Why the World Bank Group's private sector arm must close its coal loopholes

Why the World Bank Group's private sector arm must close its coal loopholes

Last year, the World Bank Group led the way on greater climate action with a commitment to end upstream oil and gas finance, a step which several groups had been calling for. However, there is an important loophole remaining in the Bank’s support for coal power.

With the UN Climate Change negotiations being held this week in Bangkok, amidst a year of record-breaking temperatures, the time has come for the World Bank to look further into this issue.

While the World Bank Group already excludes funding to coal plants except in rare cases, there is not yet a specific coal policy for the Bank’s indirect lending. This means the International Finance Corporation (IFC) – the Bank’s private sector wing – can still invest in coal-intensive companies, such as banks in the Philippines which later invested in a pipeline of coal plants.

Earlier this year, research by Bank Information Center Europe and IDI showed that after receiving more than half a billion dollars in funding from the IFC, two Philippine banks went on to participate in $24.2 billion of coal financing. This is now the subject of a complaint by local groups to the ombudsman.

Since IFC’s indirect lending reaches around 2000 companies in 125 countries – this is a far-reaching issue with major implications.

Countries in the region want clean, inclusive and affordable energy, not the polluting coal plants being built currently. Development banks have a role in supporting a shift away from coal, not only in terms of finance, but also technical assistance to support a shift toward renewables, energy efficiency, and a transition to clean-energy powered economies.

IFC can also provide economic advice about the true costs of energy to help countries take advantage of rapidly falling renewable energy costs, as well as providing advice on the increasing dangers and risks of coal, such as health costs.

Fixing the private sector coal loopholes

What can the Bank do about this? One potential example comes from the UK. The UK’s development finance body, CDC Group, has had a policy in place which says that if it invests in a coal-intensive company, a 'carve out' clause ensures the money does not go to coal.

The World Bank Group has no such policy in place. While IFC does have provisions to ‘ring-fence’ its loans to targeted sectors – such as women-owned enterprises – the provision does not mention excluding coal specifically.

In this regard, IFC may be lagging behind some private banks. ING has stated it will no longer finance utilities sector clients that are over 5% reliant on coal. Existing clients in the utilities sector should have ended their reliance on coal by 2025 for ING to continue the relationship. BNP Paribas will only provide services to, or invest in, companies pursuing a policy of diversifying away from coal.

Last year, IFC did adopt a policy to ensure it would begin tracking private clients’ exposure to coal, and the IFC’s CEO Philippe Le Houérou said that they would reduce high-risk lending. This is a good step in the right direction – but the IFC should now go further with a specific policy to ensure coal-based utilities are not bankrolled again.

While IFC does track the emissions reduced by its equity investments, they do not appear to be keeping track of emissions generated by these investments – an example of cherry-picking results.

The World Bank Group can take further steps to “green” its indirect lending. Green lending is already at the core of its mission. In 2016, the IFC released a report that estimated the market for investment in green business opportunities to be at least $23 trillion by 2030.

True leadership could be shown by ensuring the companies it invests in adopt better environmental standards – for example requiring companies to transparently report on total portfolio emissions and to commit to decarbonization over time.

The implications could be huge. The total value of companies that IFC invests in could be between $55 to $220 billion, since IFC has a disbursed equity portfolio of more than $11 billion, and generally invests in between 5-20% of a company’s equity.

This is not just a problem for IFC. The main multilateral development banks have total assets of more than $1 trillion, and all these banks need to address this issue. London-based EBRD is currently revising its energy strategy, a great opportunity to update its policies in line with best practices. That would send a strong signal to the market about the end to coal.

E3G analysis shows there is already some good progress among development banks but must do more. A growing number of countries and regions have recognized the need to phase out coal and are working together on this, most notably in the global Powering Past Coal Alliance, led by the UK and Canadian governments. This raises the question: which of the development banks will be the first to join the Powering Past Coal Alliance?

Staying up-to-date with international best practice

The World Bank’s own analysis shows climate change poses a huge threat and could force over 140 million people to migrate within their countries by 2050, demonstrating the true costs of coal.

In addition, many public and private banks are benchmarking against IFC’s performance standards – including power plant standards. In the past decade, an estimated $4.5 trillion in investments across emerging markets have adhered to IFC’s performance standards. Many of its peers – including the huge China Development Bank – look toward the World Bank as a standard-setter.

IFC can be a leader but must also ensure its standards and guidelines are kept up-to-date to take account of climate change.

Yet the IFC’s new environment, health and safety guidelines seen in draft form last year looked weak and were outdated, according to several energy experts. These technical details are important in setting the standards for peers and remaining a respected global institution.

The Bank must continue to innovate and stay up to date with best practices in order to maintain its leadership on climate change and support the shift to clean energy.

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