IFC's new 'responsible exit' policy: Milestone or a missed opportunity?

The International Finance Corporation, the World Bank’s private sector arm, has released a new policy on how it exits investments; guidelines civil society organizations have sought for years to ensure the organization does not leave communities in the lurch when it leaves a project. Exiting is a natural part of the investment cycle, but the timing and manner of the IFC exit can have a significant bearing on the potential impact of a project, including the resolution of any environmental or social problems that arise. IFC has come under scrutiny in the past for exiting investments after complaints were filed, seeming to shirk responsibility, and then claiming it no longer had leverage over the project, civil society organizations said. There are dozens of examples through the years where IFC has left people in a bind, including cases under investigation or in dispute resolution processes at the Compliance Advisor Ombudsman, or CAO, said Carla García Zendejas, director of people, land and resources at the Center for International Environmental Law. “Having an actual document that is telling IFC and the world we have to look at some things before we leave and this is what we’re going to do, even as short as this is, we consider it a milestone,” she told Devex. The CAO watchdog defines a “responsible exit” as one that ensures a project’s positive impact endures beyond IFC’s involvement and that any harms caused, such as violence against local communities or environmental damage, are addressed. Investigations by the CAO into several high-profile cases pushed IFC to create a new approach to responsible exits. The watchdog found that in some cases IFC left an investment project without addressing documented social or environmental problems, even if dispute resolution processes were ongoing. In some cases, IFC withdrew earlier than originally planned, while in others — particularly in equity investments, where the timeline is less defined — the exit appeared to coincide with ongoing investigations into the IFC’s role in the project’s mismanagement. One such case was an IFC investment in the Inter-American Corporation for Infrastructure Financing, or CIFI, a financial institution that invested in Hidro Santa Cruz to construct the Canbalam hydropower plant in Guatemala. Local communities claimed their opposition to the project resulted in violence and repression from the company and the government and filed a complaint with CAO. The investigation found that IFC failed to comply with its own policies in addressing violence associated with the project, and that there was ongoing social harm to communities after the exit. IFC committed to reviewing its policies and procedures on investment exits to ensure it takes into account potential harm while it can still play a role in addressing it. In the two-page policy, IFC pledged to evaluate whether development impact could be achieved or sustained after it ends its relationship with the project, or if additional action is needed. IFC also committed to addressing environmental and social issues, including structuring its exit in a manner that ensures outstanding issues are resolved. It must mitigate risk following its exit and work with clients or use its leverage so it considers remediation of harms before an exit or as part of one. IFC told Devex it created the new policy to “strengthen its analysis of, and approach to, managing environmental and social issues throughout the project cycle, including at the point of exit.” IFC considered the terms of agreements, its business model, and the practices of peer institutions, sought feedback, and conducted a pilot before releasing the final document. Now that the policy is finalized, IFC is “taking steps to operationalize the Approach, including developing internal training and guidance for staff,” IFC told Devex in an email. The responsible exit policy has been closely watched by civil society organizations but also by other development finance institutions, which often look to IFC’s policies and decisions as a blueprint of sorts. What’s missing? Despite the guidelines, civil society groups remain concerned about how it will be implemented. One key concern is whether IFC will try to use financial or legal risk as an argument to avoid addressing problems before leaving an investment. The responsible exit principles only apply to investments where IFC leaves, but not if the client pulls out early or prepays its loan. That limits the policy, Stephanie Amoako, policy director at Accountability Counsel, told Devex. There is evidence of a pattern that shows IFC exits investments when environmental and social problems are already underway, she said, noting that a CAO report found that 41% of cases it investigated between 2013 and 2022 had an exit while the accountability process was ongoing. In some such cases, IFC initiated the exit, but in others, the client may have prepaid a loan or left early. In those cases where a client exits early, this new policy would not apply, which is a significant gap, Amoako said. “IFC should have a concrete plan to address environmental and social concerns with all projects,” she said. Another major concern is the lack of engagement with affected communities, Zendejas said, adding that often communities don’t know that IFC has left an investment for many months and should be consulted. Transparency is another pressing issue. While IFC piloted its exit approach, it has not released information on what projects were included, what it means for communities, or what informed the final version of the policy, several civil society groups told Devex. The approach to risk management is also flawed and could undermine IFC’s ability to make informed decisions about how to divest, Megan Pearson, a policy associate at Accountability Counsel, told Devex. Just because IFC exits an investment, it doesn’t mean that the risk of reputational harm goes away — as in the high-profile case of Bridge International Academies. Exiting investments that are under investigation makes IFC look like it is avoiding or evading accountability, she said. In 2013, IFC invested in Bridge International Academies, a for-profit chain of schools where child sex abuse was reported in Kenya in 2020. CAO’s investigation found that IFC had failed on multiple counts, including staff turning a blind eye to reports of abuse and interfering in the investigation. “IFC is really shooting itself in the foot by thinking that it can just drop these projects and think that they’re not going to continue to reflect on them,” Pearson said, adding “There’s a huge reputational risk.” So how would the new principles have applied in the Bridge case? In a November 2023 letter to David Pred from Inclusive Development International, IFC Managing Director Makhtar Diop wrote, “We left Bridge consistent with the pilot ‘Responsible Exit’ principles, which aim to address outstanding environmental and social issues with investee companies, to the extent practicable, prior to exiting the investment.” Amoako said it was concerning and audacious to say that was consistent with a responsible exit. “If that’s how you define consistent, then this doesn’t bode well for the future because even to this day, survivors are waiting for concrete remedy,” she said. “IFC is going to have to demonstrate how it is actually applying these principles.” In cases where problems arise, if IFC remains involved, it can hold the client accountable, enforce corrective actions, and use its leverage to drive change. However, exiting removes the leverage, and makes it more difficult for affected communities to seek remedies for the harm caused by the investment. “They say they’re making concrete steps towards responsible exit, now is when the rubber hits the road. You have to show us, you have to show your work,” Amoako said.