IFC response to problematic Philippine investment lacking, says watchdog

The International Finance Corporation’s oversight body highlighted issues this week with a management-endorsed plan to remedy problems caused by coal power plants financed by a Philippine bank in which it holds investments. “IFC action to date does not demonstrate that IFC has effectively implemented its Management Action Plan commitments to address CAO non-compliance findings and related harm,” the Compliance Advisor Ombudsman’s compliance investigation monitoring report says. At the heart of the dispute is how IFC and the Rizal Commercial Banking Corporation, or RCBC, a Philippines Bank, applied environmental and social standards to investments in 10 coal-fired power plants. Local communities report that these projects have led to displacement, pollution, health issues, and disrupted livelihoods. This marks the first instance where communities have included greenhouse gas emissions in their CAO complaint and highlights the complexities that can emerge when the IFC channels invest through financial intermediaries such as banks. IFC and other development finance institutions often distribute much of their funding via these intermediaries. “This case encapsulates the risky nature of financial intermediary lending, whereby a publicly-funded bank hands power over to profit-driven private banks, with catastrophic outcomes for people and the environment,” Daniel Willis, finance campaigner at Recourse, said in a statement. The CAO findings indicate that IFC efforts to assist RCBC in improving its environmental and social risk management systems were lacking. It also noted failures in mitigating the impacts identified in independent reports and a lack of participation by power plant operators in initiatives to address greenhouse gas emissions. IFC told Devex that it has “used all its available leverage to effectively implement the agreed actions.” That includes engaging with national authorities to obtain relevant data, commissioning studies, and visiting and engaging with affected communities. The backstory IFC first invested in RCBC in 2011 but has made several other equity and loan investments in the bank since. In October 2017, communities near 10 coal-fired power plants that RCBC financed filed a complaint to IFC’s watchdog, CAO. The complaint, supported by three NGOs — Philippine Movement for Climate Justice, Inclusive Development International, and Bank Information Center — raised concerns that RCBC failed to apply IFC’s performance standards to the coal plant financing deals. This oversight led to environmental and social damage within local communities and contributed to climate change. Issues raised included water and air pollution, health impacts, disruption of livelihoods, especially for farmers and fishermen, displacement, loss of biodiversity, and intimidation. Following an investigation, CAO concluded that IFC had not complied with its own policies and that harm had likely resulted from the investment. In April 2022, IFC’s board approved a management action plan to address the CAO noncompliance findings and the harm caused by the investments. It involved four main objectives: Improve RCBC’s implementation of environmental and social standards to align them with IFC’s Performance Standards, assess and mitigate the environmental and social risks and impacts of the power projects, address the emissions complaint and improve climate-related disclosure, and refine systems related to investing in financial institutions. Despite these efforts, recent findings from CAO indicate that IFC’s implementation of this plan has been insufficient. The challenges Challenges have persisted because RCBC agreed to comply with IFC standards on environmental and social issues when receiving the investments, yet it has repeatedly failed to uphold these standards, particularly with the coal projects and possibly other investments. “RCBC’s failure to apply legally binding E&S requirements to its higher-risk business activities which assure that IFC Performance Standards are achieved over time is a continuing non-compliance and poses an ongoing risk to IFC of new and additional environmental and social issues,” the CAO monitoring report out this week says. Although IFC commissioned an independent investigation to assess the risks and impacts of the coal power plans, which took years to complete, it has not publicly disclosed the final reports or the 186 recommendations aimed at improving plant performance and addressing community concerns. These recommendations primarily focus on enhancing environmental performance and monitoring, improving the handling of coal ash, engaging communities, assessing and addressing resettlement concerns, livelihood impact and health, according to IFC. RCBC has expressed disagreements with the study’s findings and recommendations, according to IFC. Local communities and supporting NGOs have urged IFC to make these reports public, but it has declined to do so. The latest CAO report also called for the disclosure of findings to the communities, though it recognized IFC’s efforts to complete the analysis despite challenges in data collection. “We are angered by IFC’s resistance and unwillingness to disclose the assessment reports. Affected communities remain unheard and invisible. We are kept in the dark at a time when we are beset with the disastrous impacts of coal plant operations,” said Aaron Pedrosa, the head of the legal team at the Philippine Movement for Climate Justice in a statement. IFC explained to Devex that while it has taken all feasible actions within its control, legal constraints prevent the release of the reports. “Though we understand civil society organizations are interested in accessing the final gap analysis reports produced in this process — and we have investigated this — the strict data privacy law in the Philippines and agreements between IFC, RCBC and its borrowers legally prohibits sharing these reports publicly without consent,” IFC said in an email to Devex. However, NGOs argue that IFC should not be let off the hook simply because RCBC is inactive and have called on the World Bank Group to directly address the negative impacts of its investments by collaborating with the coal plant owners and the Philippine government to mitigate the environmental, health and economic impacts, according to a joint statement. “The fact is the World Bank Group has profited for thirteen years from its ill-conceived investments in RCBC and the coal bonanza that it financed with the Bank’s capital, so its shareholders have a moral obligation now to clean up their mess,” David Pred, the executive director of Inclusive Development International, said in a statement. “The Board should instruct both the public and private arms of the Bank to use all of the levers, relationships and resources they have at their disposal to implement the remedial recommendations made by the assessments that they funded.” The case lays bare some of the accountability challenges of investing through financial intermediaries, even in cases where the public development finance institution mandates specific standards in its loan documents. IFC reports that under this model it cannot engage with the financial institutions’ clients without permission. In this case, the coal plants did not cooperate, and the lack of direct engagement hindered IFC’s ability to promote or facilitate the implementation of certain recommendations, IFC said in a recent progress report. In this case, RCBC did not include IFC standards as a requirement in its lending agreements to the power plants, which also involved other investors. Future management action plans should consider the challenges related to financial intermediary investments and “develop more implementable measures and more realistic expectations,” the recent IFC progress report said.