Not just dirty, but deadly: Can the World Bank clean up its fossil fuel problem?
By David Pred and Nezir Sinani
The implications are stunning. The Global Assessment Report on Biodiversity released by the UN last week found that human economic activities, including those driving global warming, threaten a million plant and animal species with extinction — more than ever before in human history. Unless immediate action is taken, experts say the rate of extinction will continue to accelerate. Loss of biodiversity on this scale would be devastating for our planet and pose an existential threat to humankind. Deep transformation of our industrial, energy and food systems is necessary to change the way we use, protect and nurture the earth’s resources.
Ending reliance on coal is a particular priority. Coal presents multiple environmental threats that contribute to climate change and biodiversity loss. Carbon emissions from coal burning power plants are a significant source of greenhouse gasses, while coal mining operations destroy forests and ecosystems, adding additional carbon to the atmosphere as dead plant life decays.
International financial institutions, including the World Bank’s private-sector arm, the International Finance Corporation (IFC), have an important role to play in the transformation and they need to step up to the plate now. Last year, IFC’s Chief Executive Officer Philippe Le Houerou laid out in a blog post a proposed new strategy of leveraging IFC’s equity investments in commercial financial institutions to “green” their portfolios over time. Under the strategy, the IFC will coax banks to increase their climate-related lending over the next decade by 30 percent and decrease their coal exposure to zero.
It’s a step in the right direction. But given the urgency of the climate crisis, the world’s leading multilateral development institution should be doing more to achieve the goals of the Paris Climate Agreement and hasten the transition to a low-carbon economy.
In April, our organizations Inclusive Development International (IDI) and Bank Information Center Europe, along with the Indonesian NGO Jaringan Advokasi Tambang (JATAM), released a report examining the impact of coal mining in Indonesia, viewed against the backdrop of IFC’s proposed ‘Green Equity Strategy’.
Coal mining has devastated large parts of Indonesia, the world’s second-largest coal exporter. It has decimated the archipelago’s globally important rainforests and biodiversity, threatened the country’s food security, and displaced thousands of indigenous people from their homes and land. The impacts have been particularly severe in Borneo, Asia’s most biodiverse island. Our research for this report took us to a village in Borneo’s East Kalimantan province called Keraitan, which is home to the Dayak Basap people.
For generations, the forests of Borneo provided everything the Dayak Basap needed to prosper: game to hunt, water to drink and bathe, and fertile soil to cultivate rice and vegetables. The Dayak Basap have lived for at least seven generations on a 300-square-kilometer swath of lush jungle near the eastern coast of the island. They are deeply tied to the land and have been good stewards of Borneo’s rich biodiversity. But a massive coal mining operation has closed in, destroying ancient rainforests and threatening their way of life.
Ten years ago, the Keraitan community had made the wrenching decision to abandon their original village deeper in the jungle after mining encroached. Now they once again find themselves surrounded by Kaltim Prima Coal, one of the largest open-pit coal mining operations in the world, owned by Bumi Resources. It has poisoned their rivers with mining waste and stripped the land of its forest cover, causing flooding and driving off animals that they relied upon for food.
Now the community is living under the constant threat of forced eviction from the mining company, which wants access to the rich deposits of coal under their land. They have been told they will be moved — violently, if needed. They tried to resist the mining giant, even attempting to block the road used by the company’s trucks, but Kaltim Prima Coal uses military and state security apparatus to guard its operation.
The destruction of Borneo’s forests, an important source of carbon sequestration, also has broader implications. Combined with emissions from power plants burning hundreds of millions of tons of Indonesian coal yearly, coal mining is helping to fuel global climate change, which threatens everyone.
Disturbingly, the destructive mining operation threatening Keraitan received indirect funding from the IFC, an institution that is supposed to be devoted to socially and environmentally sustainable development. The IFC, it turns out, is heavily exposed to Indonesia’s coal industry through its financial relationships with commercial banks, including Austria’s Raiffeisen Bank and Axis Bank of India. Six companies active in coal mining in Indonesia have received funds that can be traced back to IFC, including Kaltim Prima Coal.
Our research linking Kaltim Prima Coal to the IFC is part of an ongoing investigation into the IFC’s sprawling and opaque financial-sector portfolio, worth some $6.4 billion in 2018 alone. While the World Bank Group member has historically provided direct financing for private-sector projects, it has increasingly outsourced its budget to commercial banks, private equity funds and insurance companies. This new model of development finance has exposed the IFC to a range of harmful corporate activities that fly in the face of the World Bank’s sustainable development mandate.
Our investigation has uncovered hidden financial flows to more than 150 companies and projects around the world that have violated human rights, damaged the environment and accelerated climate change, in violation of the IFC’s social and environmental Performance Standards. We have been releasing the results of the investigation, which began in 2016, in a series of reports and a comprehensive database.
More than half of the 150 projects uncovered involve new coal plants, including 19 projects in the Philippines that were the subject of a mass complaint to the IFC’s Compliance Advisor Ombudsman.
In response to these pressures, the IFC recently unveiled its draft Green Equity Strategy, designed to incentivize its financial sector clients to increase their lending to renewable energy projects and reduce their exposure to coal. The strategy is aimed at commercial banks, private equity funds and other financial institutions in which IFC owns a stake, or that are seeking investment from IFC.
The World Bank’s board met this week to consider the IFC’s proposal. We are urging them to make three important changes: 1) ensure that all types of finance to coal mining and power generation companies are covered by the strategy; 2) speed up the timeline of targets, and 3) extend the new rules to other fossil fuels in order to make the strategy commensurate with the urgency of the climate crisis.
A major loophole in the current draft of the Green Equity Strategy, which is open for public comments through May 17, is that it excludes general purpose corporate financing for coal mining companies, which is the way primary way that most coal mines are financed. This loophole means that under its current iteration, the Green Equity Strategy would not include the type of financing that has enabled Kaltim Prima Coal’s devastating mining operations in Borneo.
Second, the draft gives the IFC’s financial intermediary clients until 2030 to eliminate their coal investments. But the Paris Climate Agreement calls for “making financial flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development” and its goal of limiting warming to 1.5ºC. According to experts, in order to avoid catastrophic climate impacts, coal use must be completely phased out from the OECD and EU countries by 2030, from China by 2040, and from the rest of the world by 2050. Given that coal plants have an economic lifetime of 40 years, this means that new coal investments must end now. There is simply no excuse for the World Bank to be invested in banks that aren’t ready to immediately stop financing new coal projects.
Finally, for the strategy to be effective, it has to go beyond coal. A recent report by Oil Change International found that even if coal mining was immediately phased out, the emissions from oil and gas fields already in operation would result in more than 1.5ºC of warming. If the IFC is serious, as it says, about helping banks to eliminate climate related risks by 2030, then the new rules must also include oil and gas.
As the Global Assessment Report on Biodiversity concludes, the need for economic, social, political and technological transformation has never been greater. We humans who created this crisis will need to harness every tool at our disposal to save our planet. The World Bank has identified climate change as an “acute threat to global development and efforts to end poverty,” the Bank’s twin objectives. It has committed to helping countries to reach their climate targets and to align its overall portfolio with the Paris Agreement. With its vast resources and enormous influence, the Bank is critically positioned to help us shift away from our deadly dependence on fossil fuels, towards a resilient, low carbon future.
The IFC’s Green Equity Strategy could be a pivotal engine for transformation if it truly rises to the challenge.
David Pred is the Executive Director of Inclusive Development International.
Nezir Sinani is the Co-Director of Bank Information Center Europe.