Impact Management | March 14, 2022

Listening to community voices to combat ‘impact washing’ and promote good governance

Margaux Day
Guest Author

Margaux Day

Many who worry about impact washing have touted better Impact Measurement & Management (“IMM”) practices as the solution. Until recently, however, IMM standards have omitted a fundamental good governance requirement: hearing from and being accountable to local communities. Fortunately, this is beginning to change. 

Over the past two years, IMM practices have begun to include communities’ voices. This nascent and growing community-informed IMM movement, if adhered to meaningfully and scaled, could make impact investments more sustainable and better assure investors, regulators, and the public that investment outcomes are living up to promised impacts.

Community accountability 

The people who bear the most risk for an investment’s environmental or social impacts might not be who you think. While investors expose themselves to certain financial, legal, and reputational risks if their money misses its mark, it is local communities, those living near and working at investment sites, who bear the most direct and immediate risk. Notably, too, given local communities’ proximity to an investment, they can be the first to know if an investment is off track. If they have a trusted channel to raise issues to investors, they will.

Take for example a biomass plant championed as a sustainable investment opportunity in Liberia. When rubber trees were cut down for biofuel, charcoal producers and farmers struggled to make a living. The biofuel company’s management demanded bribes, including sex, to work at the plant, the company committed rampant labor rights violations, including lack of adequate protective equipment, safety training, and medical care, and the plant itself contaminated community drinking water. While the investor could hardly claim the project was a success, given that its investee abruptly withdrew from the project, the most devastating impact was suffered by local communities.

Painfully, the Liberia case is not a singular example. International investments in a project aimed at increasing access to drinking water harmed Indigenous communities in India; a hydropower plant in Mexico aimed at producing sustainable electricity harmed individuals’ homes, water, and cultural resources; a transmission line aimed at connecting new hydroelectric sources to the national grid in Nepal harmed Indigenous communities; and an industrial park built as a part of earthquake relief harmed farmers in Haiti. All of these investments intended positive environmental or social impacts, yet were pursued at the expense of local communities.

In each of these cases, communities were able to access an investor’s accountability mechanism to raise environmental and social issues and seek redress. And in turn, investors learned of the negative impacts of their investments and had an opportunity to improve that particular investment and learn lessons for future ones. For most impact investments promoted by the private sector, however, no such mechanism to hear from communities exists. With the advent of new community-informed standards, however, this is beginning to change.

Good governance   

IMM standards are numerous and range from specific disclosures to high-level principles, but they largely attempt to achieve the same thing – accurate assessment of and reporting on an investment’s net impact on people and the planet. Community-informed IMM requires investors to put into place mechanisms to hear from communities and redress harm.

Until recently, impact measurement standards largely omitted community voice. While it’s true that the International Finance Corporation’s Operating Principles for Impact Management include an indirect reference to accountability mechanisms for investees in a footnote, and GIIN’s IRIS+ includes metrics related to stakeholder engagement and hearing grievances from employees, it is only within the past two years that IMM standards expressly state that investors should establish effective accountability mechanisms to hear from and address issues raised by local communities. Now, at least three major IMM frameworks acknowledge that establishing accountability mechanisms for communities is a tenet of good governance.

First, in 2020 and 2021, the United Nations Development Programme (UNDP) issued three sets of impact standards, for private equity funds, bond issuers, and enterprises, to track alignment with the UN Sustainable Development Goals. Grounded in high-level principles, the SDG Impact Standards aim to help organizations integrate sustainable development into their organizational systems, frameworks, and practices. Each set of standards includes an expectation for investors to establish, participate in, or implement “effective grievance and reparation mechanisms” for affected peoples. This work was supplemented by requirements for grievance and reparation mechanisms within the Impact Standards for Financing Sustainable Development, jointly created by the UNDP and the Organisation for Economic Cooperation and Development.

Second, and also in 2021, the Global Reporting Initiative (GRI) updated its Universal Standards on Material Topics for the purpose of improving the quality and consistency of disclosures related to “impacts on the economy, environment, and people.” These disclosures come into effect on January 1, 2023, and GRI Disclosures 3-1, 3-3(e)(1), and 2-25, require investors to not only report on the availability of grievance mechanisms, but also to describe how the mechanisms are designed and implemented to manage impact and facilitate remedy for unintended negative impact, as well as the actual use and effectiveness of the mechanism.

Third, the World Economic Forum and International Business Council’s Stakeholder Capitalism Metrics, published in 2020, also include grievance reporting as a metric. The Stakeholder Capitalism Metrics are based on a collection of existing standards and include a disclosure of the “[n]umber and type of grievances reported with associated impacts related to a salient human rights issue in the reporting period and an explanation on type of impacts.” The Metrics rely on the UN Guiding Principles on Business and Human Rights to define the criteria for an investor’s grievance redress mechanism to be considered “effective.” 

Closing the gap

The past two years have revealed a growing acceptance of something accountability advocates have long known – that sustainable investment requires hearing from communities and responding accordingly to respect their rights. Accountability mechanisms offer investors the opportunity to hear about unintended negative impact and demonstrate the sincerity of their commitment to positive environmental and social impact by responding to and rectifying issues raised. Standards that have yet to explicitly require accountability mechanisms, including the Global Impact Investing Network’s IRIS+ Metrics, the Sustainability Accounting Standards Board’s Standards, and those being explored by the recently created International Sustainability Standards Board, should include accountability mechanisms as governance indicators in their metrics.

Many impact investors still do not have mechanisms for hearing from and addressing issues raised by communities, which is a glaring governance gap. As impact measurement and management standards continue to recommend them, this gap can close.

Margaux Day is the policy director at Accountability Counsel.