By Lisa Friedman of ClimateWire

The World Bank ignored its own environmental and social protection standards when it approved nearly $200 million in loan guarantees for palm oil production in Indonesia, a stinging internal audit has found.

The report, detailing five years of funding from the International Finance Corp. (IFC), the private-sector arm of the World Bank, lambastes the agency for allowing commercial pressures to influence four separate loans aimed at developing the industry.

“The IFC was aware for more than 20 years that there were significant environmental and social issues and risks inherent in the oil palm sector in Indonesia,” auditors wrote. “Despite awareness of the significant issues facing it, IFC did not develop a strategy for engaging in the oil palm sector. In the absence of a tailored strategy, deal making prevailed.”

The report (pdf) from the office of the Compliance Advisor Ombudsman comes as Indonesia prepares to enter the carbon markets by protecting its tropical forests. Working in partnership with Australia, the Indonesian government currently is working to design a national carbon accounting system. Australia is building a satellite to monitor deforestation in the Southeast Asian country, according to new U.N. submissions.

Indonesia is home to the world’s second-largest reserves of natural forests and peat swamps, which naturally trap carbon dioxide — the main greenhouse gas that causes climate change. But rampant destruction of the forests to make way for palm oil plantations has caused giant releases of CO2 into the atmosphere, making Indonesia the third-largest emitter of greenhouse gases on the planet.

The audit does not address climate change or how lending for palm oil — an ingredient in foods and a biofuel added to diesel for cars — fits into the World Bank’s new “strategic framework” for development and climate change. It also does not examine any of the specific charges or environmental accusations lodged against the firm to which the World Bank loaned money.

Rather, the report confines itself to whether the IFC abided by its own standards. On that front, the multilateral bank came up short.

IFC saw burning the trees as having ‘no impact’

Specifically, auditors said, when loaning to Wilmar International Ltd. and other firms between 2003 and 2008, the IFC did not check out concerns about the companies’ supply chain plantations. The Forest Peoples Programme, a U.K.-based nonprofit group that originally brought the complaint, charged that the companies illegally used fire to clear forestland, cleared primary forests, and seized lands belonging to indigenous people without due process.

The IFC, auditors noted, labeled the initial loan as a “category C” — a listing signifying that a project has little or no adverse environmental or social impacts, and which is typically given to financial intermediaries. But by failing to examine the subsidiaries that source the raw materials, IFC ignored issues like the absence of publicly available environmental impact assessments for the subsidiary companies.

“For each investment, commercial pressures were allowed to prevail,” auditors wrote. “Commercial pressures dominated.”

In a written response to auditors, the IFC acknowledged shortcomings in the review process. But the lender also defended investment in palm oil production as a way to alleviate poverty in Indonesia.

“IFC believes that production of palm oil, when carried out in an environmentally and socially sustainable fashion, can provide core support for a strong rural economy, providing employment and improved quality of life for millions of the rural poor in tropical areas,” it said.

Hunting for a ‘sustainable’ strategy

The agency vowed to develop a new strategy to guide its future palm oil investments, to be completed in about three months, and to put “renewed emphasis” on assessing a company’s supply chain before lending.

Marcus Colchester, director of the Forest Peoples Programme, called that response “inadequate.”

In a letter to World Bank President Robert Zoellick and the board, Colchester and leaders of other nonprofit groups called on the World Bank to freeze palm oil lending, charging that IFC suffers a “systemic problem whereby the pressure to lend and to support business interests overcomes prudence, due diligence and concern for social and environmental outcomes.”

They noted that the management response included no actions to address the problem of climate change being exacerbated by planting on peatlands and burning forests, and advised no discipline for staff that failed to comply with standards.

Barbara Bramble, a senior program adviser for international affairs at the National Wildlife Federation, said she believes the World Bank should help the Indonesian government at all levels change incentives for palm oil planting and refuse to invest in any company whose primary plantation is primary rainforest.

She, Colchester and even IMF officials widely agreed that there is in Indonesia an abundant amount of already degraded land that could be used for palm oil productuon. The challenge, Bramble said, is shifting national and local laws to encourage more sustainable production.

Meanwhile, the IFC indicated in a statement to E&E that the agency does not plan to give up palm oil investment anytime soon.

“IFC is aware of the environmental and social concerns associated with the palm oil sector in Indonesia. We also believe that the sector has considerable potential for job creation and economic growth,” agency officials wrote. “We believe it is imperative to promote sustainable practices in the sector that will benefit the poor and preserve biodiversity.”