WASHINGTON — The World Bank’s private sector arm — the International Finance Corporation — should put a percentage of its profits into a “remedy fund” to compensate communities harmed by IFC-backed projects, accountability advocates have said.
The call comes in response to growing concerns about how IFC manages and mitigates the environmental and social risks associated with its investments, especially in fragile and conflict-affected countries where the risks are higher.
With the development finance institution looking to deliver 15-20% of its investments in these countries by 2030, communities will need access to extra funding to help cope when negative impacts inevitably occur, experts have warned.
IFC’s accountability record has come under heightened scrutiny in recent months. A group of Indian farmers won the right to sue the institution after a high-profile legal battle that went all the way to the U.S. Supreme Court. The farmers claim their health and livelihoods were damaged by an IFC-backed coal plant.
“IFC want to prevent issues, but they still don’t have an answer for when things go wrong.”— Kristen Genovese, Dutch Centre for Research on Multinational Corporations
David Hunter, a professor of international and comparative environmental law at American University and an expert on the accountability of DFIs, is leading on the idea of a remedy fund. He wants IFC to rebalance its approach so that communities shoulder less of the risk and reap more of the benefits associated with development projects.
Speaking at a side session during the World Bank Annual Meetings in Washington D.C. earlier this month, Hunter called on the DFI to establish a pooled risk insurance fund.
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“We shouldn’t fool ourselves ... We are doing development … in more highly difficult countries and we know as we sit here [that] environmental and social risk is going to be falling on communities … [so] we need to think of risk a little differently and pool it across the portfolio,” Hunter said.
Kristen Genovese, from the Dutch Centre for Research on Multinational Corporations, which supports communities seeking remedy from multinational corporations and DFIs through nonjudicial grievance mechanisms, agreed that IFC — along with other DFIs and commercial banks — needs to think harder about remedy.
“IFC want to prevent issues, but they still don’t have an answer for when things go wrong,” she told Devex.
A spokesperson for IFC told Devex that a pooled remedy fund would be discussed as part of the board-led review of the institution’s grievance mechanism — the Office of the Compliance Advisor and Ombudsman, or CAO — that was launched in October.
Hunter’s idea, which is still being developed, is that the fund would be administered by independent accountability groups like CAO and could be used to directly compensate affected individuals or pay for community-backed projects aimed at overcoming the damage.
“Taking direct responsibility for things does give us pause because we want the companies we invest in … to have a system that is dynamic and responsive to risk.”— Jamie Fergusson, acting senior director for environmental and social policy and risk, IFC
Some money could also be spent on helping communities access grievance mechanisms and the pooled fund itself, Hunter said. It could be paid for by diverting 2% of IFC loan revenue from projects that pose significant environmental and social risks.
The call is the latest development in a long-running campaign by civil society groups, CAO, and accountability experts to make IFC a more responsible investor.
NGOs such as Accountability Counsel have been supporting affected communities, including Indian tea workers and Mongolian camel herders, to bring cases to IFC’s grievance mechanism for years. NGO EarthRights International helped Indian farmers in the Supreme court case, Jam vs IFC.
Jamie Fergusson, IFC acting senior director for environmental and social policy and risk, who spoke on the panel, was skeptical about the idea, pointing out that IFC’s mission is to galvanize financially sustainable and responsible businesses and banks in low-income countries, part of which means encouraging them to respond when things go wrong.
“Diving in and taking direct responsibility for things does give us pause because we want the companies we invest in … to have a system that is dynamic and responsive to risk, and has a grievance mechanism that thinks about how to respond,” he said.
Fergusson also questioned the feasibility of establishing a remedy fund with “quasi-judicial” powers.
However, Hunter disagreed, saying that the fund would provide compensation as a last resort so that borrowers are still incentivized to avoid causing harm. Furthermore, the remedy fund does not need to be judicial and could be managed through existing bodies such as CAO, he said.
Genovese said that while most DFIs do not offer remedy, the Overseas Private Investment Corporation, the U.S. government's DFI, has contributed financially to solutions in the past, providing $750,000 to support a community development plan linked to a mining project in Bolivia. In Nicaragua, a group of DFIs also contributed to help sugarcane workers suffering from chronic kidney disease linked to harsh working conditions.
But these are “one-offs,” Genovese said, since most DFIs see their clients as responsible for redressing harms, rather than the investor. IFC in particular has so far refused to compensate affected communities, including the sugarcane workers in Nicaragua, she said.
“What we hear from them [IFC] is that they don’t have the mechanisms … [to] provide direct support to communities. We’ve tried to take a creative approach … and say let’s just find another way … can you forgive part of the loan of the company in return for a commitment … to spend those resources on the community … but it seems as though that is not something they are interested in,” Genovese said during the panel session.