From bad to worse: IFC safeguards

13 June 2005

Devastating impacts of IFC-supported projects on people and the environment, and irresponsible company practises continue to highlight the serious shortcomings of the institution’s environmental and social safeguards. The current safeguard policy revision process (see Updates 45, 44) is failing to address the crucial issues and has been subject to scrutiny by civil society, private banks and industry alike.

Slave labour in Brazil

A compliance advisor ombudsman’s (CAO) audit report released at the beginning of June has questioned the IFC’s $30 million loan to the Amaggi group soy project in the Brazilian Amazon (see update 44). The audit focused on the indirect impacts of Amaggi’s third-party soybean suppliers on deforestation in Matto Grosso. It criticised the categorisation procedure as “loosely defined and relying heavily on professional discretion”.

An ILO-commissioned report in May revealed that Amaggi buys soybean from Amazon farms where slave labour was detected by the federal government. Amaggi later admitted receiving supplies from two farms where a total of 84 slaves were freed by federal agents in 2004, though denied being aware of this at the time.

buys soybean from farms where slave labour was detected

The audit found that the IFC did not provide sufficient public information that would enable affected parties to make an informed judgment about the adequacy of its categorisation decision. The ‘category B’ rating assigned to this project could not be fully justified unless the IFC could ensure that Amaggi’s environmental and social policies comply with the IFC’s requirements.

The Bank’s environmental assessment policy mandates a ‘category A’ rating for large-scale agro-industries, controversial projects and those threatening indigenous people and critical natural habitats. A ‘B’ categorisation allows money to be lent without checking the practices of the borrowing company. Roberto Smeraldi, of the Forum of Brazilian NGOs, said that the audit “shows to the financial sector that it is not possible to finance agribusiness in the Amazon without an adequate risk evaluation” and affirms the need to make IFC categorisation more “objective and rigorous”.

In June, the Amaggi group, owned by Blairo Maggi, governor of the state of Matto Grosso suffered corruption allegations following the arrest of 48 officials- including Mr Maggi’s environment secretary Hugo Jose Scheuer Werle- accused of allowing the illegal extraction of Amazon timber.

Goldmine fuels conflict

A coalition of Guatemalan and international NGOs and movements has questioned the IFC’s due diligence in financing the Glamis Gold Marlin mine in Guatemala (see Updates 45, 44). It states that the IFC should call on Glamis to suspend project activities until a resolution can be reached between the communities, the company and the government.

National movements and religious representatives assert that mining investments in Guatemala are “fuelling the rising social tension and conflict between the government and indigenous Mayan communities”, in a country where systematic human rights abuses have reached levels not seen since the end of the 30-year civil conflict. A recent letter from NGOs to Bank executive directors reiterated that Glamis does not enjoy broad community support, has violated the rights of indigenous peoples and is doing little to contribute to poverty alleviation. It states that the IFC failed to conduct an appropriate level of due diligence with respect to a number of issues, including: shortfalls in the Environmental and Social Impact Assessment .

Safeguard review under attack

In a two-day consultation with the IFC in April, about 40 international NGOs presented comments and questions on the revision of its environmental and social safeguard policies. Little clarity was gained on many crucial issues and few commitments obtained. IFC representatives provided evasive answers and often failed outright to respond directly to much of the analysis. NGOs reiterated the need for a second draft illustrating public comments received to be publicly released before the policy and guidance papers are submitted to the board’s committee on development effectiveness in July, as was earlier promised by IFC management. IFC have since clarified that they will not do this.

NGO concerns include:

  • numerous weakenings to World Bank group safeguard policies;
  • the IFC’s prioritisation of the ‘needs’ of the client over and above the affected communities and environment;
  • the level of discretion and flexibility in implementing the policies;
  • the IFC’s failure to clarify key concepts such as “broad community support”, “adverse impacts”, “critical natural habitats” and “good international practice”;
  • inconsistencies and/or the failure to reflect several board-approved commitments in the management response to the extractive industries review;
  • the IFC’s unwillingness to make explicit statements on minimum, binding standards that comply with international law in relation to environment, human rights, indigenous peoples and labour that will apply to all projects and clients equally;
  • the IFC’s contention that “for the vast majority of clients we do not believe that we need independent monitoring of projects”;
  • IFC threats to abolish the ABC categorization framework for assessing project risk; and
  • the inconsistency of the performance standard on indigenous peoples be with the World Bank’s policy;

A number of these criticisms have been supported by the private banks who have signed the Equator Principles on environmentally and socially responsible investment. Industry associations have also called for the imposition of penalties for failure to comply with an action plan, and for more incentives and regulation to encourage businesses to invest in sustainable development and clean energy projects.

The revised drafts will be sent to CODE in early July. Final board approval is expected in October.

No policy on intermediaries

The IFC have yet to make clear how the revised performance standards will apply to its non-project lending i.e funding that is channelled through financial intermediaries (FI). This is now estimated to comprise approximately 35% of the IFC’s portfolio. A World Resources Institute report examines the limitations of FI lending, such as equity investment in local commercial banks and finance insurance, to monitor the environmental and social impacts of subproject investments. The report emphasises that the IFC’s explicit poverty alleviation and sustainability mandate means that it must be accountable for the environmental and social impacts of all of its financial activities, and must hold FI projects to the same standards as those for traditional lending projects.

An independent review by the CAO noted that “the rapid growth of the proportion of the IFC’s portfolio in FIs has outstripped IFC’s capacity to conceptualise an effective safeguard policy system for FIs”.