The International Finance Corporation (IFC) is the private sector arm of the World Bank Group. It 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:

In 2020, the IFC introduced the Green Equity Approach (GEA) policy 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. The IFC works with financial intermediary (FI) clients where it has equity or equity-like exposures. The GEA policy mandated clients to reduce their exposure to coal by half by 2025 and to zero by 2030.

Impact of GEA policy:

Under the previous version of the GEA policy, IFC clients were allowed to continue supporting new coal projects. This led to disastrous consequences, and hence, the IFC issued an update to the GEA policy.

Recent Update to GEA by IFC:

The recent update to the GEA policy by IFC mentions that it will no longer allow financial intermediary (FI) clients to support new coal projects. It demands 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, like the equity investment in India Infrastructure Fund in 2007, which had invested in GMR Kamalanga Energy Limited (GKEL), a coal-based power plant near Kamalanga village in Odisha state. Several concerns were raised over the potential environmental and social risks and impacts of the project.

Shortcomings in present set of reforms:

The new guidelines should be extended to all lending done by the IFC and not just be limited to 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.

Why In News

This recent update to IFC’s Green Equity Approach policy marks a significant shift in the organization’s stance on coal-related projects, in line with the global effort to combat climate change.

MCQs about IFC’s Impact on India

  1. What is the International Finance Corporation (IFC)?
    A. The private sector arm of the World Bank Group
    B. An international organization for wildlife conservation
    C. A global investment bank
    D. A non-profit organization for human rights advocacy
    Correct Answer: A. The private sector arm of the World Bank Group
    Explanation: The essay states that the IFC 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.
  2. What is the Green Equity Approach (GEA) policy of the IFC?
    A. A policy to encourage financial intermediary clients to increase their climate lending
    B. A policy to support new coal projects
    C. A policy to reduce the exposure to coal-related projects
    D. A policy to eliminate all investments in coal, oil, and gas
    Correct Answer: C. A policy to reduce the exposure to coal-related projects
    Explanation: The essay states that the GEA 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.
  3. What is the recent update made to the GEA policy by the IFC?
    A. Financial intermediary clients are no longer allowed to support new coal projects
    B. Financial intermediary clients are mandated to reduce their exposure to coal by half by 2025
    C. Financial intermediary clients are required to increase their exposure to coal-related projects
    D. Financial intermediary clients are asked to commit to financing any new coal projects
    Correct Answer: A. Financial intermediary clients are no longer allowed to support new coal projects
    Explanation: The essay states that the recent update to the GEA policy by the IFC mentions that it will no longer allow financial intermediary (FI) clients to support new coal projects and demands a commitment from FI clients to not originate and finance any new coal projects.
  4. What is the impact of the GEA policy?
    A. It allowed IFC clients to continually support new coal projects
    B. It is not aligned with the Paris Agreement goals
    C. It helps financial institutions to strengthen their own coal reduction policies
    D. It reduces exposure to coal-related projects
    Correct Answer: D. It reduces exposure to coal-related projects
    Explanation: The essay states that the GEA policy was introduced by IFC in 2020 to encourage its financial institution clients to reduce their exposure to coal-related projects in line with the Paris Agreement goals. The recent update to the GEA policy by the IFC no longer allows financial intermediary clients to support new coal projects, which further reduces their exposure to coal-related projects.

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