Impact Investing

  • Overview

    What tools do people around the world have to raise grievances if an impact investment in their community causes harm to their livelihoods, negative gender impacts, or environmental abuse? How would an impact investor know about the harm, prevent further harm, or remedy an abuse? Accountability Counsel is working to address these questions with concrete tools.

    While development finance institutions like the World Bank have had social and environmental safeguard policies and community-driven accountability offices for decades, many impact investors – financing similar projects and even co-financing the same projects – are still in the process of developing the social and environmental standards that govern their investments. And so far, impact investors do not have an independent accountability office where communities harmed by their investments can be heard. We are working to change that for the benefit of communities in areas where investors operate, and investors who are seeking to use their resources for the benefit of people and the planet.

    The rapidly growing impact investing industry is evolving quickly. There is attention being paid to the need to define impact, critically evaluate philanthropic trade-offs, and apply due diligence standards to evaluate social and environmental risk of these investments.

    Accountability Counsel partnered in 2018 with Stanford Law School on a project related to the unintended consequences of impact investing, with a goal of working to improve the accountability framework for impact investing. Further, in 2019-2020, Accountability Counsel advocated for an accountability office to be a part of the UNDP’s SDG Impact Standards.

    Ultimately, we imagine a world where there is an independent forum, serving networks of impact investors, where communities can file a grievance about harm resulting from an impact investment, have their voice heard, and their grievance addressed. Investors and the public could use information from this process to prevent harm, make better decisions, and ultimately improve the outcomes of investment for people and the planet.

    “Impact investors have the chance to create a state-of-the-art accountability office that is truly independent, and that can serve as a model for all of international project finance.” Natalie Bridgeman Fields, Accountability Counsel’s Executive Director

    Related Media

  • Our Advocacy

    Identifying the Gap: Community Feedback for Greater Net Impact

    Accountability Counsel’s experience supporting communities harmed by internationally financed projects that are also considered impact investments demonstrates that there is just as much need for an accountability system for renewable energy projects as there is for coal fired power plants. Take, for example, a biomass project in Liberia that sent family farmers into poverty, and contaminated water supplies amid sexual abuse and labor rights violations. Or another project in Mexico, where construction of a small hydroelectric facility began through illegal land acquisition, and endangered both a water supply and the safety of an adjacent dam curtain before the project was stopped. In both cases, investors genuinely thought they were benefiting their host communities. And yet their failure to take risks of social and environmental harm seriously ultimately led to catastrophic financial, human, and environmental outcomes. It is only because the now-defunct U.S. Overseas Private Investment Corporation (OPIC) financed these projects that communities were able to use their internal accountability office to raise their grievances.

    A creek in Oaxaca, Mexico, that faced destruction from a ‘mini-hydro’ project. The OPIC OA
    dispute resolution process allowed the parties to stop the project from causing further
    harm and more needless investment.

    Impact investments are no less susceptible to unintended adverse impacts outside of the renewable energy context. A prime example is that of a recent conservation project in Myanmar, financed in part by the United Nations Development Programme (UNDP), which sought to protect land from development but instead resulted in social and economic upheaval. Indigenous Karen communities expressed serious concerns with the top-down development approach, as opposed to a design process developed through the free, prior, and informed consent of Indigenous Peoples. Among many unanticipated impacts, the design of the conservation project disrupted the livelihoods of Indigenous communities, jeopardized existing ceasefire agreements in an area recovering from civil war, and violated the right of return for people who were forced from their land during the war.

    While addressing negative impacts has not been on the radar for most impact investors, traditional DFIs––such as OPIC or the UNDP––have routinely applied policy and accountability frameworks to manage their social and environmental risks and to remedy harm that results from the projects they finance. When these institutions invest in a project, they bring environmental and human rights standards and community-driven accountability offices that local communities can use to raise grievances and have them addressed. We believe that a fit-for-purpose community feedback mechanism would provide impact investors with the ability to connect with those who are impacted by their investments and provide redress and solutions when harm occurs.

    If traditional development institutions are not involved in a project financed by an impact investor, chances are that communities will have no direct course to raise concerns to the investor or receive remedy for harm. Likewise, most impact investors lack the mechanisms to receive information directly from impacted communities, prevent unintended environmental and social harm, or learn from missteps to improve overall outcomes and maximize net impact.

    The Opportunity to Build Stronger Systems

    There are three reasons why this is a good time to develop the movement for an accountability and learning system for impact investment. First, we believe the individuals behind impact investments––if given the chance––would want systems in place to ensure that any policies they have adopted to protect people and the environment are complied with, to better understand and evaluate their impact, and to have a way to address social or environmental harms associated with their investment when they do occur.

    Second, we have the required evidence of why accountability frameworks are needed (see, e.g., Mexico, Liberia, and Myanmar) and the experience to design and help implement accountability offices and community feedback mechanisms that are likely to work effectively and efficiently for impact investments.

    When failure happens—as it can, even when an investor does engage in earnest due diligence—then the people harmed need a forum to raise grievances. Thankfully, accountability offices, such as the Compliance Advisor Ombudsman (CAO), exist for just this purpose. Reporting to the president or board of institutional investors such as the International Finance Corporation (IFC) and dozens of others, these offices receive and evaluate complaints about social and environmental harm. They provide compliance reviews to determine compliance with due diligence and project monitoring rules and issue public findings, and also dispute resolution services, sometimes hiring mediators to address conflicts at the local level.

    If run effectively, when compared with courts, accountability offices and community feedback mechanisms can offer a cheaper, faster, and even fairer forum for all parties to address disputes. They also serve institutional investors by providing valuable third-party input on governance—for example, by reviewing an investor’s policies for soundness and its activities for compliance—and by assessing impact by weighing an investor’s positive impact against any harm caused.

    Third, the potential for positive impact if an accountability framework for impact investing is implemented is staggering. The converse is true of the status quo. If impact investing scales further without governance and accountability structures in place to prevent abuse and address harm, the consequences to local communities are dire. They will be certain to include the land grabs, contamination of water, labor rights abuses, and displacement of indigenous people that are typical of investments where there is weak rule of law and use of land and labor.

    Benefits of creating a robust accountability framework with a community feedback mechanism, if achieved, could spread beyond impact investing and could extend to all of global finance, including back to development finance, where existing frameworks could be improved based on leadership from the impact investing community.

    Seeding the Movement for Accountability in Impact Investing

    Drawing on our years of work in partnership with communities around the world harmed by international investment, and our policy work advocating for creation of accountability frameworks, we are bringing impact investors a vision of what a system could look like in policy and practice. We are seeing natural leaders of this work emerge in the impact investing community to make this vision a reality.

    We launched this conversation about the golden opportunity in impact investing in our 2016 blog in the Stanford Social Innovation Review (SSIR). We worked with Stanford Law School in 2018 on a Law and Policy Lab focused on accountability for unintended consequences of impact investing and how impact investors can develop community feedback mechanisms to address these consequences in a proactive and community-oriented manner.

    Mali Ole Kaunga, Natalie Bridgeman Fields, and Gabino Vicente spoke about the
    need for accountability in impact investing at Confluence Philanthropy.

    Building on our work at Stanford, in December 2018, Accountability Counsel participated in an in-person consultation on the International Finance Corporation’s (IFC) draft Investing for Impact: Operating Principles for Impact Management (the Principles). The Principles are a set of voluntary guidelines for impact investors, touching on impact strategy, assessment, and monitoring. Accountability Counsel and several partners made a joint submission to the IFC, advocating for revisions to the Principles that would commit signatory investors to implement a systematic approach to avoid and remedy negative impacts, consult and receive grievances from local communities impacted by their investments, and adhere to high transparency standards. The IFC published the final version of the Principles in March 2019.

    Accountability Counsel was able to explore what incorporating community feedback would look like in practice during our Deep Dive session on “Community Feedback for Net Impact” at the 2019 Sorenson Winter Innovation Summit and our session “Case for Accountability: Considering Potential Harm for Smarter Investing & Stronger Impact” at the 2019 Confluence Philanthropy Annual Gathering. In March 2019, Accountability Counsel, along with researcher and advocate Joanna Levitt Cea, gave a presentation as part of a series of webinars hosted by Transform Finance. The presentation demonstrated how impact investors can learn from the experiences of development finance institutions (DFIs) and use community feedback to identify environmental or social risks and redress negative impacts on local communities.

    Major institutions are now incorporating high-level principles of impact management into standards regimes. In 2019, the UNDP began developing practice assurance standards for private equity fund managers and bond issuers that seek to integrate the United Nations’ Sustainable Development Goals (SDGs) into their investment activities. The UNDP’s SDG Impact Team announced that the assurance system would ultimately allow investors and bond issuers to be certified by an “SDG Impact Seal.” Accountability Counsel and partners expressed concern that the proposed certification scheme risked providing a weighty stamp of approval to private institutions that operate in the impact investment field, yet do not have adequate accountability frameworks to understand the full scope of their investment impacts. In May 2020, we wrote to the SDG Impact Team to urge that certification requirements include effective grievance redress mechanisms so that communities could express concerns about investment impacts. Our recommendation was incorporated in subsequent drafts of the private equity and bond issuer standards so that effective grievance mechanisms are considered as evidence of good governance.

    The UNDP SDG Impact Standards, with its present requirement for certified entities to maintain effective grievance mechanisms, mark an advancement for accountability in the field of impact investment. In our view, community feedback mechanisms are necessary to understand the net impacts of investment and address unintentional harm to communities and the environment – and here the UNDP is moving the field in that direction. As next steps, we await the final versions of the standards and are offering advice on how impact investors can implement a grievance mechanism efficiently and effectively.

    Please contact us to learn more.

  • Documents

    Documents & Media by Release Date

    Jul 2020ImpactAlpha, by David Bank “Will impact investors welcome the arrival of mechanisms to redress community grievances?”

    Jun 2020 – Accountability Counsel letter to UNDP SDG Impact Team, commending the draft requirement for effective stakeholder grievance mechanisms to demonstrate good governance under the SDG Impact Standards.

    Jun 2020 – Draft UNDP SDG Impact Standards include a recommendation that certified entities adopt or create effective grievance mechanisms.

    May 2020 – Accountability Counsel letter to UNDP SDG Impact Team, urging an accountability framework to underpin SDG Impact Standards.

    Mar 2019 – The IFC released the final version of the Impact Investing: Operating Principles for Impact Management.

    May 2019Accountability Mechanisms: Benefits and Best Practices for Impact Investors, by Accountability Counsel.

    Apr 2019ImpactAlpha, by Kindra Mohr, “Developing community feedback tools to help investors manage positive – and negative – impact”

    Dec 2018Joint Submission to the IFC on the drafting of its Investing for Impact: Operating Principles for Impact Management.

    Jul 2018New York Times Opinion, by Rachel Cernansky, “It Takes Consultation to Help a Village”

    May 2018Stanford Law & Policy Lab Blog, Q&A with Natalie Bridgeman Fields, “Do no harm: accountability for impact investing”

    Apr 2018Devex Article, by Sophie Edwards, “Impact investors must set up ‘accountability tools,’ experts say”

    Nov 2016 – Stanford Social Innovation Review Blog, by Natalie Bridgeman Fields, “Accountability: The Golden Opportunity in Impact Investing”