ImpactAlpha, April 22 – The International Finance Corp.’s new Operating Principles for Impact Management provide the field with guidelines for managing positive and negative impact throughout the lifecycle of an investment.
But they don’t yet provide the tools to implement those guidelines. As it happens, the IFC itself houses such a tool, a state-of-the-art accountability office to receive direct community feedback about IFC investments, known as the Compliance Advisor Ombudsman, or CAO.
Investors need to take note of such models and take the initiative, to create their own community feedback tools to hear about and address harm from their investments.
The IFC’s operating principles take an important step by recognizing the need to “assess, address, monitor, and manage the potential risks of negative effects of each investment.” Among the 60 “first adopters” were Acumen Capital Partners, TPG Growth’s Rise Fund, and UBS.
The IFC is uniquely positioned to provide these impact investors with a specific tool to promote “learning and accountability.” The IFC is grappling with how to integrate the CAO’s work as part of its organizational accountability framework. Impact investors don’t need to wait for IFC’s signal.
Foundations, individuals, and institutional investors can share the costs and benefits of creation of community feedback tools without having to share the same impact goals, due diligence standards, or operational methods. Investors just need to be willing to learn from and respond to the people they seek to benefit, and who have the most to lose when they are not heard.
Even with careful planning, investments can cause unanticipated harm to communities and expense to investors. Examples of impact investments that can harm people and places, and undermine investors’ impact goals include large-scale renewables projects and for-profit schools.
The harm from such specific projects and ventures is itself enough reason to create accountability frameworks. Additionally, these types of harm pose a larger risk to the field of impact investing more broadly as well. If even a small number of impact investments are seen to harm rather than help communities, this perception jeopardizes the field’s ability to mature and achieve positive social and environmental goals.
As the impact investing field aspires to scale and increasingly invest in vulnerable communities and fragile environments, including Opportunity Zones, the time is ripe to ensure that investors have the tools they need to meaningfully engage with the communities that their investments impact.
The converse is also true: investors using a community-centered approach that plans for and addresses potential adverse impacts not only protect themselves from the threat of conflict and stalled or failed operations, but can also burnish their reputation as ethical actors, attracting business from customers in search of the industry’s most respected players. And they can better attain actual positive impact by avoiding or remedying the harm.
How do these community-driven accountability tools, like the CAO, actually work? There are now dozens of them, most of them tied to multilateral and bilateral financial institutions. Another forty-some are tied to the Organisation for Economic Co-operation and Development, or OECD. For decades, they have been used to address grievances involving the unintended harmful social and environmental consequences of investments on local community members.
These mechanisms can often provide an affordable, relatively fast, and fair platform for communities to raise grievances to investors, and for relevant parties to resolve disputes and remedy harm. They employ two main tools: professional mediation and independent fact-finding.
Companies and institutions tell us the tools can also be effective for capturing data about harm and providing stakeholders with skills for consultation and dialogue, and we’ve seen the results in our support to communities. In Mongolia, we taught nomadic camel herders how to engage one of the world’s largest copper mines, which was backed by the IFC and the World Bank, and vice versa. The negotiations produced dozens of agreements covering water use, livelihood support and compensation.
These lessons learned allow operators and investors to address risks proactively and prevent harm from escalating, leading to better investment outcomes and sustainable benefits for local communities.
In Haiti recently, we supported a mediation made possible by just such a community feedback tool. We worked successfully to bring together farmers who were harmed by investment in a textile factory, a development bank that financed the factory, and government representatives. This process resulted in an agreement to remedy the harm and restore lost livelihoods. Only because of its community feedback tool was the development bank able to hear directly from the community, use a predictable and fair process to evaluate the grievance, and resolve the dispute.
Despite these benefits, philanthropic or private sector impact investors have yet to establish community-driven accountability tools of the kind that have proven critical to addressing social and environmental harm in development finance.
Communities around the world and their advocates are calling on the IFC’s first adopters and the wider impact investing community to act. Accountability Counsel is offering impact investors a vision of what a fit-for-purpose community feedback tool could look like in policy and practice.
Foundations committed to accountability, feedback, and with impact investment portfolios are a natural group of leaders to establish the field’s first community feedback tools. Each institution need not create its own accountability office. Rather, they can collaborate, as they already do with policy and impact measurement. Elements of such collaboration might include:
Single point of contact. Institutions can identify a single point of contact where a person who believes he or she is harmed by an investment of the collective can file a grievance, receive a response, and – through mediation or fact-finding efforts – find a remedy.
Reserve fund. Investors could set aside a reserve fund to provide the needed response.
Engagement guidance. Lessons learned can be shared across the industry to improve community engagement practices, due diligence, and impact objectives.
Shared service. The U.S. Impact Investing Alliance, perhaps with the participation of its partners in other networks like the Global Impact Investing Network, Mission Investors Exchange and the Intentional Endowments Network, could be a highly efficient place from which to provide such an accountability service.
We have spent the past year engaging with leaders in the field to explore how to make this vision a reality. We have participated in conferences, meetings, seminars, workshops, and with academic institutions like Stanford, to educate impact investors to understand possible harm from their investments, and to start thinking about what accountability frameworks would look like.
We are circling back with the investors who have been part of our conversations about why this matters and how to overcome potential obstacles. We’ll be supporting first movers with technical policy advice to pilot community feedback tools and make the most of them. We look forward to celebrating the resulting learning, accountability, and better net impact.
Kindra Mohr serves as Accountability Counsel’s policy director.