Lend no evil

By Kris Genovese, Senior Attorney
By Kris Genovese, Senior Attorney

It’s a truism in environmentalism that the farther you are from the impact of your action, the less you know and, for the most part, the less you care.  That’s just what the International Finance Corporation (IFC)—the private sector lending arm of the World Bank—has done through its investments in so-called financial intermediaries (FIs).  A financial intermediary can be a commercial bank, private equity fund, microfinance institution, or insurance company.  So, basically, the IFC lends money to other banks who, in turn, lend it to…

Well, that’s the $20 billion question.  We don’t know whom the FIs lend to or what the impacts of that lending are.  And, as a 60-page audit released this week shows, neither does the IFC. 

I’m not using $20 billion rhetorically here because that’s the amount that the IFC has invested in the financial sector.  That’s nearly half of the IFC’s portfolio.  The audit, conducted by the Compliance Advisor Ombudsman(CAO)—the IFC’s independent accountability mechanism—found that the IFC has no way of knowing whether nearly half of its investments are causing harm to communities and the environment.

The fly in the ointment is that the IFC only focuses on the environmental and social management system that the FI has in place and not on the outcomes of that system.  The key, it turns out, is what you’re managing for and what you’re trying to protect, your profits or communities and the environment.

Here’s a great example from the audit.  Imagine you’re an FI with money from the IFC and your client is a polluting factory.  The pollution presents a clear risk to the surrounding communities and the environment.  It also presents a risk to your bottom line if the factory is fined or shuttered and unable to repay the loan.  What do you do?

If you said, stop the pollution, you’d be wrong.  This is the answer from the CAO’s audit: “An IFC client staff acknowledged that a polluting subclient could be considered an acceptable credit risk because it has provided good collateral or because the loan is short term and the pollution will occur later in the client’s production cycle.”

How does the IFC respond to the shocking finding that it cannot guarantee that nearly half of its portfolio is not causing harm to communities and the environment?Stormtroopers-no-evil

In all seriousness, the IFC’s response to the CAO’s audit is shameful given the significance of the findings and the profound questions it raises about the IFC’s policy model.  The seven-page response (which it took the IFC almost four months to write) asserts, without justification, that the best response to the CAO’s findings is business as usual.  The response ignores, mischaracterizes or takes out of context the CAO’s findings.   Perhaps most egregiously it highlights the CAO’s finding that 90% of IFC’s investments in FIs complies with its policies without acknowledging that the policies themselves are fundamentally and fatally flawed, leaving communities and the environment vulnerable to harm.

We deserve better and, more importantly, the communities affected by IFC’s investments deserve better.  It’s time the IFC stop thinking about what’s best for its clients and start thinking about the people who it’s supposed to be helping lift out of poverty.

Read the key findings and links to the full audit and IFC’s inadequate response here.

Originally posted on February 8, 2013.