Moving beyond aspirations? IFC still unable to determine the impact of its financial intermediaries investments

12 November 2014

Credit: Adrienne Pine

In October, the Compliance Advisor Ombudsman (CAO), the accountability mechanism of the International Finance Corporation (IFC), the World Bank’s private sector arm, released a compliance monitoring report relating to its 2012 audit of IFC’s investments through financial intermediaries (FIs) (see Observer, Spring 2014).

While the report acknowledged positive steps taken by the IFC since the audit, it noted that “important findings from the audit remain unaddressed.” The report stressed that its previous finding “that IFC does not have a systematic methodology for determining whether the implementation of an E&S [environmental and social] management system actually achieves IFC’s objectives of doing no harm or improving E&S outcomes on the ground” has not been tackled.

Impact of billions of dollars of investments remains unknown

According to the CAO, IFC’s FI business continues to grow, with new commitments amounting to more than $10 billion in a disbursed portfolio of more than $14 billion in fiscal year 2014”. The CAO’s central finding “that the measurement of outcomes that correspond to IFC’s higher-level E&S commitments relevant to its FI business appears to be beyond the scope of the changes that IFC has proposed” places the progress made by the IFC into perspective.

The inability of the IFC to demonstrate that its investments through FIs comply with its own commitment to “do no harm” and “to achieve positive outcomes”, as outlined in its policy on environmental and social sustainability, has been a long-standing concern of civil society organisations (CSOs). In light of the structural nature of the problems identified by the FI audit and the CAO’s investigations into Honduran bank Ficohsa (see Bulletin Autumn 2014) and palm oil company Dinant (see Observer Autumn 2014), and the rapid expansion of FI lending, CSOs have repeatedly called for a comprehensive response from the IFC.

The need to strengthen the IFC’s capacity to ensure that it does no harm was a recurring theme of the October World Bank and IMF annual meetings discussions between the IFC, World Bank executive directors and CSOs. During the meetings representatives from communities in Guatemala and Cambodia that claim to have been negatively impacted by IFC FI investments made a strong plea for the IFC to undertake the necessary actions to ensure that the human rights and livelihood of marginalised communities are not negatively affected its activities.

The IFC responded to concerns raised during the meetings by highlighting its ongoing efforts to strengthen its social and environmental management system and arguing that organisational and structural changes take time to bear fruit. Participants in a joint IFC, CAO and CSO discussion about IFC lending through financial intermediaries, while supportive of steps taken by the IFC, stressed that its responsibility to “do no harm” must not remain an aspiration (see Bretton Woods Project). The IFC was also reminded that it is responsible for ensuring that the public funds it invests contribute positively to the World Bank Group’s twin goals of eliminating extreme poverty and boosting shared prosperity.

The CAO monitoring report acknowledged improvements made by the IFC. The report  highlighted in particular the detailed and broad set of additions made to internal staff guidance notes on the Environmental and Social Review Procedures (ESRPs), which the CAO notes would place environmental and social risk on a more even footing with the assessment of financial risk. Despite progress made in these areas, the CAO noted that the IFC has taken a step backwards by limiting the application of its protection policies to certain loans only. The CAO expressed concern that “this represents a narrowing of the application of the Performance Standards”. The IFC’s openness to a broader discussion about disclosure was welcomed by the CAO.

Greater transparency urgently required

The monitoring report also analysed steps taken by the IFC to address concerns raised by the CAO’s investigation into Honduras’ biggest bank, Ficohsa. The CAO stressed in the investigation that “absent disclosure of information related to the end-use of funds from its FI investments … systems designed to ensure that IFC and its clients are accountable to project-affected people for delivery on their E&S commitments [are] effectively diluted”.

Criticisms about the lack of transparency arising from the Ficohsa investigation echoed those of CAO’s 2012 FI audit, which noted that “the fact that the end use of such a significant proportion of IFC funding remains opaque is a matter of some concern.” The monitoring report repeats these concerns, stating that “while CAO has welcomed greater disclosure of subprojects by IFC’s Private Equity clients, the end-use of the majority of financial intermediary investments is not yet subject to disclosure.” Considering the potential for FI lending to result in serious harm to marginalised communities, as extensively documented by the Dinant, Ficohsa, GKEL (see Update 85, 76) and Dragon Capital (see Observer Summer 2014) cases, CSOs continue to urgently call for increased disclosure of IFC investments in FIs. In March 2014 26 CSOs from around the world, including Cambodian NGO Equitable Cambodia and Indian NGO Programme for Social Action, wrote a letter to the IFC vice president, Jin-Yon Cai, calling for greater transparency of IFC investments. Following up on concerns raised in the letter, participants in this year’s annual meetings discussions between the IFC and CSOs stressed that disclosure is an absolute necessity, as without knowledge of the origins of investments, communities are denied access to existing complaints mechanisms and, consequently, recourse.

In an October statement responding to CAO’s findings, the Bretton Woods Project, Belgium-based network Eurodad and Oxfam International urged IFC shareholders to recommend “that the IFC undertakes fewer investments in the financial market sector, and dedicates more resources to ensure their positive outcome” and that “the World Bank Group develop a new group-level strategy for investments in the financial sector to fundamentally rethink the nature, purpose, modalities and limits of these investments.”