15 April 2020

World Bank and IFC Agree to Landmark Accountability and Transparency Reforms

The World Bank Group (WBG) recently agreed to reforms to improve its accountability, transparency, respect for human rights, and environmental, social, and governance risk management. These wide-ranging commitments are the result of successful negotiations with the U.S. House Financial Services Committee to include a $5.5 billion capital increase for the WBG’s private sector arm, the International Finance Corporation (IFC), in COVID-19 stimulus legislation. On April 8, 2020, House Financial Services Committee Chairwoman Maxine Waters announced the agreement, which is memorialized in a letter from World Bank President David Malpass to the U.S. Treasury Secretary Steven Mnuchin.

As advocates for communities impacted by WBG activities, we applaud these reforms and the strong leadership from Chairwoman Waters that enabled this significant step forward. Two sets of these commitments – those related to the bank’s private sector accountability and the transparency of its lending – will be particularly consequential for the communities we serve.

Support for the Effectiveness and Independence of the Compliance Advisor Ombudsman

The recent commitments signify a step forward for the accountability office of the IFC and Multilateral Investment Guarantee Agency (MIGA), known as the Compliance Advisor Ombudsman (CAO). The CAO is vital to ensuring that the WBG’s private sector projects adhere to social and environmental standards, respect the rights of local communities, and address adverse impacts. In his letter memorializing the reforms, President Malpass committed to ensuring that the CAO is “robust, responsive, and independent” to effectively address grievances from communities impacted by IFC and MIGA financing and, “where appropriate, to provide remedy to those who are harmed.”

Malpass’ affirmation of the importance of the CAO’s mission and mandate is particularly consequential given its context: an ongoing review of the environmental and social accountability at the IFC and MIGA, which includes an assessment of the CAO’s role and effectiveness. Accountability reviews like this are the principal time when changes, large and small, can be made to the CAO. While this process presents an opportunity for needed improvements and innovation, it also opens the door for backtracking, with significant ramifications for communities around the world. Thus, a commitment to accountability at this time holds weight.

To make Malpass’ words meaningful during the review, a robust, inclusive review process is needed to enable the accountability framework for the IFC and MIGA to benefit from the experience of communities and civil society. The recent commitments also indicate progress on this front. Mr. Malpass relayed that he has “instructed IFC staff to participate fully” in the ongoing review, and he will work to ensure a more transparent and open process that encourages civil society engagement as the WBG Board of Directors consider a report drafted by the external experts conducting the review. In addition to requesting that representatives of the IFC and CAO jointly instruct the external review panel on their common positions of agreement, the WBG President committed to use his status as Chair of the Board to champion public disclosure of the external report and public consultation on any “subsequent reform proposals of the Board.” This is a welcomed change from the lack of transparency and participation in the recently concluded review of the WBG’s public-sector accountability office, the Inspection Panel.

Based on Accountability Counsel’s experience assisting communities who have brought complaints to the CAO, we have put forward substantive recommendations to make the IFC and MIGA’s accountability framework, including the CAO, more effective and seek for these recommendations to be incorporated through the external review process. We welcome President Malpass’s commitment to enhanced transparency and consultation for the review process, which we and several of our partners have been calling for to ensure that the very individuals and communities who need to use the office can contribute to its reforms. This new approach will be an opportunity for the WBG to demonstrate good-faith engagement on the substantive accountability issues.

Critical to an accountability office’s effectiveness is its independence from bank management’s control, a safeguard shored up by an independent accountability head. In this regard, President Malpass committed to a “transparent and participatory” selection process for the next CAO Vice President, who will play a key role in ushering in any changes resulting from the review. His commitment assures that he will continue the practice of relying on an independent selection process led by civil society, industry and academia. We applaud the commitment securing the independence of the CAO VP as a crucial step to ensure that the accountability office remains a legitimate avenue for communities harmed by WBG activities seeking accountability and redress.

Increased Transparency for Financial Intermediaries

Another important advance in these reforms is increased transparency around the IFC’s financial intermediary lending. There has been an alarming recent trend of the IFC increasingly lending to “intermediary” institutions – such as commercial banks, private equity funds, and hedge funds – that then use IFC funds to finance projects. This practice has resulted in limited visibility of the ultimate recipients of IFC money, which in turn restricts communities’ ability to seek accountability.

In his letter, President Malpass commits to improving the “transparency of new Financial Intermediary (FI) projects.” FIs that receive certain types of IFC investments must now annually “report the name, location by city, and sector for sub projects funded by the proceeds from IFC’s [investments].” FIs may not avoid the new disclosure requirements without providing a “specific legal reference” to applicable domestic legal restrictions. Further, the IFC will publish the disclosed FI information along with a summary of their Environmental and Social Management Systems on the IFC project disclosure portal.

Communities whom Accountability Counsel supports have seen first-hand the harms caused by the limited visibility around financial intermediaries. For instance, the lack of transparency regarding the financial intermediaries who received financing from the IFC for a coal plant in Lamu, Kenya, created an accountability gap that resulted in the communities’ complaint to the CAO being deemed ineligible. If implemented well, the new commitments to increased transparency will enhance communities’ ability to understand who is financing FI projects, which in turn provides them an avenue to inform and seek accountability for projects affecting them.

Why These Reforms Matter

Communities who are impacted by WBG projects stand to benefit from all of the sweeping reforms, and in particular the ones related to the CAO and financial intermediaries. Individuals whose environmental and social rights are violated by private sector WBG projects rely on the CAO for accountability. A more “robust, responsive, and independent” CAO means stronger protections of communities’ rights. Increased transparency of projects involving financial intermediaries provides communities with a more accurate understanding of the projects that affect them and of their accountability options. Moving forward, we will continue to work with partners to ensure that the WBG robustly implements these reforms, to the benefit of communities around the world.