Bank private sector watchdog calls for stricter policing
News||25 May 2003|update 34|
In April a review of the social and environmental policies of the International Finance Corporation (IFC) tabled many criticisms of current practice and suggestions for improvement. The hard-hitting review, produced by the IFC's independent office for examining social and environmental issues, contains important findings and recommendations that NGOs following projects such as the Baku Ceyhan oil pipeline will be able to use.
Its contents are also likely to be debated in other boardrooms and campaign networks because of the IFC's role as a standard setter for many other banks and export credit agencies. Indeed this role became more explicit in April when four major private banks (ABN Amro, Barclays, Citibank and WestLB) announced that they had adopted the IFC's social and environmental policies for their project finance activities.
The Compliance Advisor/Omb-udsman (CAO), an office which examines the social and environmental impacts of the World Bank's private sector arms, has assessed the system of social and environmental policies and procedures that IFC corporate clients are supposed to follow in order to merit IFC support. These so-called safeguard policies cover areas such as indigenous peoples, involuntary resettlement and environmental assessment. The CAO report is not binding on the IFC, but management is currently preparing a response to present to the Executive Board in August or September.
Turning the screws
The review finds that "overall, the safeguard policies are having a positive effect and contributing to positive environmental and social impacts". This often goes beyond damage limitation to provide "a demonstration effect on other companies". However in other cases the policies are not a serious part of the IFC's negotiations with corporate clients (known as 'sponsors' in IFC jargon). In some cases "the political importance of the deal meant that due diligence was rushed, corners cut, sponsors hurried, and effectiveness and impact compromised". In others large companies with which the IFC wants to do future business were given flexibility which was denied to small or medium-sized companies.
The review finds that there is a "lack of specific objectives, weak project monitoring and supervision, and poor integration of safeguard policies into IFC's core business". In some cases it found a "cold war" style relationship between the IFC's investment officers and staff in its Environment and Social Development Department. The policies are, however, effective when the company is committed, when there is clear communication about what is expected, good teamwork across the IFC and the national regulatory framework is strong and enforced. This appears a fairly circular argument, but the CAO singles out the corporate client as the most critical variable.
It therefore proposes measures for the IFC to increase its scrutiny of potential corporate clients and its leverage over them. It recommends that: "assessing commitment and capacity on environmental and social issues should be a fundamental aspect of investment departments' due diligence of a prospective sponsor." It also says "environmental and social issues should be included in legal covenants [and] IFC should consider suspending loans or withdrawing from projects whose environmental and social performance present unacceptable risks to IFC." To be able to do this the project supervision system would have to be overhauled as the IFC "relies on self-monitoring by sponsors for the majority of projects".
The review urges the IFC to state more explicit goals and targets, including the development objectives of each project and to extend accountability for achieving them "to all levels of management and investment staff". To date IFC managers have focussed mainly on portfolio volume and profit.
The review states that "too often public consultation occurred too late to affect project design, did not facilitate local stakeholders' understanding of the project and ability to express their concerns, allowed insufficient time for stakeholders to process the information and provide thorough feedback, and was not sustained after project approval. Stakeholders did not receive feedback from IFC or those doing the public consultation". It continues: "many sources complained about the difficulty of accessing project information, that the available information lacked sufficient detail, and that business confidentiality concerns had been inappropriately extended to the social and environmental dimensions of projects. These sources strongly encouraged IFC to revise its information disclosure policy. "
The review also proposes a number of reforms in how the IFC deals with Financial Intermediaries (FIs). These are institutions financed by the IFC which on-lend money to other companies. This now constitutes one third of the IFC's portfolio. The review suggests developing monitoring and supervision systems specifically designed for FIs and accountabilities within investment staff and management for their environmental and social performance. It recommends examining the FI portfolio in depth to see if any sub-projects are causing material harm.
The CAO says safeguard policies "must be made more specific and easy to use, with clear targets and guidelines on how to use them". They are long on process and short on specific goals. For example the indigenous peoples policy "does not specify who is affected, how they are affected, or what specifically should be done to mitigate the impact." The policies must be updated more regularly to reflect scientific and political advances.
It also suggests creating a framework that encompasses all project social impacts under either a social assessment or social impact policy. This would also improve the IFC's ability to assess and understand issues of gender, ethnicity, race, social structure, and community health. Referencing international agreements, norms, or standards that have been signed up to by countries and the World Bank would also help. At present only the child labour policy explicitly mentions such international agreements; other policies such as natural habitats do not refer to conventions in the relevant area.
A number of civil society groups are discussing their response to this review before the IFC Board discusses it.
CAO recommendations on specific policies
"The criteria for environmental screening and categorization are not clear".
"This review found a number of areas where no policy or adequate guidance exists. In some cases, IFC has committed to developing guidelines, and this has not materialized. These areas include treatment of cyanide and cyanide processes in mining operations and mine closure."
"Climate change is not addressed explicitly with sponsors as a matter of routine. Sponsors and others in workshops suggested the need for a climate change policy or explicit treatment of climate change issues in environmental assessment."
"The review found significant disagreement between sponsors and IFC on what constitutes a natural habitat or significant conversion."
"The policy does not give sufficient guidance about how to monitor or establish certification, chain of control, and third-party verification. There is little specificity on how biodiversity considerations should be incorporated in plantation and social forestry projects."
"The pest management policy was considered to be vague by sponsors in workshops and by NGOs."
"The policy needs to be given specificity in terms of guidance on application and implementation for private-sector sponsors. This guidance may need to be sector specific, for example, for infrastructure project concessions".
"There is tremendous lack of clarity and specificity in who should be treated as indigenous, what impacts should trigger the policy, and, other than the preparation of an Indigenous Peoples Development Plan, what should be done for indigenous peoples. Lack of clarity leads to the policy's not being invoked."
"Despite a clear definition of cultural property by the UN and clear understanding of what cultural property constitutes among the specialists with expertise in this area, the review found confusion among sponsors and financial intermediaries as to what is meant by the policy."
"In some sectors there was resistance to the [Child Labor] policy."
"IFC policy ... does not treat the right to collective bargaining and freedom to organize. IFC's commitment to the remaining labor standards should be examined."
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Published: 25 May 2003 , last edited: 20 May 2008
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