Impact Investors Recognize that Accountability Mechanisms Help Manage Unintended Impacts

Last year, Accountability Counsel reviewed the first set of disclosures from investors who signed onto the Operating Principles for Impact Investment to see who reported having an accountability mechanism to measure unintended investment impact. We’ve undertaken that analysis again this year and see an increase in the number of Signatories who report having such mechanisms. Given that accountability mechanisms are critical tools for hearing from communities and for managing impact, we applaud this trend. We call upon all Signatories to adopt accountability mechanisms and report them in their disclosures or for Signatories to agree that the Principles themselves should fall under the purview of the IFC’s accountability mechanism.

What are the Operating Principles for Impact Management?

The International Finance Corporation (IFC) launched the Operating Principles for Impact Management (“Impact Principles”) in April 2019 as a framework for impact investors to approach their investment processes. As Signatories, impact investors are required to publish an Annual Disclosure statement detailing their alignment with each of the Principles.  As of the date of this post, 135 impact investors have signed on to the Impact Principles, managing a total of US$ 407,161 million in assets.

At the time of their development, we urged the IFC to make sure the Principles were governed by accountability mechanisms.  Our advice was not heeded directly; instead, the Principles reference “good international industry practice” in a footnote. We’ve since been concerned that this governance gap would mean that the Principles are not effective for the people who bear the most risk when investments go off-track: communities living near or working at investment sites.

What change did we see in the disclosures this year?

This year, we looked at the 95 available annual disclosures to see if there was a change in the investors’ interpretation of the Principles. Here is what we found:

1. More Signatories are recognizing that accountability mechanisms are tools for managing unintended impacts. Last year, only four Signatories had explicitly disclosed the existence of an accountability mechanism (Acumen Capital Partners, Belgian Investment Company for Developing Countries, Deutsche Enwicklungs Gesellschaft (DEG), and Sarona Asset Management Inc.).  This year, that number  increased to eleven (Acumen Capital Partners, Belgian Investment Company for Developing Countries (BIO), DEG – Deutsche Investitions- und Entwicklungsgesellschaft mbH, Developing World Markets, FMO – Dutch Development Bank, IDB Invest, IFC Asset Management Company, International Finance Corporation (IFC), Mirova, The Private Infrastructure Development Group Ltd., and Sarona Asset Management Inc.).
2. An additional fourteen Signatories (Actis, BNP Paribas Asset Management, CAF Corporacion Andina de Fomento, CDC Group plc, European Bank for Reconstruction and Development, European Investment Bank, FinDev Canada, Finnfund, Japan International Cooperation Agency, MIGA, Norfund, Swedfund, The Investment Fund for Developing Countries (IFU), and U.S. International Development Finance Corporation) referenced policies in their disclosures, which in turn included requirements for or references to accountability mechanisms.

Why do accountability mechanisms matter? And why should investors disclose them? 

The increased number of Signatories that disclose accountability mechanisms suggests that more Signatories are recognizing that an accountability mechanism is an effective impact management tool for the Principles, specifically Principle 5, which aims to “assess, address, monitor, and manage potential negative impacts of each investment.” As they should. Accountability mechanisms are critical impact assessment tools for investors for two reasons: First, they offer the people who bear the most risk from investments — namely communities living near or working at investment sites — an opportunity to protect their rights and environment. Second, because these communities live and work near the investment sites, they are often the first to know when things go off course.  Giving communities a channel to raise complaints can lead to timely and efficient redressal of unintended impacts and in turn, more sustainable investments. Accountability mechanisms also serve as an important check against impact washing by serving as a governance tool for positive environmental and social claims.

While all investors should recognize these benefits, impact investors — those seeking more than a positive financial return — should in particular want to know if their investments cause unintended environmental and social harms. Being engaged in solving critical issues like climate change, impact investors benefit from knowing that every dollar they invest is having its intended impact.

Disclosing accountability mechanisms allows the Impact Principles to better serve their stated purpose of bringing greater transparency, credibility, and discipline to the impact investing market. While being a Signatory allows investors to signal their commitment to a global standard for managing investment impacts, the disclosure of accountability mechanisms signals a commitment to the people most directly impacted by these investments.

What can the Signatories and IFC do next?

Based on our analysis, the next steps are clear:

1. All Signatories should adopt investor-level accountability mechanisms and disclose them explicitly.

• • Explicit disclosure of the existence of an accountability mechanism, as opposed to indirect references to policies, would make the effectiveness of the Signatories’ environmental and social governance easier to assess.
  • For Signatories that directly or indirectly disclosed accountability mechanisms, they did not always specify whether they had Signatory-level mechanisms or project-level mechanisms. The distinction matters. Project-level mechanisms, while important, often lack independence, with the entity managing the project also being responsible for the complaint mechanism.  An investor- or Signatory-level mechanism, on the other hand, can help ensure compliance with and redress for environmental and social harms across investments.

2. The IFC could offer explicit guidance related to Principle 5 that directs Signatories to disclose accountability mechanisms as part of their effort to monitor and manage potential negative impacts of their investments. If more Signatories came to see Principle 5 as explicitly endorsing the use of accountability mechanisms (as opposed to the present indirect reference in footnotes referring to “good international industry practice”), we would be more likely to see widespread adoption.
3. Better yet, the IFC could seek for the Impact Principles themselves to be under the purview of its own accountability mechanism, the Compliance Advisor Ombudsman. That would mean that a community harmed by the noncompliance of any Signatory with their own environmental and social standards could raise that issue to the IFC’s accountability mechanism to seek redress. The CAO already assesses compliance with the Performance Standards, which many of the Signatories adopt. This single mechanism touchpoint would be an effective and efficient way to ensure that the Principles have their intended impact.