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.

    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

  • Our Advocacy

    Our 2016 blog in the Stanford Social Innovation Review (SSIR) provides a helpful summary of Accountability Counsel’s thinking about the Golden Opportunity in Impact Investing. 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.

    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 while attending the The Economist’s 2019 Investing for Impact event. In March 2019, Accountability Counsel’s Policy Director Kindra Mohr and Global Communities Director Sarah Singh, 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.

    While addressing negative impacts has not been on the radar for most impact investors, traditional DFIs – such as the U.S. Overseas Private Investment Corporation or the IFC – have been routinely applying policy and accountability frameworks for decades 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 a grievance and have it 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 an impact investor (e.g. a foundation, individual investor, or bank’s impact fund) is funding that same project without traditional development institutions involved, chances are there is no way that communities can have their voices heard or receive remedy for harm. Likewise, impact investors currently have no vehicle to receive information directly from impacted communities, holistically prevent harm, or learn from their investment decisions in order to improve overall outcomes and achieve the impact they are seeking.

    Creating systems for accountability where they don’t yet exist

    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 OPIC financed these projects that communities were able to use their internal accountability office to raise their grievances.

    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.

    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.

    Second, we have the required evidence of why accountability frameworks are needed (see Mexico and Liberia) 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 (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.

    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.

    Please contact us to learn more.

  • Documents

    Documents by Release Date

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

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

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

    Apr 2018 – Devex 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”