IFC reviews safeguards

November 01, 2005

The International Finance Corporation, the private sector arm of the World Bank Group, in September put the drafts of its Policy and Performance Standards on Social and Environmental Sustainability into the public domain for a final round of consultation, beginning a 60-day window for final comments before they are put to the board of directors for consideration in January.

The performance standards – the rules that borrowers and other companies benefiting from IFC funds must follow in completing development projects – relate to areas such as community health and safety, labour and working conditions, pollution prevention, biodiversity and processes such as management systems and integrated social and environmental assessments. The impact of the review is far-reaching in terms of private finance since IFC standards serve as a benchmark for regional banks, banks subscribing to the Equator Principles, export credit agencies and private companies.

The review has not been without controversy. Leading NGOs have criticised the IFC for failing to integrate internationally recognised environmental, labour and human rights standards and for weak implementation of past guidelines. Meanwhile some NGOs have stated publicly that they have boycotted the public consultation. Rachel Kyte, Director of the Environment and Social Development Department, talks us through the consultation.

Briefing: Why should companies here in the UK, particularly corporate responsibility practitioners, be interested in the review of the IFC’s safeguard policies?

Rachel Kyte: These policies became an important benchmark for other financial institutions lending into the private sector and these became the founding basis of the Equator Principles in 2003 – now subscribed to by 34 financial institutions and covering in excess of 85% of project finance in developing countries.

The world has moved very fast and very far in a decade in understanding what the environmental and social risks are for companies and how to avoid, mitigate and manage those risks. But even more than that, the world has understood a lot more about the opportunities that come from well-managed private sector investment?The performance standards have to meet our needs, as a development institution making sound investments that are financially profitable, environmentally safe and socially positive, and to speak to the leadership we are increasingly seeing from the private sector around the world. In the 1990s, ‘command and control’ was very much the approach? increasingly the evidence is now pointing to a full integration of environmental and social issues into business operations. We’re really trying to embrace ‘triple bottom line’ in a policy framework. They address issues of risk for the private sector that haven’t been addressed before – so we’re providing a framework – we hope at least 34 Equator institutions will follow us, although we also hope many other financial institutions will also use them. This means capital that’s accessible to many private companies around the world will have the same quality benchmark and that’s the benchmark put in place by us.

Briefing: If the private sector has made such progress then why does it need this framework. Aren’t private companies becoming leaders by themselves?

RK: We’ve developed this framework for our operations that are exclusively operating in emerging markets. A vast majority of our businesses are national companies; smaller companies seeking to do business in a very global market. In 2003, when the Equator Principles came into place, what was happening within the banking industry was a realisation that continued environmental and social reputational risk events were having an impact on the industry as a whole. While competition on banking business made sense, to compete on social and environmental issues simply didn’t from the perspective of the health of the industry. What’s quite amazing about the Equator Principles is the degree of cooperation, consultation and discussion that’s been promoted on how best to mitigate these risks to their own business and their clients. Banks have now moved from simply seeing this as a way to prevent a reputational event to a way to now really trying to compete on being the leading bank in understanding sustainability issues, Certainly ABN Amro, HSBC and others have been very competitive in their pitching to clients in what they can bring in terms of understanding the social and environmental aspects of their business.

Briefing: Why will the ‘outcomes-based’ approach lead to more sustainable project finance?

RK: We can write excellent policy, we can have really fancy policy documents and we can have excellent environmental assessments, but unless the result of those assessments and the agreement between the lender and the lendee about what is going to be done in terms of avoidance and mitigation is integrated into the operational business on a day-to-day basis, you don’t achieve the results on the ground. We want to make sure we can see eye to eye with our clients, in the process of project preparation and investment, so that we have the same, shared view of what we want to achieve.

Briefing: Does this lead to better community engagement?

RK: The focus in the past has been consulting with the community in the process of project preparation so that you can get approval for the project and it can go ahead. The emphasis is now on building a sustainable and meaningful engagement with communities over the life of the project, through preparation and identification of risks and then consulting with the community over time. After all, communities change – a community that might be in situ when the project starts may not be the same community at the end of the project. There might be migration and there might be a change in status. There is a change of emphasis to engagement ‘from cradle to grave’.

Briefing: There has been a fair amount of opposition to the performance standards from some NGOs, namely the Bretton Woods Project, which in April said they fail to integrate internationally recognised environmental, labour and human rights standards and result in fewer protections for local communities, indigenous peoples and the environment. What’s your response to this?

RK: At that point they were referring to a previous draft. Since then we’ve discussed with NGOs their concerns around these issues. In the draft that’s out for public comment now, reference to environmental treaties and certain international labour standards are more explicit. The content was there before, but the explicit reference wasn’t.

Briefing: There still seems to be quite a lot of objections, especially from Friends of the Earth which says these new policies do not actually help implementation. They call them “feeble” with the policies being “regularly violated.” What is your response to those kind of comments?

RK: I’m unaware of that comment. These performance standards are clearer, they are more comprehensive, they address issues that have never been addressed before, and they will put in place standards that no other international financial institutions have. They will cover labour standards in a much broader sense than we have ever covered them before. They move standards into the realm of community health and safety.

There is community engagement over the life of the project. We have an expanded approach to bio-diversity and a much more thorough one. We have integrated environmental and social assessments and I could go on… I think the final draft we’ve put in the public domain is eminently stronger, is clearer and more comprehensive and is clearly tailored to doing business as a development institution with private companies. There are limits to the roles and responsibilities of the private sector; we have tried to make it more explicit how companies think about these things. These are far more robust than anything we’ve ever had in place before.

Briefing: A number of NGOs have decided to boycott the consultation since they object to the use of ‘public’ money for private financing. One of their biggest objections is they say that in practice these safeguard policies aren’t mandatory. Is this the case?

RK: These performance standards will apply to every aspect of our business not just project finance, but corporate finance, equity investment and investment through intermediaries. The standards will apply to every aspect of our business – they will be part of the loan agreement. That has never been in doubt. Stepping back a little bit – we’re making these safeguard agreements stronger and more robust because we believe it is good for us as a development institution, it’s good for our clients and we think we have evidence of that. We have moved into a position of leadership on environmental and social sustainability with considerable investment of our time and innovation on how to do this. This is not just some add-on, environmental and social policy that it’s nice to have. It’s good business and it’s good development.

Corporate Citizenship Briefing, issue no: 84 – November, 2005