This week marks the close of the third and final public consultation period for the review of the International Finance Corporation’s (IFC) Sustainability Framework. The policies, standards, and guidance notes in the Framework set expectations on social and environmental performance for the financial institutions and companies who receive funds from the IFC (the private sector investment arm of the World Bank Group).
You might not think that a “policy review” is the most exciting of events, but the 18-month process that has unfolded is nothing short of extraordinary. More than 3,000 people around the globe—from companies to NGOs to affected communities—engaged in intensive in-person and online discussion on how a financial institution can best evaluate ESG risks and opportunities associated with its investments; drive proactive assessment and effective management of project impacts by client companies; and make transparent the net development outcomes of these projects.
The outcomes of the review will have implications far beyond the IFC’s direct clients. The original Framework in 2006 revolutionized the financial sector’s approach to ESG risks and oversight through widespread adoption of the Equator Principles (EP)—which are based on the Framework—by private financial institutions, public development finance institutions, and export credit agencies. Over 70 percent of investments in emerging markets have been made under the EPs. And proposed changes break new ground in evaluating inherent risks tied to specific sectors and geography—and in a wide range of products beyond project finance, such as equity and corporate loans.
The framework also represents a key reference point for stakeholder expectations and for companies striving to improve performance. Indeed, part of the impetus for the review lay in the desire to better reflect evolving best practice, lessons learned on the ground, and address emerging issues.
The review process hasn’t been without debate and controversy. Particularly contentious topics have included:
- Integration of specific language and due diligence requirements around human rights. The IFC has sought alignment with Ruggie’s Protect, Respect, Remedy Framework, analyzing how the current standards fare in supporting respect for human rights. But some civil society organizations are demanding a clearer statement from the IFC around not supporting activities that may cause or contribute to human rights abuses, mandatory (rather than voluntary) human rights assessments, greater disclosure of human rights risks in the portfolios of financial institutions receiving funding, and alignment of grievance mechanism requirements with the principles based on Ruggie's framework.
- Rights to water and challenges in measuring biodiversity and ecosystems services. Proposed changes increase the emphasis on efficient use of resources—including water—and ensuring use does not adversely impact the needs of others. However, some actors have called for mandatory assessment of impacts on the right to water and assurance that this right is respected in practice. Practical challenges to assessing these impacts—and broader effects on biodiversity and ecosystems services—are raising critical implementation questions.
- Requiring free, prior, and informed consent. The idea that companies should seek the free, prior, and informed consent of indigenous peoples before conducting business that will affect them has been endorsed by the UN and other financial institutions. Yet, what “consent” looks like and how to obtain it is ill defined. Civil society has been particularly critical of the proposal to apply the principle only in a narrow set of circumstances.
Early next week I’ll explore the implications of the proposed policy changes in more detail as the IFC turns to the challenge of finalizing and submitting the revised framework for board approval and implementation.