Report: Development Banks' Standards Leave Environmental Loophole

Report: Development Banks' Standards Leave Environmental Loophole

A new report by the World Resources Institute recommends that multilateral development banks (MDBs) incorporate environmental and social policies into their lending to financial intermediary (FI) institutions in developing countries.

The report has been released as the World Bank Group's private-sector arm, the International Finance Corporation (IFC), updates its environmental and social safeguards. The revised policies are expected to be approved by the World Bank Board within the next few months, but the latest draft of these "performance standards" does not address how the new guidelines will apply to FIs. Traditionally, MDBs have made direct loans for projects such as roads and large dams. However, the growing trend is for MDBs to make loans to FIs (such as commercial banks or investment funds), which then invest the MDB money in a variety of subprojects ranging from large infrastructure to small- and medium-sized businesses.

WRI's report, "Multilateral Development Bank Lending Through Financial Intermediaries: Environmental and Social Challenges," finds that MDBs often support loans to FIs based only on a limited assessment of potential environmental and social impacts of subprojects.

"Large lending banks such as the IFC should require the same standards for all projects, whether the lending is direct or channeled through a financial intermediary," said Atiyah Curmally of WRI, who co-authored the report with WRI's Jon Sohn and Christopher Wright. "As it stands now in the draft performance standards, a large percentage of IFC lending may not require application of environmental and social standards -- a potentially significant loophole."

The report surveys the current FI lending practices of three leading MDBs: the European Bank for Reconstruction and Development (EBRD), the Inter-American Development Bank (IDB) and the IFC. The growing practice of MDB lending through FIs currently consists of between 20% and 40% of MDB annual private-sector investments in developing countries. By 2003, approximately 35% of the IFC's total cumulative commitments, or $5.89 billion, were investments in finance, insurance, or collective investment vehicles. The IFC is the largest provider of equity and debt to private-sector companies in emerging markets. The report's findings are based on interviews with staff members at various MDBs and a survey of MDB publications.

WRI's report recommends that MDBs:
  • Create a new environmental and social policy system that applies traditional MDB environmental and social safeguards to FIs

  • Develop a transparent environmental- and social-risk rating tool to ensure that all FIs have the ability to manage subproject risks prior to making investments in those subprojects

  • Require increased transparency and information disclosure for FI investments within MDB performance standards
Additionally, the report advises that donor countries increase support for funds to build the capacity of FIs to manage environmental and social risks.

The report is available online.