a useful, if limited, multiplier effect on public funds, it casts serious doubts on claims made about their leveraging potential and reveals that it is often impossible to know where the public money ends up.

“These tools only work with very large and mostly Northern companies and the investments are unlikely help those who are most in need,” Pereira added. “The average size of the loans provided by the IFC is above € 15 million and it’s just not possible to pretend that investments of this size will help smallholders in developing countries cope with climate change.”

Eurodad says that international development institutions should make sure financial intermediaries are more transparent and accountable; their investments have to be properly integrated into the national strategies of developing countries; and they must be used effectively to help those most at risk adapt to climate change, notably through support for small, local businesses, rather than Northern-based multinationals.

“We are not suggesting developed countries and international organisations should stop using financial intermediaries altogether, but given the evidence this should only be a small part of the solution,” said Eurodad’s Director Jesse Griffiths.

ENDS

The report, “Cashing in on climate change? Assessing whether private funds can be leveraged to help the poorest countries respond to climate challenges” is available at: http://eurodad.org/wp-content/uploads/2012/04/CF-report_final_web.pdf

For further details or comment, contact:

Javier Pereira, Eurodad policy and advocacy officer, on jpereira@eurodad.org or Tel: + 32 2 894 46 47; Mobile: +32 488 570 654; or

Jesse Griffiths, Eurodad director, on jgriffiths@eurodad.org or Mobile: +32 491 429 697 (in Washington DC).

Eurodad (the European Network on Debt and Development) unites 49 non-governmental organizations from 19 European nations working on issues related to debt development finance and poverty reduction.

Cashing in on climate change? Assessing whether private funds can be leveraged to help the poorest countries respond to climate challenges

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The effects of climate change on developing countries have created a huge financial burden. Policymakers aim to limit global warming to a rise of 2°C in this century. In this scenario, the cost of adapting to and mitigating the impact of climate change would be in the range of USD 110-275 billion (€79-198 billion) per year for developing countries. Given their historical responsibility, accumulated climate debt and the principle of common but differentiated responsibility, developed countries will have to shoulder most of the cost.

Rich countries have pledged to make available USD 100 billion (€72 billion) per year by 2020, most of which will presumably be channelled through the Green Climate Fund. Although originally this money was expected to come from public sources, developed countries have begun to rely on mobilising large amounts of private money.

As the discussion about mobilising private resources is mainstreamed, financial intermediaries (FIs) are placing themselves at the forefront of the debate. They are receiving a great deal of attention due to their perceived ability to use public money to overcome the barriers to private investment in developing countries. Estimates suggest that through the use of FIs, it may be possible to raise in the range of USD 100-200 billion (€72-144 billion) per year of private flows from developed to developing countries.

While climate finance is vital for both mitigation and adaptation, this report focuses on the latter. It looks at some of the main instruments that can be used to leverage private climate finance through financial intermediaries and analyses data from some major development finance institutions (DFIs). It specifically assesses the role of financial intermediaries in low-income countries (LICs) and in supporting small and medium sized enterprises (SMEs) and looks into the main monitoring and accountability constraints when using financial intermediaries.

Eurodad’s report finds that:

  • Important gaps exist in the knowledge of how money is leveraged through financial intermediaries. These gaps should be filled before channelling any significant amounts of climate finance through FIs.
  • Financial intermediaries and existing investment instruments are very limited when it comes to targeting LICs and SMEs in sectors which are particularly vulnerable to climate change.
  • Developed countries are looking at financial intermediaries as isolated actors without paying attention to the policy and institutional environments in which they operate.
  • Monitoring financial intermediaries is extremely difficult and there are no mechanisms to ensure private climate finance is aligned with developing countries’ priorities.

These shortcomings underscore the importance of direct public finance. Leveraging money through financial intermediaries cannot be used as a substitute for directing sufficient public resources directly to the poorest. Given the gaps, a strong reliance on FIs and the private sector could spell disaster for many citizens in developing countries.

Read the full Eurodad report: “Cashing in on Climate Change?”