30 August 2017

Accountability: A Public Good Worth the Investment

Development finance institutions (DFIs)—from multilateral development banks to national agencies—are soul searching. These institutions understand that the Sustainable Development Goals cannot be achieved with public funds alone. Increasingly, private finance is driving infrastructure development, financial inclusion of the poor, public health innovation, and more. In response, DFIs’ leaders speak of mobilizing capital and leveraging their institutions’ expertise to remain relevant.

In this changing landscape, the Center for Global Development recommends multilateral development banks prioritize global public goods, given these banks’ capacity for coordination and international reach. Indeed, Jim Yong Kim, President of the World Bank Group has acknowledged the role of these goods as a pillar in the Bank’s strategy for the future. Effective, equitable, and transparent accountability mechanisms should be part of global public goods investment at the World Bank and beyond.

So, what is a global public good?

In economic-speak, a public good is one that is non-excludable—meaning that one individual can’t reap all the good’s benefits—and non-rivalrous—one person’s enjoyment of the good doesn’t prevent another from enjoying it as well.

A lighthouse is a classic example. One navigator would struggle to exclude another from using it to locate a treacherous coast. Then again, one ship’s use of a lighthouse doesn’t make it less useful for the next to come along. For these navigators, the value of the lighthouse offsets its costs. But, because the benefits are non-excludable, the temptation to wait for someone else to pay to build it is strong. If everyone waits, no lighthouse gets built. If, however, everyone commits a little of the cost and can hold each other to those commitments, all are better off. When it comes to public goods, efficiency requires collaboration.

The benefits of lighthouses are experienced locally, but for some public goods—prevention of climate change and eradication of communicable diseases, for example—these benefits transcend borders. Accountability in development finance is one of these global public goods.

No one person, community, or even nation enjoys all the benefits of compliance with environmental and social safeguards at DFIs, private financial institutions, and project-implementing companies and organizations. The benefits are non-excludable. These benefits are also non-rivalrous. A coffee farmer’s enjoyment of clean air from a conscientious neighboring solar project does not necessarily prevent an impact investor from enjoying returns on her sustainable portfolio, nor does it prevent future generations from enjoying the consequences of cumulative climate change actions. Community empowerment alongside capacity building and compliance in development are not just local benefits. They are global victories.

At Accountability Counsel, we maintain that accountability mechanisms are crucial to the development mandates of DFIs. They are a key means of ensuring that environmental and social safeguards aren’t just words and instead represent real protection for communities directly impacted by projects.

Now, more than ever, it is important to realize that the threat of hollow environmental and social safeguards is not limited to DFIs. Private financial institutions must embrace accountability to build and sustain legitimacy as development actors.

Accordingly, grievance redress mechanisms feature in many policies relevant to the growing private-sector role in development, including: the UN Guiding Principles on Business and Human Rights, OECD Guidelines for Multinational Enterprises, the Equator Principles, and others. DFIs are well positioned to deploy the expertise of their own accountability mechanisms and to coordinate enhancement of accountability processes across the public-private divide. This coordination, as with other public goods, is vital in lessening the economic pressures that can accompany social and environmental responsibility.

DFIs must first get their own houses in order and ensure that their accountability mechanisms are models worth emulating. The criteria for non-judicial grievance mechanisms laid out in the UN Guiding Principles on Business and Human Rights are a good start. However, formal compatibility with these criteria alone is unlikely to produce mechanisms that effectively hold institutions to their promises. Ultimately, mechanisms must be built to have leverage, and not to be ignored if their findings are inconvenient for bank management.

DFIs should also pursue accountability capacity building with co-financing institutions, financial intermediaries, and project implementers. The International Finance Corporation recently offered an environmental and social due diligence webinar for financial intermediaries, and its accountability mechanism, the Compliance Advisor Ombudsman, has issued a guide to designing and implementing project-level grievance mechanisms. Collaboration for stronger accountability at all levels should be standard.

Finally, DFIs must support their accountability mechanisms with sufficient resources and respond readily to advice and findings of non-compliance. Otherwise, the mechanisms will wither into irrelevance, communities will suffer, and DFIs will lose any claim to special competence over the private sector.

Development has risks. Ignoring accountability and allowing the consequences of those risks to fall on the most vulnerable is a choice made by development actors. At the 2016 International Monetary Fund and World Bank Group Annual Meetings, President Kim quoted Martin Luther King, Jr., invoking “the myth of time…the strangely irrational notion that there is something in the very flow of time that will inevitably cure all ills.” There is also a strange irrationality in any model of development that assumes the flow of relentless growth will inevitably cure the ills of poverty. Accountability mechanisms make development more inclusive, are potential troves of knowledge, and can be sources of legitimacy for their institutions. They are goods worth the investment.