A very welcome and long awaited reform on transparency for IFC’s financial intermediary lending
The United States recently authorized IFC’s capital increase allowing IFC to get a boost of $5.5 billion in new capital, a capital increase negotiated by the World Bank’s Development Committee through its Board of Governors back in 2018. This capital increase could not come at a better time for IFC as it was ramping up its response to COVID-19 but also because, since the authorization was accompanied by a series of reforms -advocated for by Chairwoman of the House Financial Services Committee, Maxine Waters- aimed to improve, among other things, IFC’s transparency practices with respect to its financial intermediary lending.
One of those critical reforms, outlined in a letter from World Bank Group President David Malpass to Treasury Secretary Mnuchin, is for IFC to require its financial intermediary clients including commercial banks to “annually report the name, location by city, and sector for subprojects funded by the proceeds from IFC’s senior loans or senior bonds or by the IFC equity investee that would be considered “Category A” according to the IFC Performance Standards, as well as relevant Category B sub-loans.”
This is really a big deal!
For years Oxfam and many other civil society organizations have been advocating for greater transparency on IFC’s financial intermediary lending to promote stronger due diligence in higher risk investments made by IFC’s commercial bank clients, in particular to ensure the environment and communities are not being negatively impacted and that there is accountability when they are. IFC’s financial intermediary lending has been increasing progressively from 54.2%, 55.4%, to 62.9% of the institution’s overall portfolio in 2017, 2018, and 2019 respectively. Throughout this period, IFC had an active portfolio of almost $13 billion in financial intermediaries, yet it was almost impossible for the public — or even IFC shareholders- to know where that money ended up. But finally, through this reform, more light will be shed on some of those environmentally and socially higher risk projects, which IFC is exposed to through its financial intermediary clients’ investments.
This new transparency reform will also allow for better monitoring and accountability of previous commitments IFC has made over the last three years. In 2017, IFC’s CEO, Phillipe Le Houerou said, “We must do better”, referring to IFC’s lending to commercial banks and other financial institutions, after multiple investigations revealed human rights abuses linked to their financial intermediary (FI) lending. One of the main strategies IFC has used since then has been to reduce its own exposure to higher risk FI activity by reducing its general-purpose loans to FIs, and instead increasing targeted financing (or ring-fenced investments) to support Small Medium Enterprises (SMEs), women-owned business, housing, and climate related investments.
Looking into IFC’s project portal from 2017 to 2019, about 98% of its FI portfolio is debt financing, basically loans and bonds, while the rest falls into equity investments. Unlike equity investments, with debt financing, IFC’s exposure to the FI’s investment portfolio itself depends on how clear the objectives are for the use of IFC’s proceeds in such loans, meaning there is a possibility that IFC can still be exposed to higher risk operations within its 98% debt financing.
Now, here is where this new transparency reform becomes very important. Prior to this, looking into IFC’s loans to financial intermediaries only revealed the broader purpose of IFC’s investment in a particular FI client, but not the specific projects that said FI was supporting with the proceeds from IFC. Our analysis of IFC’s FI debt financing shows that 34% require the use of proceeds to support SMEs, 8% to support housing, and 7% to support women-owned business, arguably low risk activities. However, about 28% of IFC’s debt financing to FIs are still for general purposes such as expansion of client base and increased access to financial services, while 23% is targeted to climate related investments, mostly for the power sector for renewable energy. For the climate related FI investments, though about 11% are categorized as low-risk, 15% are classified as high-risk while 74% are moderate-risk, which means there is potential to have negative impacts on land rights and environmental ecosystems, as well as fueling social conflict. Initial findings of research Oxfam has commissioned show that IFC’s FI climate related clients have invested approximately $11 billion in the power sector and renewable energy, including hydroelectric projects, from 2017 to 2019.
IFC’s targeted FI climate related investments are very important to scale up a transition to a sustainable and clean economy, but it does not mean they are immune from inadvertently causing harm or are exempt from high risks and impacts to communities and the environment. Climate related targeted investments also require effective environmental and social due diligence and standards, as we have learned from previous similar investments like Hidro Santa Cruz project in Barillas, Guatemala, a moderate-risk financial intermediary subproject of IFC that lacked transparency, effective due diligence, and accountability and caused serious negative impacts and harm to people, their land, and livelihoods.
Therefore, access to information on the type and location of these projects is still critical. A lack of disclosure breaks the link in the chain leading from investments to sustainable and effective projects by preventing local people from knowing and accessing their rights and protections under IFC’s Performance Standards and thereby holding investors accountable.
Additionally, this new transparency reform in FI lending comes at a time in which the World Bank Group recently announced that it will mobilize a $14 billion package, through a fast-track window, to support countries to respond to the COVID-19 crisis. $6 billion of this package will be channeled through the IFC, through lending to financial intermediaries to support businesses and their employees.
Although there are still some areas for further improvement of transparency practices like disclosing actual environmental and social documentation of those subprojects, and expanding this requirements to all moderate-risk projects, this reform represents a critical steppingstone to build upon. Particularly since transparency in financial intermediary lending, especially through the banking sector, has been such an uphill battle. This new commitment absolutely places IFC at the front of the pack in terms of transparency with respect to financial intermediary lending which is becoming an increasingly common lending modality for Development finance Institutions (DFIs). We strongly encourage other DFIs to follow the IFC’s leadership and send strong signals to their financial intermediary clients that transparency is a requirement for sustainability and accountability.
This post was written by Christian Donaldson, economic justice senior policy advisor at Oxfam International’s Washington Office.
