Missing the Target: Climate Change & IFC’s Performance Standards

The climate crisis is the defining problem of our time, creating impacts globally that threaten the very foundation of our economies and societies, and undermine the hard-won development gains of recent years. Around the world, ecosystems and communities are already experiencing the pervasive and destabilizing effects of climate change. Moreover, it is poor and marginalized communities who are likely to feel the consequences of a rapidly warming planet more heavily. 

The United Nations Intergovernmental Panel on Climate Change last year delivered a stark warning: crossing the 1.5-degree Celsius global average temperature target could unleash severe environmental and weather impacts. The hurricanes, droughts, heatwaves and floods seen around the world in recent years are considered by scientists to be a sign that the climate is already in crisis. 

Fortunately, the international financial sector has adopted important commitments to both address and report on climate change risks. The Partnership for Carbon Accounting (PCAF), which has developed and published the Global Greenhouse Gas (GHG) Accounting and Reporting Standard for the Financial Industry, welcomed its 500th signatory in August. These are supported by efforts among regulators in some jurisdictions, such as the European Union, the United States, and Singapore, which have passed regulations requiring companies to file disclosures regarding climate risk. These efforts complement those of private sector climate leaders, including more than 1,100 companies that have adopted the 1.5-degree Celsius target as the aim of their decarbonization efforts. 

Closer to home, the World Bank Group, under its Climate Change Action Plan and alongside eight other multilateral development banks, committed to aligning its financing with the goals of the Paris Agreement. For IFC’s part, it committed to aligning 85 percent of its new investment projects with the Paris Agreement from July 1, 2023 and achieving 100 percent alignment of these investments by July 1, 2025. This is in addition to the commitments in IFC’s Sustainability Policy to address climate change.

With these commitments in mind, CAO has published a new advisory note exploring how IFC’s Sustainability Policy, and corresponding Performance Standards, are adequate to meet the unprecedented challenge of reducing GHG emissions to achieve the Paris climate goal of keeping a global temperature rise well below 2 degrees Celcius, and preferably limited to a 1.5 Celsius increase. Examining 40 IFC projects, the aim of our research was to understand whether the 2012 Sustainability Policy and Performance Standards are adequate to help IFC contribute to this critical global challenge. 

Our research shows that the Performance Standards do not provide a sufficient basis for reducing GHG emissions in IFC-financed projects. For example, carbon sinks are not adequately protected. Similarly, the GHG reporting commitments laid out in the current Sustainability Policy are out-of-date with portfolio emissions reporting best practices that have been adopted by international bodies, industry associations, and other voluntary initiatives. Aligning portfolio-level climate emissions reporting with international best practices can help complete IFC’s carbon ledger, providing a more complete picture of IFC’s efforts toward the Paris climate targets to better inform its decision-making.

This is a pivotal moment for the institution to strengthen its efforts to reduce GHG emissions across its investment portfolio.   Implementation of some actions we have outlined in our advisory note does not need to be delayed until the update of these policies. There is no time to lose.

Photo Credit: World Bank Group