Publish What You Fund’s DFI Transparency Initiative has completed its third research work stream (ESG and accountability to communities). The research report identifies a number of areas where the transparency of Development Finance Institutions (DFIs) could be improved. However we wanted to step back, out of the detail, to explore why more transparent and better risk management and accountability is in the best interest of DFIs themselves. Peter Woicke is the former CEO of the International Finance Corporation (IFC) and Managing Director of the World Bank from 1999 to 2005. He also spent nine years as a Board Member of AngloAmerican where he chaired the Safety and Sustainability Committee for five years. Peter and our CEO, Gary Forster, sat down to discuss our research findings.
GF: Peter, as a member of our Expert Working Group for this work stream you’ve already seen the findings. But before we discuss those, what is your opinion of how DFIs manage environmental, social and governance (ESG) and accountability to communities today?
PW: That’s a good question because the situation has evolved. When I first joined IFC after a career in the private sector I was really impressed by the scale and expertise of the ESG department. I remember telling the team that this was a real competitive advantage because these people could help us mitigate the risks we faced. My sense was that what IFC had was far beyond that that I had seen in the corporate world. However today I’m not so sure. My experience tells me that the private sector has now fully recognised that ESG risks are the main risks on large projects, understanding that today engineering risks for example can be calculated and managed. As such they have developed their expertise accordingly while my sense is that the DFIs have, over time, failed to keep up. I think this is reflected in your research – the fact that DFIs are unable to be transparent about how they manage some of these issues suggests to me that they aren’t necessarily doing such a great job of it behind the scenes.
“Put simply, it is in the DFIs own interests, as well as those of their investees, that ESG risks and community engagement are managed proficiently and transparently to protect their investments and the communities in which they take place.”
GF: One of the recurring topics in our research was the question of who is responsible for engaging with communities, and raising awareness of the presence of grievance mechanisms and Independent Accountability Mechanisms. Our research indicated that DFIs weren’t transparent about how this work was undertaken, and when challenged argued that this was the responsibility of the investees. Where do you think the responsibility lies here?
PW: As you’ll know I was part of the team that undertook the recent CAO (Compliance Advisor Ombudsman) review. Of course this focussed on IFC and MIGA but your research suggests that these practices are widespread. And what we found was that there was not enough training for the clients in terms of what the IFC’s standards mean and what the client has to do as a result. So it’s not just a question of responsibility, but also one of capacity. If DFIs were more transparent about not only the activities of their investees in engaging with communities, but also regarding the efforts that had been made to ensure the client was capable of meaningfully fulfilling its role, then I think the question of who is responsible matters less.
GF: Why does transparency around ESG and community engagement matter for DFIs?
PW: Firstly I think we need more transparency because this is such an important area. For both DFIs and private companies it is the ESG risks, when they are inadequately managed, that are causing delays in project implementation, added costs, overruns and in some cases project shut downs. I’ve seen first-hand projects that took five years longer than planned to get their environmental permits because the process wasn’t managed well. I’ve seen long running projects caught up in compliance and investigation leading to costly compensation for issues which could have been addressed from the outset. And given the inter-connectedness of our world, the means that affected communities now have to challenge and seek compensation when their issues are not taken into account. I truly believe that we’re reaching a tipping point whereby DFI projects will not only undermine their own developmental mandates, but will become financially unviable if we don’t get on top of these issues. Given those two potential impacts I think all stakeholders have a right to see how ESG and community engagement are being managed and therefore we need greater transparency. There’s also one other aspect – increasing transparency will also help increase standards. This is not only important for the DFIs but also for the investee companies. If we want to help develop professional, responsible, competitive private sector companies in these countries we need to get these basics right and hold them to the right standards. Transparency will illustrate which DFIs are doing that versus those who are simply lending capital.
GF: During our research we heard from a number of DFIs that increasing transparency around these issues and how they are managed would add cost, increase red tape, and ultimately could make the institutions less competitive. How do you respond?
PW: Firstly I’m not sure how we can avoid greater transparency. These issues are so important, indeed critical for the success of these projects, that all stakeholders should have sight of how they are being addressed. There will be extra costs that are incurred as a result of undertaking or reporting on these kind of activities, but these will be insignificant compared to the scale of the costs incurred when years down the line issues arise which require investigation and compensation. Put simply, it is in the DFIs own interests, as well as those of their investees, that ESG risks and community engagement are managed proficiently and transparently to protect their investments and the communities in which they take place. And if commercial confidentiality is used as a blanket reason for non-disclosure of such information then we need to challenge that, it’s not acceptable, we should be seeing blanket disclosure with piece-meal redactions.