A new tool aims to help DFIs improve transparency

Complaints about a lack of transparency by development finance institutions are not new, but now there is a tool designed to help them improve based on research that dispels some of their typical arguments against disclosure. The DFI Transparency Tool, developed by Publish What You Fund following two years of research that included the input of many DFIs, was released last week and it aims to provide a clear definition of what DFIs need to disclose and how they can do so. The current level of disclosure among DFIs is “surprisingly low” and “most have quite a ways to go before they can claim to be operating in as transparent a way as possible,” said Rob Mosbacher, the former CEO at the Overseas Private Investment Corporation, the predecessor to the U.S. International Development Finance Corporation, who also served as chair of the project advisory board for the DFI Transparency Initiative. The initiative, created by Publish What You Fund and funded by the Bill & Melinda Gates Foundation, launched in 2019, was guided by the board and focused on five key research workstreams with the goal of creating the tool and launching an index that would improve DFI transparency. “It’s hard to discern what works, at what cost, unless there is a more standardized, harmonized way to disclose data,” he said at an event launching the tool, adding that DFIs should want more information on development impact and whether they are crowding in funding. DFIs have often hid behind a veil of commercial confidentiality, saying that they are unable to share data because it would breach trust with their private sector clients, but the initiative’s research found this is not always true. And that reticence to share data can have damaging effects on community engagement, accountability, and even the ability of DFIs to help mobilize additional private funds into the countries where they work. But the new tool aims to give DFIs a practical guide to determining where they stand and how they can improve — and two DFIs have already said they plan to use it. The challenge DFIs have often been reluctant to publish project-level data in particular — creating challenges for accountability by shareholders, the public, and local communities. The lack of information also makes it more difficult for institutional investors to understand and invest in markets where DFIs are investing. Transparency will help determine if DFIs are living up to their mandates as development institutions and being driven by the development impact of a deal rather than the ease of closing a project and need to generate returns, said Nadia Daar, the head of the Washington, D.C. office for Oxfam International. While better transparency is needed in general, DFI investments made through financial intermediaries are a “huge black hole” when it comes to transparency and accountability, and improvements there are especially needed, she said at the launch event hosted by the Brookings Institution. Beyond accountability, transparency is also critical to building trust — between DFIs and their shareholders, but also for investors, which is “key to a functioning market,” according to Tom Edmondston-Low, director of board and institutional affairs at the European Bank for Reconstruction and Development. “The more transparent we are, the more trust we engender with our authorizers and other stakeholders.” --— Elizabeth Boggs Davidsen, vice president of the office of development policy, U.S. DFC Publicly available data is also essential for mobilizing more private capital for development-related projects, said Nadia Nikolova, lead portfolio manager for development finance at Allianz Global Investors. Consistent data transparency across DFIs is “paramount” to alleviating investor concerns and convincing them to consider funding development-related projects in emerging markets, she said at the event. Having access to the data will allow commercial financial institutions to more accurately price risk, which “brings investors to a realm where they are more comfortable allocating capital in emerging and frontier markets,” Nikolova said. The tool The idea behind the DFI Transparency Tool is to try and make it manageable for DFIs to understand where they are and improve data sharing. It breaks down the information into sections: core project information; impact management; environmental, social, and governance, and accountability to communities; financial information; and financial intermediaries sub-investments. In each field, there are indicators, survey questions, definitions, and notes to help DFIs with disclosure. The tool and standards for transparency will also form the basis of a new Publish What You Fund DFI Transparency Index that will rank DFIs. The index is likely to launch next year and will be aimed at pushing DFIs to improve transparency. One area where DFIs fall short in transparency is the lending they do through financial intermediaries — they often have little reporting about where the money they invested with these financial institutions ultimately goes, said Gary Forster, CEO at Publish What You Fund, at the event. The tool offers a road map for improving DFI disclosures on that issue as well. “This tool is a huge step forward in the process,” and should help DFIs who have been “clamoring for a granular definition, one they could operationalize,” Mosbacher said. The two years of research behind the new tool showed that some of the data DFIs say they cannot release is available in the public domain, or that some concerns about confidentiality can be addressed through other means. Moreover, DFI clients are willing to disclose more information, the research found. The “lack of disclosure at DFIs and FI clients is really a choice at this point, not a legal roadblock as many would claim,” Daar said. Oxfam has been able to find information publicly – such as in Bloomberg or Reuters financial databases – that DFI’s have said they cannot disclose, she added. While there are some limitations on the disclosure of commercial information, a key element is timing, Nikolova said. Data released before a financial close could prejudice the process, but there are financial instruments, such as bonds, where there is a precedent for disclosing pricing and financial statements, she said. DFI response At least two DFIs — DFC and EBRD — have committed to using the new tool. “The tool is interesting, it is a helpful north star,” said Elizabeth Boggs Davidsen, vice president of the office of development policy at DFC, adding that it will “genuinely help DFC focus its efforts on collecting and publishing data.” About 45% of DFC’s portfolio is lending to financial institutions, and she acknowledged that getting information about the businesses they lend to is a challenge. But DFC has launched an initiative to better understand the impact of its investments through financial institutions and the first analysis — of a group of partners in Latin America — is due out early next year. “The more transparent we are, the more trust we engender with our authorizers and other stakeholders,” Davidsen said. The tool came out of a collaborative process, which is key, but what’s also critical is that it is doable for EBRD, Edmondston-Low said. EBRD will use the transparency tool, which will be a “key plank” in the next information policy review process, which is due to start soon. The institution began sharing more information in 2020 — including greater disclosures before a project goes to the board — following the previous review, he said. “The biggest challenge we face is culture change. If information is available but the culture is not there … then it will always be an uphill battle,” said Edmondston-Low.