2 July 2024

Banks do not assess project risks accurately. People and our planet pay the price.

Discover how development financial institutions’ risk categorizations impact local communities and the environment, and why current safeguard measures may be falling short in protecting those most affected by investment projects.

Do higher risk projects generate more complaints?

When development financial institutions (DFIs) review proposed investments, they often assign a risk categorization to the project to reflect the level of risk and harm to local communities and the environment that might result from the project. Every institution has its own unique way of categorizing risk, but the general pattern followed includes assigning projects to one of four broad categories: (1) Category A, or high risk projects, representing the highest level of potential risks and harm; (2) Category B, or moderate risk projects, representing limited and often reversible risks or harm; (3) Category C, or low risk projects, with minimal or no negative impacts; and (4) Category FI, or financial intermediary projects, representing investments flowing through other financial institutions, whose risks have only more recently begun to be subjected to more scrutiny and nuanced risk assessments.

The categorization of risk assigned to a project matters a great deal to communities who bear the brunt of project impacts. The project risk category dictates which of the DFI’s safeguard policies are triggered: the higher the risk, the more safeguards are put in place to ensure adverse impacts are properly identified and mitigated. As an example, under the IFC’s current policy from 2012, certain project information has to be disclosed to affected communities regardless of the risk. But, if there are moderate risks identified, consultations must also be undertaken to allow communities to express their views of the project risks and to allow the Bank’s client to consider and respond to those views. If there are significant risks identified, i.e., a project is considered Category A, there must be a robust informed consultation and participation process where clients are required to take into account the views of affected communities in their decision-making processes.

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