Lessons learnt through the external review of the IFC’s environmental and social accountability
It is on the back of these results that there has been an external review of the CAO, particularly its compliance function, and the IFC and MIGA’s environmental and social (E&S) accountability. This is the fourth review in the CAO’s history, with previous ones conducted in 2003, 2006, and 2010. These kinds of reviews are one of the integral ways in which all Independent Accountability Mechanisms (IAMs), of which the CAO is just one, improve, adapt and grow as their institutions and best practices develop. They are also an essential way in which IAMs, as independent institutions, incorporate external feedback.
This most recent review was initiated in June 2019 at the request of the IFC and MIGA Boards, to address some of the concerns raised above. These were further intensified by what are described as “increasing litigation risks faced by the IFC”, alluding to the recent, widely publicized case against it (Jam vs IFC).
The review was conducted by a group of six independent, external experts who were tasked with providing recommendations on the CAO’s governance arrangement, role and effectiveness; the impact that current CAO processes have on stakeholders; the IFC and MIGA’s responsiveness to concerns regarding adverse impacts; the uptake of learning from CAO’s work at the level of IFC and MIGA’s policies; and the need to develop complaint mechanisms within IFC/MIGA Management.
Recommendations of the External Review
Following their 10-month review process, the following set of recommendations directed at both IFC/MIGA and the CAO were produced.
Recommendations for IFC/MIGA:
- take the lead in ensuring and promoting sustainability in the private sector
- clarify E&S accountability for financial intermediaries and ensure their E&S performance
- strengthen capacities, systems, and organisational mindsets to address concerns and complaints from affected people
- create a more active response culture and greater willingness to engage with clients and complainants
- recognize that an effective CAO is an integral component of IFC/MIGA’s E&S accountability
- establish an IFC/MIGA framework for remedial action in cases in which non-compliance contributes to harm
- revise the reporting structure so that CAO reports to the Board (currently the CAO reports to the President of the World Bank Group)
- shorten complaint handling times (on average compliance review takes more than 3 years)
- strengthen efforts to seek early resolution of complaints
- enhance steps to protect the client and give IFC/MIGA a formal voice early on in the compliance process
- create a new, board-approved policy and revise the CAO’s operational guidelines
While this process and the findings it produced were directed at IFC/MIGA and the CAO, there is huge value in other international financial institutions (IFIs) and IAMs examining these findings and their broader relevance to the field of accountability in development finance. This includes for the Green Climate Fund (GCF) and the Independent Redress Mechanism (IRM), particularly due to the similarities in the funding models, including the use of financial intermediaries, and E&S policies and standards of the GCF and IFC.
One of the key findings regarding the funding structure, was the uncertainty created by financial intermediaries, entities that act as middlemen to on-lend or invest in sub-projects. The review found that there is currently insufficient clarity on how its E&S policies apply to sub-projects and significant gaps in the IFC’s ability to ensure that its financial intermediary clients are adequately assessing E&S risks and ensuring the application of the IFC’s Performance Standards. In addition, the complexity associated with financial intermediaries also creates challenges for the CAO’s functioning, both for affected stakeholders to access the CAO as well as for determining whether incoming complaints are eligible.
Therefore, the review recommended that the IFC further clarify how it will assure itself of the E&S performance of its financial intermediaries, strengthen its due diligence and supervision of financial intermediary clients and enhance the transparency of IFC-funded portfolios and sub-projects. These recommendations are very relevant to the GCF, which also channels a substantial proportion of its funding through financial intermediaries. In addition to the complexity of channeling its project finance through financial intermediaries, the GCF’s portfolio also includes ‘programmes’, which are funded activities with overarching goals and themes, which are made up of sub-projects usually spanning across several countries. These sub-projects are not, as yet, disclosed on the GCF website and are not required to be individually approved by the GCF Board, but are rather identified subsequently according to a broad set of eligibility criteria. These layers in the financing structure of the GCF are worth examining in the light of the issues faced by the IFC.
Remediation of Harm
One of the most significant recommendations was the need for improved systems for providing remedy to affected people. This remains one of the weakest points across the board for IAMs where even with findings of non-compliance, affected people are often left with no or inadequate remedy. The review recommended the establishment of a ‘remedial action framework’, a clearly defined structure and process for how remedy should be provided if required. Firstly, it recommended that there should be a requirement for all IFC clients to create a means of funding remedy should it be required. These could be in the form of insurance, performance bonds, or contingency reserves which can be accessed or triggered where needed. And secondly, it recommended that the Board should agree to the principle that where IFC/MIGA itself has contributed to harm, it should be required to also contribute to remedy, including in the form of financial compensation where needed. This could be made possible through the establishment of a remedy fund to meet these commitments.
Relations between CAO and IFC Management
Lastly, the review emphasized the importance of ensuring good relations between the management of IFC/MIGA and its accountability mechanism, the CAO. The review noted that while some level of tension is likely to occur when the CAO investigates compliance of the IFC/MIGA, they found that their disagreements have led to “polarized attitudes and unconstructive interactions”. These disagreements have in some cases impeded the flow of information, delayed processes, undermined potential corrective actions, and limited the utility of some compliance reviews to act as an opportunity to learn from difficult cases. The review, therefore, proposed that current CAO processes (including IFC/MIGA roles and responses) be adjusted to promote a more collaborative relationship. This is a finding that all IFIs and respective IAMs should take note of. Promoting a collaborative relationship which enhances the outcomes of IAM processes, while still maintaining the IAMs independence and objectivity, will facilitate greater access to remedy for affected people.
IRM’s Learning and Dialogue Forum
In order to share these lessons both within the GCF and IRM, the IRM hosted an inreach event on 13 October 2020 where Professor Arntraud Hartmann, one of the external reviewers, presented these findings to the GCF Secretariat and independent unit staff. This was followed by a brief commentary by the Head of the IRM, Dr Lalanath de Silva, on the similarities and differences between the two institutions, and what we as the GCF and IRM may learn from these findings. The virtual event was attended by approximately 40 staff, many of whom contributed to the debate with interesting questions and insights.
This review has been extremely significant for the accountability world in its scope and depth. Here at the IRM we hope that these findings will have positive consequences across IAMs and IFIs, including within our own institution. The IFC and CAO are forerunners in the development finance accountability space, with a wealth of data and experience. It is essential that we foster dialogue and learning within and between institutions, to accelerate our growth and effectiveness.
Article prepared by Katrina Lehmann-Grube and Christine Reddell