Opinion: A new IFC vision for greening banks in emerging markets

The International Finance Corporation is rapidly greening its portfolio.

This past fiscal year, 36 percent of our own accounts and mobilization supported climate-smart projects — up from 12 percent a decade ago. Since May, we have been applying a carbon price to all project finance investments in the cement, chemicals, and thermal power sectors, at $40-80 per metric ton. And in less than a decade we, along with other development finance institutions, have become a global leader in creating the green bond market, helping to start a market that didn’t exist in 2007 and that last year totaled more than $150 billion in investments.

Yet we should do more. Over the past few years, civil society groups have been critical of IFC for supporting financial intermediaries that have coal exposures. We do not lend for the purpose of financing coal-related activities. In the past, we have made equity investments in banks that may have exposures to such coal projects, and we have given general purpose loans to banks and those funds may have inadvertently been invested in coal projects.

In response, we have changed our policy in the past two years to vastly reduce our direct and indirect exposure to coal in new financial intermediaries projects. For one thing, we have eliminated our general-purpose loans to any financial intermediaries; we now ring-fence about 95 percent of our lending to financial intermediaries to ensure that the financing only supports targeted areas, such as projects promoting energy efficiency, renewables, women business owners, or small and medium-sized enterprises.

We will certainly continue to lend to financial intermediaries with targeted credit lines going forward, and take equity in banks that are not engaged in financing coal projects, in support of our development mandate. We also have stepped up our work with emerging market banks on green bonds.

But the broader discussion around the vast need for climate finance and action has spurred a lot of thinking inside IFC. We have asked ourselves, how can we have a bigger impact? Would it be to never invest in, or divest ourselves of, all equity investments in financial intermediaries that have invested in coal in the past? That, indeed, is one way.

I believe there’s a different new and more impactful approach. I want to proactively seek financial intermediaries that would like our help in greening their portfolios and reducing their exposure to coal projects, which are not only bad for the environment but could also become stranded assets in the future.

I want to develop a green equity investment approach to working with financial intermediaries that formally commit upfront to reduce or, in some cases, exit all coal investments over a defined period.

In the coming months, we will work to define the parameters of this new approach, including a framework for transparency and disclosure as well as time-bound commitments.

I strongly believe that transparency is essential to promoting accountability and ensuring good development outcomes.

On this front, I also plan to introduce a number of improvements. We will require new equity financial intermediary clients exposed to coal projects to publicly disclose their total exposure in this sector. We will also require all new financial intermediary clients exposed to high-risk projects to disclose a summary of their environmental social management systems. In addition, we have decided to pilot a voluntary initiative with our financial intermediary clients exposed to high-risk projects for the next two years to promote disclosure of such high-risk sub-projects initiated from IFC lending, including the name, sector, and host country of the project.

I believe we must also push transparency from the regulatory angle. In this regard, we will seek to put disclosure on the agenda of the Sustainable Banking Network, which brings together banking regulators and associations from 35 countries to transform their financial markets toward environmental and social sustainability.

The experience gained through the pilot program, discussions with clients, and feedback from regulators will help us define a much better way forward on transparency.

It is our intent that this twin strategy aimed at creating incentives for financial intermediary equity clients to reduce or exit coal projects, as well as improving transparency, will result in fewer of these investments. There are no guarantees, of course. But I believe that IFC and other development finance institutions must move urgently with new ideas to preserve our planet. We have no choice but to be bold.

Catch up on what happened at the World Bank Annual Meetings in Indonesia, where Devex reporters Michael Igoe and Sophie Edwards were on the ground.