International Finance Corporation (IFC), the financial arm of the World Bank Group, is advising its clients in the financial sector to increase their climate-related lending, reducing their exposure to coal to zero or close to zero by 2030. IFC already excludes coal-related investments from its loans.
In a recent report on the Green Equity Approach for investments in financial institutions, IFC said that it no longer makes equity investments in financial institutions that lack plans to exit investments in coal-related activities.
“Where IFC provides sub-debt in a financial institution, it will seek a formal commitment from clients to make all efforts to direct funding toward targeted sectors and avoid high-risk investments,” the World Bank lending arm said in the report.
“In cases where sub-debt cannot be ringfenced, it will be treated like equity in line with the new approach. In the case of a convertible loan at the time of the conversion, equity requirements will apply,” it said.
Sub-debt is a type of bond with a lower return priority by defaulting borrowers to financial institutions.
To equip client financial institutions with the tools needed to help them better identify coal exposures in their portfolios, IFC has partnered with Urgewald to develop and maintain the Global Coal Exit List. The list is a compilation of companies involved in fossil fuel business prepared by Germany-based non-profit organization Urgewald.
“The private arm of the World Bank is taking a giant first step towards determining the basis on which the exit from coal should take place. The IFC thus sends two signals to its clients. First: Get out of coal. Second: The criteria of an NGO like Urgewald are international standards,” said Ute Koczy, finance campaigner at Urgewald in a media release.
“Other development banks should now follow the IFC’s lead. In view of the global climate crisis, however, Urgewald is aware that the exit from oil and gas must follow,” said Koczy.
Urging clients to screen their portfolios against the Global Coal Exit List is an important first step. The next step for IFC has to invariably be a detailed follow-up to verify that clients implement the new criteria, Urgewald said in the release.
Earlier this year, U.S.-based JP Morgan Chase, one of the world’s largest banking institutions, committed $50 billion towards green initiatives as part of a larger $200 billion commitment towards the United Nations Sustainable Development Goals. The banking giant said that the committee aims to address a broader set of challenges in developed and developing countries to narrow down persisting social and economic development gaps.
In recent times, an increasing number of insurance and financial companies have moved away from coal-based projects. However, in a recent study, it was evident that banks continued to support fossil fuels despite pact to keep the climate deal.
Debjoy Sengupta is a Senior Assistant Editor at Mercom. Debjoy brings more than two decades of experience in frontline journalism, spending most of his career working for dailies like Business Standard and The Economic Times. He has reported on a vast array of sectors, including power and renewables. A graduate in business economics, Debjoy is an amateur 3D digital artist and a photographer. More articles from Debjoy Sengupta.