Accountability for Impact Investments: New UN Impact Management Standards Champion Hearing from People Affected by Investments

With the release of impact management standards for private equity funds that seek to align with the United Nations’ Sustainable Development Goals (SDGs), early October 2020 may very well be seen as a positive inflection point for accountability in private sector impact management. Recognizing the critical importance of hearing from communities impacted by investments, the new standards place an expectation on private equity funds in the impact investing space to demonstrate good governance and management through the availability and use of effective grievance mechanisms.

History of the Initiative

Two years ago, the 73rd General Assembly of the United Nations launched an initiative to encourage private sector commitment to the SDGs. Situated within the United Nations Development Programme (UNDP), an SDG Impact Team began to develop practice standards for private equity funds, bond issuers and enterprises. The standards relate to whether an organization’s strategy, management approach, transparency, and governance enable “more efficient decisions” that respect human rights, embody responsible investment principles, and further the SDGs. They do not impose any requirements but, rather, offer a voluntary assurance framework and accompanying assessment for organizations to qualify for global certification under an “SDG Impact Seal.”

Concerned that, among other things, the SDG Impact Seal risked “blue-washing” investment activities without adequate governance, Accountability Counsel wrote to recommend that certified private equity funds create or adhere to independent accountability mechanism to ensure that their investment activities abide by the SDGs as well as the UNDP’s Social and Environmental Standards.

Result of Our Advocacy

As a result of our advocacy, the Standards champion the value of an effective grievance mechanism. First, the Standards state that the presence of effective grievance mechanisms serve as evidence of an SDG-aligned management approach. Second, with respect to governance practices, private equity funds must demonstrate active oversight on matters relating to human rights and impact management, including through the use of effective grievance mechanisms for affected stakeholders. In addition, the draft standards for bond issuers and enterprises also include similar advice.

Why This Matters

While “effective grievance mechanisms” might sound like a technicality, their existence can have monumental and revolutionary impact.  Investments, even those intended to have positive impact, can cause serious harm, including human and environmental rights violations.  Communities living near and working at project sites bear the highest risk of unintended harms and rarely have an avenue for accountability.  Effective grievance mechanisms sitting within the investor institutions provide communities most impacted by investment decisions a way to raise issues to the investor level and seek accountability for unintended impacts. As a result, investors better understand their net impact.

Through Accountability Counsel’s work with communities impacted by international investments, we have seen how effective grievance mechanisms work in practice.  If it were not for the existence of effective grievance mechanisms — referred to more commonly as “accountability mechanisms” in the development finance arena — communities

would not have an avenue to seek redress, and investors would not have been made aware that their investments were offtrack.  To highlight but a few examples, communities used accountability mechanisms to seek redress for harms caused by internationally-financed projects in Liberia, Mongolia, and Myanmar.

While accountability mechanisms are well-established in the development finance space, they remain lacking among private impact investors. This is a missed opportunity because impact investors could benefit immensely from a mechanism that allows communities to raise concerns, and communities deserve an avenue for accountability.  In this regard, the new SDG Impact Standards for Private Equity respond to this accountability gap.

Implementation Risks Remain: Assurance, Disclosure, and Verification

A requirement on paper is a start, but it is the practice that counts. If private equity funds adopt effective grievance mechanisms, per the SDG Impact Standards, they will become more accountable to the communities they impact and will better evaluate their net impact. Accountability Counsel will watch the implementation of the standards to see if they live up to their potential to plug an accountability gap and will advocate for robust implementation of effective grievance mechanisms among private equity funds.  The risk of “blue-washing” remains.

Next Steps: A Vision of Investments Accountable to Communities

All international financial flows that affect communities should be accountable to them.  Investors should embrace effective grievance mechanisms as an accountability tool that helps them better evaluate their net impact and ensure their intended impact.  As private sector investors consider how to establish or adopt effective grievance mechanisms, Accountability Counsel stands ready to advise.