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International Finance Corporation Flashes Warning Signs for Green Climate Fund

Posted Jun. 14, 2017 / Posted by: Karen Orenstein

The IFC doesn’t know what a lot of its money is doing, and that’s bad.

Though the subject matter might at first seem a bit dull, a recent monitoring report of the financial sector lending of the International Finance Corporation (IFC) is a doozy for the warnings it provides to the Green Climate Fund (GCF).

The International Finance Corporation (IFC), the World Bank Group’s private sector lending arm, had a financial intermediary (FI) portfolio of $20.4 billion at the end of the 2016 fiscal year. In March 2017, the Compliance Advisor Ombudsman (CAO), the independent watchdog of the IFC, put out its Third Monitoring Report of IFC’s Response to: CAO Audit of a Sample of IFC Investments in Third-Party Financial Intermediaries. In the sample of FI investments the CAO reviewed, it found systemic non-compliance with IFC policies throughout the investment process.

Techno-mumbo-jumbo, yes. But this bank jargon actually has real-world importance for people living in poor countries. To put it in regular-person-speak, there are major problems with IFC-financed activities channeled through financial intermediaries (like commercial banks and private equity funds), as many in civil society have repeatedly noted. Detrimental environmental, social, and development impacts have taken a toll on people’s lives and livelihoods throughout the developing world. Inclusive Development International has even begun keeping a database to track just a portion of IFC FI investments in harmful sub-projects, along with a four-part investigative series done in collaboration with several other groups, Outsourcing Development: Lifting the Veil on the World Bank Group’s Lending through Financial Intermediaries.

What’s the GCF connection here? 

On many levels, the GCF is modeled after the IFC, especially in its reliance on FIs to do the actual implementation of projects and programs. But the GCF has significantly less actual oversight capabilities and far fewer resources. To give a sense of scale, the IFC had 3,757 staff in 2016; the GCF had 76 staff as of December 1 of that year. The CAO report should thus be viewed as a flashing “hazard” sign for the world’s premier multilateral climate fund, especially with regard to the GCF’s mushrooming reliance on FIs.

NUMBER 1: Doing financial intermediation the right way. Though it has magnitudes more capacity than the GCF to monitor its financial sector lending and compliance with environmental and social safeguards, the IFC is doing a very poor job of it. The CAO found that the “IFC does not, in general, have a basis to assess FI clients’ compliance with its E&S [environmental and social] requirements.” That’s an extremely troubling finding for an institution mandated to improve the lives of poor people in developing countries, especially since many of the sub-projects are higher risk and thus have the potential to cause serious environmental and social harm.

Now imagine the situation for the GCF and its staff-strapped Secretariat. Already-approved GCF funding proposals that are reliant on FIs could result in many hundreds of sub-projects worth hundreds of millions of dollars. If the GCF Board and Secretariat don’t take course-correcting measures, the IFC’s FI experience could represent just a tip-of-the-iceberg scenario for the GCF.

This chart includes approved GCF projects dependent, in part or in whole, on financial intermediation.

I am not proposing that none of these projects is worth doing. Some of them are very worthwhile, while others will likely be riddled with problems. But the point is that, based on reams of experience accumulated by the IFC and other development banks, the deployment of FIs requires an abundance of oversight and due diligence which the GCF is not yet set up to provide, nor does it seem likely to be prepared to do so in the near term.

Ways forward:

  • The GCF needs to scale down its financial sector investments so as to match its ability to actually make sure sub-projects are in compliance with GCF safeguards and advance sustainable development.
  • Another option would be for the GCF to rule out support for higher risk sub-projects until such oversight capacity is in place. 
  • The risk categorization of a particular funding proposal should be based on the highest level risk sub-project possible that could be financed by the proposed program. In other words, if it’s possible that a program would finance a Category A (i.e. high risk) sub-project, then the entire program should be assigned the risk category of A. (This is not currently the case. Medium risk Category B programs could potentially finance Category A sub-projects.)
  • All Category A and B sub-projects should come to the GCF Board for approval.

NUMBER 2: Safeguards tailored to the GCF. Rumors have been circulating that some on the GCF Board and Secretariat are pushing to make the IFC’s Performance Standards (i.e. the IFC’s environmental and social safeguards), now used on an interim basis, the GCF’s own permanent safeguards. But the Performance Standards, in principle and implementation, fall short of what is needed to actually meet the sustainable development mandate at the IFC — both for projects financed directly by the IFC and indirectly through FIs. If the IFC is struggling heartily to implement their safeguards, then the GCF — a far less-resourced institution — is prone to faring even worse.

Further, the IFC Performance Standards were designed for an institution with a singularly private sector focus. The GCF has both a private sector and a public sector focus. The same safeguards are most certainly not fit for purpose at the GCF, and are not adequate for long-term use. Moreover, the Performance Standards do not represent international best practice in multiple areas and have themselves been long-criticized for a plethora of shortcomings. For example, their interpretation of the right of Indigenous Peoples to Free, Prior and Informed Consent is problematic, and they don’t have a commitment to a human-rights-based approach. This is particularly salient given that the GCF serves the Paris Agreement, which calls on countries to “respect, promote and consider their respective obligations on human rights, the right to health, the rights of indigenous peoples, local communities, migrants, children, persons with disabilities and people in vulnerable situations and the right to development, as well as gender equality, empowerment of women and intergenerational equity.”

A way forward:

  • The IFC Performance Standards should be replaced in a timely manner with the GCF’s own environmental and social safeguards grounded in a human-rights-based approach, developed through a process involving international best practice stakeholder consultation.

NUMBER 3: Taking a break to get the GCF’s house in order. There are many other GCF policies that still need to be developed, approved, or revised. These include the long-delayed simplified approval process, a much-needed review of the proposal approval process, the establishment of a full-fledged GCF environmental and social management system with the development of the GCF’s own environmental and social safeguards, a review of observer participation, the full establishment of the GCF’s Accountability Mechanisms, an accreditation strategy, an Indigenous Peoples Policy, etc., etc., etc. (to quote the King and I).

A way forward:

  • The GCF needs to put a pause on further approvals of funding proposals and accreditations and focus its July meeting solely on addressing much-delayed fixes to GCF policies and practices. 
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