International CSOs Comment on Draft IFC Policies


AUGUST 27, 2010

General Observations

The undersigned civil society organizations believe the latest drafts of the Sustainability Policy, Performance Standards, and Disclosure Policy respond usefully to some issues raised previously by many civil society organizations, including, for example, several issues related to gender, resettlement, and climate change.  Many of our most significant concerns, however, remain unaddressed, including centrally important issues related to due diligence, transparency, and accountability, and other issues related to substantive concerns.

In the following paper, we provide a description of how we believe the drafts must be revised to ensure (1) adequate identification and attention to risks; (2) strong development outcomes; (3) financial intermediary lending that meets poverty alleviation needs and does not avoid standards; (4) respect for indigenous peoples’ rights and other human rights; (5) protection of biodiversity; and (6) strong application of standards to IFC activities through advisory services.

Attention to these issues is particularly important given the new approach to standards adopted by IFC when it revised its environmental and social policies in 2006.  Through adoption of the Social and Environmental Sustainability Policy (the Policy) and Performance Standards, IFC moved from providing a set of clear requirements for IFC clients to a so-called “outcomes-based” approach.  Clients are given greater flexibility for determining how to address environmental and social concerns of projects; standards are more loosely defined and clients assume a greater role in determining what these standards mean in practice and how they can be met.  IFC relinquished to these clients many responsibilities and obligations IFC once had.  

IFC is no longer as involved in identifying and assessing risks, developing plans (in concert with clients) to respond to these risks, disclosing information, and monitoring implementation of requirements.  And, in fact, many clients fail to satisfy these responsibilities adequately.   This failure is noted in the recent review by the Compliance Advisor Ombudsman (CAO) of IFC’s Policy and Performance Standards.   The CAO notes that many clients are not developing robust action plans or disclosing action plans, are not reporting to communities on implementation of action plans (as required), have unsatisfactory annual monitoring reports in many of the reviewed projects, and lack or have inadequate grievance mechanisms.  As detailed below, the draft revisions do not ensure that clients and IFC robustly address environmental and social risks.

With an approach that provides fewer bright lines and certainty for IFC clients and local communities, a heightened need for checks and balances exists.  However, the draft fails to include measures that respond to this need.   Monitoring and supervision information that would support an informal community auditing role is essential in this regard.    
An added level of discretion is involved in the case of lending to financial intermediaries (FIs), which represents nearly half of IFC lending and which the IFC initially utilized primarily in support of microfinance activities.  Through FI lending, IFC provides significant sums of money to other financial institutions that, in turn, invest in many projects (termed “subprojects).   Although IFC appears to be proposing that Category A and B subprojects be subject to the Performance Standards,  application of the Performance Standards will not be the same, and, as described below, most likely not as robust.  Moreover, once IFC provides funds to an FI, the FI, and not IFC, deals directly with FI clients – making decisions about projects that will receive IFC funding, engaging with clients, conducting project appraisal, managing risks, monitoring, etc.   In addition, a number of IFC-supported FIs appear to be domiciled in secrecy jurisdictions, making the application of transparency, consultation and other environmental, social and governance requirements difficult, if not impossible, to implement.

Although the FI essentially assumes the role of IFC and acts as an extension of the IFC with respect to these subproject clients, not all important IFC Sustainability Policy and Disclosure Policy requirements apply to the FI.   For example, neither IFC nor the FI are required to disclose, publicly, the name, location, and other critical information about the subprojects.  Moreover, and most significantly, each project – even those in high-risk sectors and those that require significant IFC funding - does not require approval by the IFC Board or even IFC staff/management.   The IFC Board and IFC are failing, in this regard, to ensure that IFC funds support development outcomes that achieve IFC’s poverty alleviation mission and do not, through collateral damage, lead to increasing impoverishment and environmental destruction.

 IFC’s approach to Advisory Services programs, and its move to become more decentralized in its operations, also signals a move toward shifting IFC responsibilities for IFC-related activities.  As noted by the CAO in its review of the Policy and Performance Standards, “IFC provides a variety of advisory services to private businesses and governments in developing countries. These services cover a broad spectrum including advice on privatization; business related public policy; and industry-specific issues. The distinguishing characteristic of this category, compared with IFC investments, is that IFC capital is not relied upon.”   Although IFC capital is not used, these IFC activities can involve significant environmental and social impacts.  As noted by the CAO, the environmental and social (E&S) risks and impacts “vary significantly between the different types of advisory products, with some yielding substantial E&S risks.”    Despite these risks, “There is a lack of clarity and gaps in institutional infrastructure regarding application of the Performance Standards to advisory services.”

The new discretionary approach does not appear to be providing the “better outcomes” promised by IFC in exchange for flexible standards for clients and less responsibilities for IFC.  In its three-year review of implementation of the Policy and Performance Standards, IFC failed to describe whether projects funded under the Policy and Performance Standards are meeting any indicators of progress toward results.  Additionally, current and proposed requirements to secure, measure, and report results are inadequate.

Finally, IFC’s latest draft still responds inadequately to widespread support for the United Nations Declaration on the Rights of Indigenous Peoples  and increased progress in understanding the responsibilities of private actors with respect to human rights,   and the proposed standards fall short of those recently adopted at other multilateral developments banks, including, for example, the Asian Development Bank (ADB) and European Bank for Reconstruction and Development (EBRD).

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