Develop reference guidelines for incorporating
climate risk management into project and program
design, appraisal, and implementation.
Guidance is lacking on when and how to incorporate
climate risks into project design
and appraisal.
Current procedures are ad hoc.
Original Response: Agreed: IFC: As the report recognizes, IFC has created the Climate Risk Working Group whose task is to develop recommendations on operational inclusion of climate risk and adaptation considerations in investment
project appraisal. Along with operational procedures, the group is tasked with defining tools and methodologies for operational use in climate risk and adaptation assessment for a set of pilot sectors and geographies.
IFC Specific Action: Provide guidance to IFC staff on addressing climate risk and adaptation considerations in investment project appraisal. Climate risk and adaptation assessment guidance will initially be developed for a pilot set of sectors, and expanded to other real sectors and financial market investment projects after piloting the first stage.
Indicator: A structured and consistent climate risk and adaptation assessment is part of IFC's project appraisal process.
Baseline: No consistent climate risk and adaptation assessment.
Target: 100% of all investment projects undergo a structured climate risk and adaptation assessment at appraisal. [The target is subject to approval by IFC Senior Management, whose decision is expected no later than Q4 FY13.]
Timeline: FY15 for investment projects in pilot sectors and FY16 for all real sector and financial market investment projects. [The timeline is subject to approval by IFC Senior Management, whose decision is expected no later than Q4 FY13].
Screening for IFC climate risk and adaptation considerations are now included in the appraisal procedures for selected sectors across the four IFC industry groups, with the expectation that IFC will mainstream the related methods and tools across all industries. IEG upgrades this particular action from Moderate (last year) to Substantial (this year) based on the pilot implementation and progress.
Over the past year, climate risk management tools for all sectors that were selected by IFC's industry departments to be included in the first pilot set (ports and waterways, forestry and pulp and paper, and insurance) were finalized. The outputs include global coverage of sector-relevant climate indices on which risk assessment relies. The outputs of the first set of tools have been tested, per last year's note, and one tool validated (forestry and pulp and paper), while validation for the others (ports, waterways, insurance) is still in the validating process. The development of the second set of sectors, which includes roads and airports, is currently underway and planned to be finalized in FY18. With the finalization of these tools, the development of the initial set of sectoral climate risk management will be completed. This includes guidance and training to the key IFC investment teams and users of the tools, such as industry specialists of respective sectors. Pending the finalization and validation of the tools, incorporation and usage of their results in project appraisal is yet to be implemented consistently across sectors for which the tools exist. Implementation in other relevant sectors will depend on the industry departments' demand for such tools and availability of funding.
IEG upgrades from Negligible to Moderate in this cycle.
The initiatives undertaken by IFC in climate risk screening at the project level and carbon asset risk assessment provide the necessary impetus to the action plan and the rationale for IEG upgrade in this cycle. As next steps, IEG welcomes implementation of the tools in a consistent and structured way as part of the appraisal process. In addition, codified guidance and training to IFC staff on "how to proceed" once the climate risk screening is complete is critical.
Climate risk management was incorporated into IFC's Climate Implementation Plan. The Plan, part of the World Bank Group Climate Change Action Plan, was announced on April 7, 2016, following approval by the Executive Board of the World Bank Group. The full Plan is available on www.ifc.org/climatebusiness. The Plan rests on 4 objectives:
1) Scale climate investments to reach 28% of IFC's annual financing by 2020
2) Catalyze $13 billion in private sector capital annually by 2020 to climate sectors through mobilization, aggregation, and de-risking products
3) Maximize impact through GHG emissions reduction and resilience
4) Account for climate risk - both the physical risk of climate impacts and the carbon asset risk in IFC's investment selection.
IFC is developing a process to screen climate impact risk in its investments. This process was approved by COC, based on recommendations from the Climate Risk Working Group. The process includes a risk screening tool that will be rolled out as a pilot on the following sectors: ports, waterways, forestry, pulp & paper, and insurance. The climate risk assessment is not intended to be the basis for a go/no-go decision, but an additional data point in the decision making process. IFC expects to test and validate the outputs in on the first set of sectors by September 2016.
IFC is reviewing a specific proposal on how to build resilience into agricultural supply chains. IFC has started on climate-resilient seeds through investments (Kaiima) and advisory (Bangladesh). IFC also invested in a renovation of coffee plantations in Latin America affected by coffee rust disease, which was linked to warmer temperatures. This innovative model can be replicated, but will require blended finance and technical assistance.
To begin to understand the carbon intensity of IFC's portfolio and the corresponding potential carbon asset risks, IFC analyzed its carbon footprint in May 2015. This analysis was for the on-site emissions (scope 1 and 2) of its direct investment portfolio. IFC found that the following sectors account for 81% of IFC's portfolio emissions - cement, electric power, chemicals, oil gas and mining, and primary metals. IFC has hired a consulting firm to help analyze its carbon asset risk. The consultants will look at where IFC is vulnerable, potential strategies that could help mitigate risks, and insights into how other FIs and companies are addressing these risks. IFC will create a cross-industry consultation group to get input on the consultant's recommendations and next steps.
One tool to mitigate carbon asset risk that IFC is evaluating is a carbon price. IBRD has a carbon price starting at $30/ton in 2015 and rising to $80/ton in 2050, to be considered during the economic evaluation of its projects. After a year of implementation, the Bank is evaluating the process and results of utilizing a carbon price. IFC will take these lessons learned and determine whether a carbon price would be an effective risk mitigation tool for IFC.
The IEG recommendation emphasized IFC to develop guidelines, specific mainstreaming tools and methodologies tailored to project types or sectors, that include relevant risks to be assessed guidance on available risk assessment tools including their strengths, limitations, and applicability and options for integrating climate risk considerations into design and implementation. IFC in its management update indicated that it is developing a Climate Risk Mitigation initiative. A pilot sector studies for ports and water transport, insurance, forestry, and pulp and paper is underway but is in its early stage. The IEG recommendation emphasized the need to develop an integrated guidelines, mainstreaming tools and methodologies, as opposed to presenting in the management update the lists of projects IFC has financed.
The items identified in the management action plan are still in the initial stages.
IFC is developing a Climate Risk Mitigation initiative, to produce tools to assess and address climate risks in IFC investments at project appraisal stage. IFC has hired a specialist to launch pilot sector studies in ports and water transport, insurance, forestry, and pulp and paper. Trainings have been conducted with IFC's Agriculture investment officers on opportunities in adaptation. IFC successfully launched the Roya Renovation project in Nicaragua, which will help farmers renovate 5,000 hectares of coffee infected with Roya, a leaf rust disease expanding due to climate change. South Asia Climate Resilience project in Sri Lanka is working with SANASA on flood and drought risk insurance for farmers affected by climate change. IFC is contributing to private sector adaptation as part of the Pilot Program for Climate Resilience (PPCR) project teams in the following IDA Countries: Bangladesh, Dominica, Grenada, Mozambique, Nepal, Niger, Saint Lucia, Saint Vincent and the Grenadines, Samoa, Tonga, Yemen, and Zambia.
The IEG recommendation emphasized IFC to develop guidelines, specific mainstreaming tools and methodologies tailored to project types or sectors, that include relevant risks to be assessed guidance on available risk assessment tools including their strengths, limitations, and applicability and options for integrating climate risk considerations into design and implementation. IFC only indicated its initiation of elaboration of guidance, tools and information for a structured climate risk assessment for pilot sectors rather more specific mainstreaming tools and methodologies for all sectors. it remains difficult for investment officers to grasp how to define, operationalize, support and strengthen the mainstreaming of climate change risk screening process into project and program design, appraisal, and implementation.
Elaboration of guidance, tools and information for a structured climate risk assessment for pilot sectors has been initiated, with the aim of finalizing it and test implementing in pilot sectors by the end of FY15 per agreed timeline.