The International Finance Corporation (IFC), the World Bank Group’s private lending arm, is being investigated for its investments in a commercial bank that is financing the construction of two new coal-fired power plants at Indonesia’s Suralaya Power Station.
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The Compliance Advisor Ombudsman (CAO), IFC’s internal watchdog, made the announcement last Friday. The inquiry is in response to a complaint filed in September last year by communities in Indonesia’s Banten province who say the new plants, known as Java 9 and 10, will have catastrophic impacts on their health, livelihoods, and the environment.
Java 9 and 10, currently under construction, represent a 2,000-megawatt (MW) expansion of the Suralaya Power Station, one of the biggest coal complexes in Southeast Asia. Indonesia, the region’s largest economy, is already the world’s third-largest coal producer and a major coal consumer.
“It’s encouraging that the CAO will do a full investigation, which brings us one step closer to justice,” said Sarah Jaffe, senior legal and policy associate at United States-based nonprofit Inclusive Development International (IDI).
“People’s lives are being upended by this project, and they deserve full and fair redress for the harm they’ve suffered.”
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It’s encouraging that the CAO will do a full investigation, which brings us one step closer to justice.
Sarah Jaffe, senior legal and policy associate, Inclusive Development International
In the same CAO report, the IFC management asserted that no non-compliance with relevant environmental and social policies occurred in its transactions with its client PT Bank KEB Hana Indonesia (Hana Bank), which is part of a consortium of commercial and public banks that provided financing for the expansion of the Suralaya coal complex.
IFC pointed out that under its sustainability framework it is not required to conduct environmental and social due diligence or supervise sub-projects of financial intermediary clients directly.
IFC has put in equity investments worth US$46.9 million in Hana Bank since 2007, according to CAO’s initial assessment of the complaint. The bank had provided a US$56 million loan to PT Indo Raya Tenaga, developer of Java 9 and 10, which amounted to about 2 per cent of total financing and about 1 per cent of total project cost.
The complaint was raised by civil society organisations, including IDI, Netherlands-based nonprofit Recourse, as well as Indonesia-based Trend Asia and PENA Masyakarat, on behalf of residents of the Suralaya Village.
The ongoing construction of the new coal plants, known as Java 9&10, in the Suralaya coal complex in Banten, Indonesia. Image: Inclusive Development International
‘Loopholes’ in existing policy commitments to end coal funding
CAO’s inquiry comes amid another analysis published by IDI, Recourse and Trend Asia, which highlights cases of two coal-powered nickel refineries on Obi Island in Indonesia being similarly funded by Hana Bank. The report states that publicly-funded multilateral development banks like the World Bank are at risk of “funding a wave of captive coal expansion in climate-vulnerable countries, despite commitments to shift funds from fossil fuels to renewable energy”.
Captive coal units, usually constructed to support industrial processes such as metal smelting or cement production, are set to become more common in the coming decade.
CAO’s appraisal report, the watchdog raised questions about IFC’s management of predictably high risks associated with investment in Hana Bank.
The report suggested that IFC may have underplayed those risks by classifying its investment as “moderate” as opposed to “high” risk, and noted that IFC failed to ensure, over many years, that known deficiencies in Hana Bank’s environmental and social management system were rectified.
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We are providing full support to the CAO during the compliance investigation. We welcome a productive dialogue with the CAO and other stakeholders as the CAO completes the compliance investigation.
IFC spokesperson
However, in the report, IFC said that any alleged harm to local communities “would not be plausibly linked” to any potential non-compliance given its “indirect and nominal exposure to Java 9 and 10” through Hana Bank.
In a statement to Eco-Business, an IFC spokesperson said although the organisation has an equity investment in Hana Bank, it has not directly supported the construction of the Suralaya coal-fired power complex and has not taken part at any stage in its development.
IFC added that documentation shared by Hana Bank indicated that the Java 9 and 10 project has been properly assessed, environmental and social risks and potential impacts identified, and an environmental and social action plan has been agreed with the developer.
“We are providing full support to CAO during the compliance investigation. We welcome a productive dialogue with CAO and other stakeholders as CAO completes the compliance investigation,” said the spokesperson.
Weak points in IFC’s green equity approach?
Daniel Willis, finance campaign manager at Recourse, described IFC’s inability to assess the mega coal project bankrolled by its client against existing social and environmental policies as a “serious supervision failure”.
IFC updated its “green equity approach” last year, which is aimed at intermediary clients such as commercial banks, to explicitly state that the organisation’s investment will no longer support new coal.
The policy previously only required financial clients to reduce their exposure by half by 2025, and to zero by 2030.
Financial intermediaries represent more than half of IFC’s investments and have received almost US$40 billion of IFC support since May 2019.
Willis pointed to how this policy gap that permits companies to only reduce their coal investments has allowed IFC’s clients to support a number of substantial and new coal projects over the past five years.
“While IFC has stated that the ‘no new coal’ approach applies to all existing equity clients, it is unclear whether and how that is being enforced,” added Willis.
“By entrusting public funds to commercial banks that are more concerned with profits than people, the IFC has found itself supporting a monstrous coal project that is both unnecessary for energy supply and disastrous for the environment. IFC must cooperate with its ombudsman to remedy the harms identified by the investigation and make systemic changes to how it invests in the future,” he said.
