False solutions? The IFC, private equity and climate finance

5 April 2012

As the International Finance Corporation (IFC), the Bank’s private-sector arm, announces new investments in its climate-focused private equity fund, critics argue that investing scarce public climate funds in the financial sector is of unproven effectiveness, will miss the world’s poorest regions and has questionable developmental impacts.

The IFC Climate Catalyst Fund, a new private equity ‘fund of funds’ launched in November 2011 (see Update 79), will receive $75 million in IFC seed money, and aims to mobilise investment from large institutional investors. It will invest in other private equity funds that specialise in what the IFC calls “low-carbon and climate-friendly projects and companies” in emerging markets. The fund will be managed by the IFC’s Asset Management Company (AMC) (see Update 76). The AMC is a wholly owned subsidiary of the IFC, and is headquartered in Delaware in the US, a secrecy jurisdiction which holds the top spot in international NGO Tax Justice Network’s financial secrecy index.

The fund will also receive a $50 million investment from the UK government’s Department for International Development (DFID). This money is included in a newly announced package of UK climate finance, and is part of a UK initiative called the Climate Public Private Partnership, or CP3, an expansive public-private investment platform part-designed by the IFC. The public finance is provided by donor governments and multilateral development banks, alongside equity investments made by private institutional investors. The aim is to use public finance to leverage large amounts of private capital to invest in low-carbon infrastructure in developing countries. DFID and the IFC claim that every £1 of public finance will generate £30 of private investment.

The launch of the Climate Catalyst Fund and CP3 is a sign of a growing confidence amongst some developed country governments and the IFC that the financial sector, through specially designed private equity investment vehicles and the use of public finance, can stimulate the investment necessary to finance the transformation to low-carbon development (see Update 78, 76).

When announcing DFID’s investment in the IFC fund, IFC head Lars Thunell underlined the IFC’s rationale for the project: “Addressing climate change is a strategic priority for IFC, and private equity is well suited to jump start climate-friendly investment in emerging markets. We hope that the fund will help make the business case for these kinds of investments and encourage additional private sector investment into innovative climate projects.”

Alex Scrivener, of UK NGO World Development Movement, questions this strategy: “The CP3 is part of a worrying trend towards diverting scarce UK climate finance away from the grant finance of adaptation and mitigation projects in the developing world and towards attracting private investors seeking very high rates of return. The effectiveness of this strategy is unproven, and is indicative of the UK government’s blind faith in the effectiveness of the international financial markets to deliver green development in the global south. Entrusting this vital role to secretive hedge funds and private equity funds is dangerous, and subjects low-carbon development to the perceived need for profitability and the whims of the market. In other words, this could lead to more effective, albeit less profitable, projects being dropped in favour of schemes that are likely to yield high returns in the short term.”

Mithka Mwenda of Pan-African Climate Justice Alliance observes: “Estimates of the money able to be leveraged are often exaggerated and needs much more interrogation. Involvement of the private sector also comes with considerable risks. For example, the IFC relies on financial intermediaries who very often have negative development and climate impacts, carry considerable financial risk, are able to evade safeguards and have serious implications for accountability. Allowing the private sector to control a large amount of finances that go into climate change efforts stands the risk of bypassing developing country governments. This would weaken governments’ control over where the money is spent and could potentially go into ‘bad’ projects that harm the environment and negatively impact on people’s livelihoods.The IFC also intends to invest in emerging markets which is a clear indication that climate vulnerable areas in Africa and other parts of the developing world will be neglected by the fund.”

Mwenda continues: “We urge that the majority of financing comes from the public sector which is supported by accountable, representative, inclusive, and transparent governance. Private sector investment should be at the national level where its participation is best decided, managed, regulated and incentivised according to national strategies that were identified with the participation of people who are most impacted by climate change. We need climate finance in Africa that contributes to sustainable, vibrant local economies that stimulate local entrepreneurship.”