Financial intermediaries

Since the financial crisis in 2008, development finance institutions (DFIs) have channelled more and more funding through financial intermediaries – third parties including equity funds and commercial banks.

This ‘hands off’ form of lending has brought many risks for local communities and the environment, including forced evictions, human rights abuses, deforestation, and the construction of destructive coal mines and power plants.

Why Recourse campaigns on financial intermediaries

Financial intermediaries (FIs) represent a growing part of multilateral development bank (MDB) portfolios. For example, over 50% of the International Finance Corporation’s portfolio goes through FIs.

The MDBs use FI lending to attract additional private investment to development projects, and claim to influence environmental and social standards across the private sector. The IFC estimates that, from 2014 to 2024, investments totalling $4.5 trillion across emerging markets use the IFC’s own performance standards.

Campaigning for better policies and practices in FI lending presents a huge opportunity to have a ripple effect on private finance, resulting in far greater impact than campaigning on DFI’s direct finance alone. Wins will enable us to leverage change with private financial institutions such as commercial banks.

Recourse’s campaigning focuses on: closing remaining loopholes for coal finance; shifting finance from fossil fuels to sustainable renewable energy; improving disclosure and accountability; and supporting affected communities to demand and access remedy when investments cause harm.

Financial intermediaries: still funding fossil fuels

Financial intermediaries receive investments from DFIs in the form of loans, equity shares and guarantees, which they then invest in subprojects. This arms-length lending can be very risky for human rights and the climate because of the lack of transparency and the dilution of safeguards as the investment chain gets longer.

Here are some examples of indirect public financing of fossil fuels through FIs:

Between 2007 and 2019, the IFC invested $65 million in equity and loans in Hana Bank. In 2020, Hana Bank provided a $56m loan to the developer of Java 9 and 10 coal plants in Indonesia.
In April 2020, the AIIB invested $150 million equity in Keppel Asia Infrastructure Fund (KAIF). Three years later, KAIF closed the deal on a new ‘hydrogen-ready’ gas power plant in Singapore.
Since 2018, the AIIB has been pursuing capital markets projects, notably debt securities via Bayfront Infrastructure Capital. The company’s portfolios include large amounts of oil and gas assets, and are linked with projects that have caused proven environmental and social harm.

Despite the IFC’s 2023 pledge to end direct financing of coal, and efforts to reduce indirect financing, many of the institution’s FI clients continue to invest in new coal power projects. Read more in our report: Paris aligned? The International Finance Corporation’s Financial intermediary investments, fossil fuels and the climate crisis

Financial intermediaries: evading human rights, transparency and accountability

For too many development finance institutions, FI lending is shrouded in secrecy – with little or no disclosure of sub-projects. Without transparency, there can be no accountability, while human rights risks in FI lending are higher than in direct project finance.

Recourse campaigns to drive up standards and create a race to the top across DFIs, for example between the European Investment Bank, the European Bank for Reconstruction and Development, the Dutch development bank FMO, the Asian Infrastructure Investment Bank, and the IFC.

We support communities affected by FI projects to seek redress for the harms they have suffered, including by filing cases to the institutions’ accountability mechanisms – so that DFIs cannot simply walk away when they have caused suffering, as the IFC did in Guatemala in 2020.