Financial intermediary (FI) lending has increased during the past 15 years to the point that it represents a significant proportion of some DFIs’ total investment portfolio. IFC alone has over 60% of its entire portfolio invested in financial intermediaries. This escalating trend has been monitored by civil society, and over the last 15 years, organizations have been researching and advocating to make it more accountable, ensuring environmental and social standards are fully applied and communities are protected. Campaigners have called this hands-off form of lending ‘outsourcing development’, since the DFI delegates responsibility for assessing and managing social and environmental impacts of high-risk sub-projects – in sectors such as extractives, infrastructure, energy, agrobusiness among others – to FI clients, with often disastrous results. NGOs have linked financial intermediary investments to cases involving forced evictions and other human rights abuses, forest destruction, environmental pollution disasters and destructive coal mines and powerplants.
The global financial crisis of 2008 prompted this new trend of creating a larger role for the private sector in development finance including investing through financial intermediaries. DFIs channeled investments through private actors in order to stabilize the global economic and financial market and since then, financial intermediary lending has increased year on year. Such reallocation of resources from direct financing to indirect financing has taken place without adequate systemic and structural policies and practices needed to ensure effective transparency, accountability, and development impact as well as effective implementation of environmental and social standards.
Un recent years, the IFC has undertaken significant reforms to try to address some of these problems, including improving monitoring and supervision, changing risk definitions, ‘ring-fencing’ financial intermediary loans for targeted development purposes. In 2019 IFC developed a Green Equity Approach aimed at encouraging equity clients to phase out coal financing. And in early 2020 as part of IFC’s General Capital Increase they have finally committed to disclose basic project information for their higher risk subproject in their financial intermediary portfolio, including moderate-risk projects targeting climate related investments of its financial intermediary clients. IFC’s Sustainability Framework represents a long due and critical time and space to reflect on the shortcomings of its indirect investments, what has failed, what has been achieved and how; and what remains to be done.
In this document, Recourse has gathered the research and reports done by a variety of CSOs around the world, focusing on the issue of financial intermediary and other indirect investment lending.
You can also check out Recourse’s briefing “IFC financial intermediary lending: A new safeguard needed for the World Bank Group’s riskiest investments“.