Impact Management | December 3, 2020

What we learned about the state of impact accountability from 74 investors

Margaux Day
Guest Author

Margaux Day

The International Finance Corp.’s Operating Principles for Impact Management take a step to protect against impact-washing by requiring disclosures and verification. Genuine accountability requires more. 

The Impact Principles lack a basic governance element that is required to ensure accountability for unintended impacts: an accountability mechanism. Accountability mechanisms differ from traditional risk assessment tools in that they provide an avenue for individuals who self-identify as negatively impacted by investments to raise an issue to the investment decision-makers and participate in a non-judicial process to address the issue. 

The IFC’s Neil Gregory recently provided ImpactAlpha readers an update on the public disclosures of signatories to IFC’s Impact Principles (see, “What the IFC learned about the state of impact management from 62 investors). The Impact Principles, which provide a framework to ensure that impact considerations are integrated throughout the investment life cycle, require signatories to disclose their alignment with the Principles and subject themselves to independent verification. 

Mr. Gregory’s point is well-taken “that these disclosure statements – and the accountability and transparency they provide – will make important contributions to this learning process.” In fact, the disclosure statements confirm that further accountability is required.

Redress mechanisms

Accountability mechanisms are common-place in development finance and have proven their worth for impact investments more broadly. Indeed, IFC has one of the world’s first and best accountability mechanisms in house, the Compliance Advisor Ombudsman. 

Accountability mechanisms are critical impact tools for investors for two reasons: First, they offer the people who bear the most risk from investments — namely communities living near or working at investment sites — an opportunity to protect their rights and environment.

Second, they help ensure successful investments in that they provide investors with a way to learn of and address potential negative impacts before they drive an investment materially off course. While all investors should recognize these benefits, impact investors who seek to solve some of the world’s most challenging problems should in particular understand how critical it is that money hits its mark and doesn’t end up unwittingly undermining investment goals. 

Experience shows that accountability mechanisms enable this visibility on individual investments, and their body of work can inform more responsible investment writ large.

At Accountability Counsel, we have worked with communities who identified environmental and social risks of projects billed as impact investments and were able to notify investors through accountability mechanisms: A hydropower project in Mexico intended to provide renewable energy, but resulted in illegal land acquisition and the endangerment of local villages’ water supply and the safety of an adjacent dam curtain; a conservation project in Myanmar intended to preserve diverse ecosystems, but instead risked environmental harm and violating Indigenous communities’ and refugees’ land rights and terms of a ceasefire agreement in place for the region. 

For those two projects, communities had access to accountability mechanisms to raise concerns to investors and seek redress. Had those accountability mechanisms not existed, investors would not have received notice of the negative impacts, nor would they have had an effective process for addressing them. Seeing this type of learning for impact investors drove us to create the Accountability Console, a database impact investors can use to improve ESG due diligence, now with 1,400 cases of community-driven complaint data allowing new ways to understand risk from investments.  

Because accountability mechanisms are so critical, at the time the Principles were being drafted, we advised the IFC that, in addition to disclosures and verification, the Impact Principles should include accountability mechanisms. The Impact Principles did not adopt our recommendation explicitly and instead reference “good international industry practice,” which is further defined in a footnote to Principle 5 as including the UN Guiding Principles on Business and Human Rights and the IFC Performance Standards. Both of those documents contain requirements for creating accountability mechanisms.

With the indirect reference to accountability mechanisms buried in a footnote, we did not expect signatories to interpret the Impact Principles as requiring adoption of and reporting on accountability mechanisms. 

Public disclosure

We analyzed 74 of the public disclosures, and they reinforce this assumption; only three signatories explicitly mention having accountability mechanisms, and one other references an external complaints process. Notably, the IFC itself does not disclose the existence of its best-in-class accountability mechanism, the Compliance Advisor Ombudsman.

As soon as an opportunity to amend or provide further guidance on the Impact Principles arises, the IFC should either state explicitly that accountability mechanisms are a hallmark of “good international industry practice” that should be reflected in disclosures, or the IFC should offer a shared mechanism for each signatory to use. This would be in keeping with the “emerging best practice” on which the Impact Principles are based. Mr. Gregory notes that “the SDGs have become the primary reference point for social and environmental impact.” The UNDP has recently published guidance for investors seeking to adhere to the SDGs that squarely recommend adoption of an accountability mechanism as an element of best practice. That’s the natural next step for the IFC.  

At a time when so many are focused on transparency, accountability, and how financial flows can invest in the future we want, it’s an important moment to commit to accountability mechanisms in impact investing. Hearing from communities makes investments more sustainable and benefits investors and their impact goals. 

For the Impact Principles to be meaningful to the very people they matter to the most, leadership showing accountability mechanisms as part of the “G” in environmental and social governance must be next.

Margaux Day is policy director of Accountability Counsel. Accountability Counsel amplifies the voices of communities around the world to protect their human rights and environment.