Owning the Outcomes: Time to make the World Bank Group's financial intermediary investments more accountable

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Over the past six years, the International Finance Corporation has channelled over $50bn to the financial sector, and its long-term investments in financial intermediaries such as commercial banks and private equity funds have dramatically risen by 45 percent over that same period. However, the evidence continues to grow that this private sector arm of the World Bank Group has little control over how a great deal of this money is spent. This lack of accountability is having devastating impacts on many poor communities. The IFC must start taking more responsibility for these outcomes and ensure that its investments are benefitting, rather than harming people and the environment.
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  OXFAM BRIEFING NOTE OCTOBER 2016  A woman washes clothes at a drinking water source that is next to a toxic ash-pond from the Sasan project in Singrauli. Photo: Joe Athialy. OWNING THE OUTCOMES Time to make the World Bank Group’s financial intermediary investments more accountable Over the past six years, the International Finance Corporation has channelled over $50bn to the financial sector, and its long-term investments in financial intermediaries such as commercial banks and private equity funds have dramatically risen by 45 percent over that same period. However, the evidence continues to grow that this private sector arm of the World Bank Group has little control over how a great deal of this money is spent. This lack of accountability is having devastating impacts on many poor communities. The IFC must start taking more responsibility for these outcomes and ensure that its investments are benefitting, rather than harming people and the environment.  SUMMARY Over the past six years, the International Finance Corporation (IFC), the World Bank Group’s private-sector arm, has dramatically increased its funding to the financial sector. Between fiscal years (FY) 2010 and 2015 the IFC channelled over $50bn into this sector, and over $8bn in 2015 alone. Looking at long-term investments in financial intermediaries (FIs) such as commercial banks and private equity funds, the IFC has increased its investments by 45 percent between FY2010 and FY2015. Those types of investments made up approximately 50 percent of the IFC’s FY2015 long-term commitments. Yet, while these investments in financial institutions continue to grow, there is mounting evidence that the IFC has little control over how a great deal of this money is spent. This lack of accountability has had, and continues to have, devastating implications for many poor communities. Our research suggests that despite progress in the past few years, the IFC is not taking a firm enough approach to its financial-sector investments. This briefing paper challenges five arguments that the IFC has put forward to justify limiting its responsibility for the environmental and social risks and impacts of these investments. The paper looks at: ã  the IFC’s responsibility for outcomes of its commercial bank client sub-projects; ã  disclosure of information in the financial sector; ã  the concept of ‘ring fencing’ investments, employing IFC’s links to Peru’s Tia Maria copper mine as a case in point; ã  the argument that the IFC cannot be responsible for projects that were approved by its FI clients before the IFC’s financial relationship with the FI began, where we highlight IFC’s investments in financial intermediaries in Vietnam and India which have on-lent to highly risky projects in those countries’ energy sectors; ã  the argument that the system is working since the 2012 Performance Standards were adopted, taking the examples of IFC’s links through financial intermediaries to coal projects in both Bangladesh and the Philippines. There can be no more excuses. In a context where the global community, including the WBG, has come together to commit to climate action and the Sustainable Development Goals, all must play their part. Not least are those international financial institutions with a mandate for reducing poverty. That mandate must not be limited to direct investments but must also extend to the investments the WBG makes possible through its investments in financial intermediaries. The IFC must ensure that its financial-sector investments fight poverty and promote sustainable development, while doing no harm to people and the environment. The whole institution must take a leadership role in bringing about stronger environmental, social, and human rights accountability in global finance. 2  We present eight recommendations that we believe will help the IFC move toward a more meaningful and constructive role in improving environmental, social, and human rights accountability in the financial sector: 1. Regular supervision of FI sub-projects, including commercial bank sub-projects, particularly in high-risk sectors. 2. Individual appraisal, categorization, disclosure, and monitoring of all higher-risk sub-projects of FI clients. 3. Requiring all of its FI clients, as a condition of IFC’s investment, to adopt a human rights policy that is aligned with the United Nations Guiding Principles on Business and Human Rights. 4. Public disclosure of higher risk FI sub-clients and their projects (requires FI to obtain consent of client). 5. Public disclosure of how the IFC monitors and tracks development impact from FI investments and ensuring that FI clients use IFC financing for the intended purposes and not for other projects. 6. Making remedying of harms in a prospective FI client’s existing portfolio a condition for IFC’s investment. 7. Actively ensuring FI sub-project affected communities have access to redress, including through the CAO. 8. Scaling down its FI portfolio to a level commensurate with its own capacity to ensure FI sub-projects comply with the Performance Standards. 3  1 INTRODUCTION Picture a situation in which a development institution is channelling money through commercial banks and other financial intermediaries with the rationale that this money is helping to promote access to finance, particularly for small and medium-sized enterprises. Only it turns out that this institution actually has little control over the way in which much of its money is spent by the FIs. In fact, research shows that several of these FIs have gone on to invest in projects that have had, and continue to have, devastating implications for many poor communities. Who bears responsibility for the outcomes suffered as a result of this financial chain? This paper argues that the International Finance Corporation (IFC) – the development institution in this case – must be responsible and accountable for the outcomes, alongside its financial-sector clients. This is particularly relevant given the IFC’s position as a branch of the World Bank Group, whose stated goals are to end extreme poverty and promote shared prosperity. The IFC’s mandate is to boost development in low- and middle-income countries by providing loans, equity, and advisory services to the private sector. However, over the past decade, there has been a dramatic departure from direct financing of businesses in developing countries by the IFC and other international financial institutions. Increasingly, development funds are being channeled through third parties, including commercial banks, private equity and hedge funds, and insurance companies. Today this is the predominant financing model of the IFC, with over $50bn channelled into this sector between fiscal years (FY) 2010 and 2015, and over $8bn in FY2015 alone. 1  Looking at long-term investments in financial intermediaries such as commercial banks and private equity funds, the IFC has increased its investments by 45 percent between FY2010 and FY2015. Those types of investments made up approximately 50 percent of the IFC’s long term commitments in FY2015 (this figure excludes short-term trade finance which would increase the percentage significantly). 2   4
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