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Global norms

Crucial environmental and social standards

by Korinna Horta
Palm oil plantations exacerbate an environmental crisis in Borneo

Palm oil plantations exacerbate an environmental crisis in Borneo

The International Finance Corporation (IFC) is the World Bank subsidiary in charge of supporting the private sector with the goal of helping people escape poverty and take their lives into their own hands. So far, however, there is hardly any independent information on potentially negative effects of IFC lending. The IFC recently adopted new social and environmental standards under the headline “Better standards for smarter growth”. They will come into force in January 2012. By Korinna Horta

The IFC was founded in 1956 and has 182 member states. Its mission is to promote poverty reduction through the support of private sector investments. About one-third of all official development assistance geared towards supporting the private sector is channelled through the IFC. The IFC provides loans to companies, holds shares in them and provides advisory services. In 2009, it started the IFC Asset Management Company, which aims to mobilise money from Sovereign Wealth Funds (SWF) and other institutional investors for lucrative projects that are designed to serve development.

In 2010, the IFC pledged a record total of $ 18 billion. It assumes that every dollar it invests will mobilise three additional dollars from other sources. The IFC invests some of its money in major infrastructure projects such as coal-fired power plants and oil pipelines. In addition, 47 % of IFC lending goes to financial service providers (known as financial intermediaries), but only very limited information – if any at all – is available on what these intermediaries do with such funding.

The IFC’s environmental and social standards serve as global guidelines. Some 70 private banks, including some of the world’s most powerful financial institutions, have pledged to adhere to the Equator Principles, which are based on IFC rules. OECD countries’ export credit agencies follow IFC standards too. In theory, the IFC’s social and environmental guidelines require social and environmental impact assessments for all projects worth $ 10 million or more.

The dark side, however, is that the IFC has often failed to obey its own rules in the past (see box). Last year, the World Bank Group’s Independent Evaluation Group (IEG) criticised the IFC standards for the lack of
– verification procedures,
– public disclosure of information and
– respect for community ownership.
According to the IEG, proper project evaluation is often impossible because evaluators do not get the data they need to assess environmental and social impacts.

New rules

This year, the IFC held consultations with civil society organisations, private sector companies and other actors on revising its standards. The new standards are due to take effect in 2012 and include a new information policy.

It remains to be seen to which extent the revised IFC policy guidelines serve to tackle the enforcement deficits of the past. The new sustainability rules, however, include some steps in the right direction. There is now a greater commitment to informing the public on the environmental and social impacts of individual projects, as well as on the activities of financial service providers.

Furthermore, the IFC has, for the first time, recognised the principle of “free prior and informed consent” (FPIC). This principle was established in the UN Declaration on the Rights of Indigenous Peoples in 2007. In the IFC context, though, it only applies to projects that immediately affect indigenous people, but not to those that have an indirect bearing on indigenous people’s land or resources. The IFC, more­over, is not required to disclose to which projects the FPIC principle applies.

In addition, the new guidelines are weak on protecting biodiversity and the environment in general. In contrast to the previous Performance Standard 6, the new rule allows IFC supported projects to have significant impacts on the habitat of endangered species (known as critical habitats) as long as it establishes an offset-plan at another location in order to compensate for the damage done to biodiversity. The problem is that a scientific controversy is raging on the off-set concept and there is little evidence to date that offset schemes actually work in practice.

Intermediaries and supply chains

The fact that the IFC currently channels 47 % of its lending through financial intermediaries is certainly problematic. Whether a given project is financed by the IFC directly or through a financial intermediary obviously has no bearing on its social and environmental impacts. But unlike the IFC, financial intermediaries have so far not been subject to effective information disclosure rules. This is now supposed to change to some extent. The new guidelines pay more attention to financial intermediaries, though the language remains vague.

The new guidelines also make reference to the supply chains for the projects that the IFC supports. For example, the IFC’s private sector clients are told to check whether their suppliers have significant impact on important habitats. If this is so, they are required to improve the situation or find other suppliers.

The new IFC guidelines also include a reference to human rights. Depending on the situation of individual IFC clients, a human rights assessment may be required for certain high risk projects. But the language remains vague and gives IFC clients a great deal of leeway.

Enforcing the rules effectively will be difficult because the language is frequently ambiguous. It is well known that the entire World Bank Group struggles to adhere to its own operational policies. The World Bank Group’s own internal evaluators, the Independent Evaluation Group (IEG), has a long track record of criticising various branches of the World Bank Group for paying too little attention to monitoring and assessing the activities it supports. Another contentious issue is that the IFC generally relies on its private sector clients to oversee its projects. Independent verification and adequate information thus are rare – and it remains to be seen to what extent that will change.

The IFC plays an important role in development matters. Responsible policymakers and the public must pay attention that its goals – reducing poverty and promoting sustainable development – will become reality and not remain only a good intention.