International Finance Corporation [UPSC Notes]

In an update made to its Green Equity Approach policy, International Finance Corporation (IFC) has decided to no longer allow financial intermediary clients to finance new coal projects. Read on to know more about International Finance Corporation (IFC). This topic is relevant for the IAS exam economic segment.

International Finance Corporation (IFC):

• It is the private sector arm of the World Bank Group, which provides financing, advisory services, and technical assistance to businesses and financial institutions in emerging markets, with a focus on sectors such as infrastructure, manufacturing, and financial services.

Green Equity Approach (GEA) policy of IFC:

• This policy was introduced by IFC in 2020 to encourage its financial institution clients to increase their climate lending and reduce their exposure to coal-related projects in line with the Paris Agreement goals.
• Under the GEA, the IFC works with financial intermediary (FI) clients where it has equity or equity-like exposures.
• Earlier the GEA mandated the clients to reduce their exposure to coal by half by 2025 and to zero by 2030.
• Impact of GEA policy:
  • It allowed IFC clients to continually support new coal projects and hence had a disastrous consequence.

Recent Update to GEA by IFC:

• Recently, IFC issued an update to the GEA policy mentioning that it will no longer allow financial intermediary (FI) clients to support new coal projects, and it demanded a commitment from FI clients to not originate and finance any new coal projects.
• This will align IFC’s actions in line with one of the key goals of the Paris agreement, which is to ensure that financial flows are consistent with a pathway toward low emissions and climate resilient development.

IFC and India:

• India has 88 active financial intermediary investments, close to the tune of $5bn and these include support for institutions with footprints in energy, energy utilities and renewable energy investments.
• Some of the IFC investments in India had led to controversies: In 2007, IFC had made an equity investment in India Infrastructure Fund, which had in turn invested in GMR Kamalanga Energy Limited (GKEL) a coal-based power plant near Kamalanga village in Odisha state. Later several concerns were raised over the potential environmental and social risks and impacts of the project.

Shortcomings in present set of reforms:

• New guidelines should be extended to all lending done by IFC and not just be limited to only equity shareholding.
  • Enforcing the coal reduction policy across all lending activities could serve as a powerful driving force for Indian financial institutions to strengthen their own coal reduction policies. 
  • IFC and other similar institutions have the ability to exert influence on Indian financial institutions to incorporate and effectively execute environmental and social safeguard (ESS) policies that are linked to lending.
• IFC needs to go beyond this and eliminate all investments in coal, oil, and gas in its efforts to align its portfolio with the Paris Agreement.

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