Financial Intermediaries

Close to half of the lending portfolio of the World Bank’s private financing arm, the International Finance Corporation (IFC), is in other financial institutions, including commercial banks, private equity funds, and insurance companies. These so-called “financial intermediaries” use IFC support to invest directly in their own projects; but critically, most of those investments do not requires compliance with IFC’s Performance Standards on Environmental and Social Sustainability, which bar financing for projects that threaten to harm communities or the environment.

For example, while reviewing the IFC’s direct investment in Corporación Dinant, a Honduran palm oil company, for allegations of violence against local farmers, the CAO uncovered that IFC, despite having already known of these problems with Dinant, had continued to make indirect investments in Dinant through the financial intermediary Ficohsa, Honduras’ third largest bank.  In December 2013, the CAO announced its decision to audit the IFC’s investment in Ficohsa.

Earlier that year in February 2013, the Compliance Advisor Ombudsman (CAO) made international headlines when it released a study demonstrating that the IFC invested more than $20 billion in financial intermediaries for which it “knows very little” about the environmental or social impacts. In its initial response to the audit, the IFC did not commit to any major changes in its practices.

Given that an increasing amount of IFC funding is routed through financial intermediaries, the IFC faces the risk of indirectly funding projects that violate rights and damage the environment. CIEL led the effort to demand that the IFC take corrective action through meetings with the Bank’s executive directors, coalition letters to President Kim, and media attention. Largely as a result of these efforts, the Board directed IFC to prepare an Action Plan to address the audit’s findings.