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IFC oblivious to impact of lending to financial sector

News|Bretton Woods Project|12 February 2013|update 84|url
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In early February the International Finance Corporation's accountability mechanism, the Compliance Advisor/Ombudsman (CAO), released a long awaited audit into the social and environmental outcomes of the IFC's funding of financial intermediaries (FIs, see Update 79, 73), third-party financial entities such as banks, insurance companies, leasing companies, microfinance institutions, and private equity funds. The report finds that for this growing part of the IFC's portfolio, now over 40 per cent of the total, the IFC conducts "no assessment of whether the [environmental and social] requirements are successful in doing no harm." The CAO indicated that "The result of this lack of systematic measurement tools is that IFC knows very little about potential environmental or social impacts of its [financial market] lending."

The study, which looked at 10 per cent of the clients in the IFC's FI portfolio since mid 2006, found that 10 per cent of the sample were not compliant with the IFC's environmental and social requirements, and a further 25 per cent were only partially compliant or there was uncertainty. The CAO was "surprised" to find cases where failure to comply with the requirements, which at times had been included in the financing contracts signed between the IFC and the FI, did not cause the IFC to refuse additional IFC financing to the client.

The CAO emphasises how the requirements focus on the client developing a social and environmental management system, rather than actual social and environmental outcomes. Looking at environmental and social outcomes, rather than just meeting requirements, for IFC clients "around 30 per cent of investments in CAO's sample were not regarded by the CAO panel as to have 'improved'". Furthermore, FI clients of the IFC use the institutions resources to lend to or invest in subclients. The CAO found "the proportion of cases of non-improved performance was around 60 per cent at the subclient level, which is where IFC seeks to really have an impact."

While the CAO does not list recommendations, throughout the audit it makes suggestions for improvement, including "requiring clients to report and disclose [environmental and social] performance and to engage third-party assurers to provide an independent check" and helping clients to implement a "more fundamental change management process". It also suggested harmonisation of the environmental and social standards of different private sector lending institutions such as the IFC with the European Investment Bank and national institutions such as the Dutch development bank FMO.

In its response to the CAO audit, the IFC makes no commitment to change its practices, instead championing the finding that 90 per cent of IFC FI clients are in compliance with the performance standards. In relation to sub-client social and environmental impacts, the IFC staff said: "We do not consider this necessary or efficient as our intent is to have our partner FIs manage this."

The lack of measurement of either harm or positive development impact for such a large proportion of the IFC's overall portfolio led critics to demand a full overhaul of the way the IFC does FI lending. Kris Genovese at US-based Center for International Environmental Law said "the IFC's response to these alarming findings is shameful and only succeeds in missing the point. The fact that many projects technically meet IFC policies ignores the finding that the policies themselves are fundamentally and fatally flawed."

Published: 12 February 2013 , last edited: 16 September 2013

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