Why IFC’s Practice Of Irresponsibly Exiting Projects Must Stop
In our line of work, we too often see the devastating consequences of development finance institutions evading responsibility for the negative impacts of their investments. And yet, data in a new report showing how frequently the International Finance Corporation (IFC), the private-sector lending arm of the World Bank Group, and its clients abandon investments when communities harmed by those investments demand accountability is especially alarming. At the same time that the IFC’s own policy commits “to ensuring that the costs of economic development do not fall disproportionately on those who are poor or vulnerable,” the institution cuts ties with projects after local communities are brave enough to raise issues. Now that this poor practice is unveiled, the IFC should change course and finally commit to responsibly exiting investments.
CAO Report Finds IFC Exits Projects Without Addressing Negative & Impacts
The report, issued by the Compliance Advisor Ombudsman (CAO) of the IFC and titled “Responsible Exit: Insights from CAO Cases,” reveals not only the alarming rate at which the IFC and its clients exit investments subject to the IFC’s accountability process but also the institution’s unpreparedness to address the environmental and social harm caused by early exits. The report discloses a staggering statistic: Over the last decade, the IFC and its clients expedited exits in 41% of the debt investments subject to complaints filed with its accountability mechanism, the CAO, all while the complaint process was ongoing. The majority of these exits (88%) were categorized as “early exits,” where the investment relationship ended before the loan reached maturity through client prepayment or the IFC canceling and exiting the loan.
The report further reveals that despite the IFC regularly exiting projects mid-accountability process, it lacks a systematic approach to addressing harm and ensuring a projects’ sustainability before exit. The IFC does not have procedures mandating project teams to conduct an analysis of environmental and social risks when making an exit decision. The IFC does not consistently include operational assurances covering environmental and social obligations in its loan agreements or include environmental and social requirements as a disbursement condition. The IFC does not even consistently record reasons for exiting investments, although 30% of projects linked to CAO complaints cited environmental and social issues as a reason for the early exit, and 23% cited the CAO process itself as part of the exit calculation. This admission in and of itself is quite revealing.
The concept of exiting responsibly from an investment is a widely recognized and accepted norm, referenced in a number of international frameworks. And yet, the CAO report finds that at least for the past decade, the IFC hasn’t been fulfilling its obligations.
Consequences of IFC’s Abandonment of Communities
Local communities suffer the repercussions of the IFC’s irresponsible exit practices. As the CAO’s report puts it, exits that occur during a CAO complaint process “can undermine IFC’s accountability and communities’ access to remedy.” With the investment chain severed, the IFC can more easily claim that it has no existing leverage to influence a client to do better. It also means that any actions the IFC commits to as a part of its own accountability process are largely too late to matter.
The devastating impacts of the IFC’s practice of irresponsibly exiting projects are vividly illustrated by several cases. The CAO’s report lists ways an exit hinders justice at every stage of the case process, from causing cases to close at the appraisal stage to limiting the scope of remedial actions, to inadequate remedial commitments and weak implementation of any commitments made. As one example, the IFC invested in Titan International Group’s cement plants in Egypt, and the local community suffered from pollution, livelihood losses, labor violations, and an increase in health issues in children. After the complaint process initiated by the community with the CAO had already gone on for four years, the IFC divested from Titan before the investigation report was finalized. This early exit derailed the finalizing of the investigation report, weakened leverage over the client and ultimately left the impacted community without remedy.
Harm from IFC’s exits midway through the accountability process is, sadly, not a thing of the past. The CAO’s soon-to-be-published report investigating allegations of child sexual abuse at Bridge International Academies, a chain of for-profit private schools in Kenya, brings to light this reality. In 2022, the IFC divested from the school without addressing the harm inflicted. Therefore, children who are entitled to remedy now face the exact scenario the CAO Report warns us about– the moment for accountability has come, but the IFC has already walked away.
If the IFC and its clients can just terminate investment relationships before an accountability process concludes, it calls into question not only the effectiveness of the accountability mechanism but also the sincerity of the IFC’s commitment to its mission as a whole. The IFC’s reputation is already on shaky ground in this regard. At Accountability Counsel, we reviewed all commitments that the IFC or its clients made to address environmental and social issues unearthed during the CAO’s accountability process for all of its cases, and at present, only 33% of those commitments have been documented as “accomplished.”
What IFC Can Do Now
The IFC should adopt real Responsible Exit Principles, but it has thus far been loath to do so. The IFC’s draft Responsible Exit Principles, published for consultation in February 2023, faced criticism from civil society organizations for being inadequate, vague, and nontransparent. The IFC claims to be piloting these principles already but has not disclosed the projects they were applied to, with the exception of announcing that the divestment from Bridge International Academies, the private school in Kenya where children suffered abuse, counted as being responsible. Now that the CAO’s report is out, the IFC can no longer claim it is doing enough.
Real responsible exit principles are not that complicated: the IFC should not exit a project without ensuring its own environmental and social standards are met, remediating any harm, and adequately evaluating and mitigating negative impacts of an exit, all of which requires consulting affected communities. These responsible exit principles should apply universally across the entire investment portfolio, irrespective of risk classification.
Exiting investments should not be a race to evade accountability; rather, it should be a thoughtful, transparent process that prioritizes the wellbeing of affected communities and ensures the sustainability of an investment.