OXFORD, United Kingdom — The impact investing community needs to create innovative accountability tools to deal with high-risk environments and ensure their investments are delivering positive social and environmental impacts.
This was the message delivered by Natalie Bridgeman Fields, founder and executive director of Accountability Counsel, and Gayle Peterson, director of social finance and impact investing programs at Saïd Business School, during a side event held as part of the Skoll World Forum in Oxford on Thursday.
Peterson and Fields said that as the impact investing field grows and begins to provide much-needed private capital to enterprises operating in high-risk sectors and countries, effective mechanisms need to be put in place to make sure these private investments have positive impacts and do not unintentionally cause social and environmental harm.
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Development finance institutions, which until recently were the only investors operating in the development space, have accountability offices in place to respond when things go wrong, after 50 years of experience in the space. For example, the Compliance Advisor Ombudsman is the grievance body for the International Finance Corp., the World Bank’s private sector arm. It receives, evaluates, and also mediates complaints about social and environmental harm caused by IFC-backed projects. Elsewhere, the United States Overseas Private Investment Corporation has an accountability mechanism to address claims from community members. Every multilateral development bank now has access to an accountability office.
However, no such bodies exist in the impact investing space. The Skoll session was convened to bring together investors, donors, social enterprises, and NGOs to discuss why accountability frameworks are needed; and, crucially, what these might look like for the impact investing sector.
“Impact investing is a new and very broad field … [but] the thing they have in common is they are trying to advance a social or environmental goal through the investment vehicle,” Fields told Devex. “As part of that, understanding the harm they could cause is critical to understanding whether that goal is advanced.”
This is because when attempting to combat complex problems in difficult countries “it’s going to be tough and things inevitably will go wrong,” Peterson said during the session. However, there are currently no grievance mechanisms set up to receive complaints from communities affected by projects funded by impact investors, she said. Furthermore, due diligence processes are often “tick box exercises,” which don’t involve “meaningful consultation” with communities, Fields added.
Fields and Peterson called on investors to start thinking about how to set up such tools, which should be a “benefit for investors to understand what problems are as early as possible and address them and learn from them so they are not repeated in future investments,” Fields said. An accountability framework can also help investors “co-create projects with communities” instead of imposing them from a distance, she added.
The current accountability gap in the impact investing space also creates the opportunity for investors to innovate and develop new mechanisms, Fields told Devex. She also said each investor does not need its own tool, but instead hopes the sector will move to create one that could be run independently, cheaply, and efficiently and can be used as a collective resource shared across the field to prevent repeating mistakes, she said.
Failing to implement these accountability tools could result in “devastating reputation risks” and threaten the progress of the burgeoning impact investment field, she warned.
“Now is the time for leaders in the field to get ahead of this accountability gap and provide investors with the tools needed to manage high-risk projects and achieve both the impact and financial results they seek,” she added.
The disastrous project in Liberia to finance Buchanan Renewables — a biofuel plant that was funded by OPIC and with impact investment from McCall MacBain Foundation — serves as a “cautionary tale” for investors, according to Fields. The project was investigated by OPIC’s compliance ombudsman after complaints from Liberian communities about a slew of alleged human and labor rights abuses, as well as negative environmental and economic impacts associated with the plant’s operations.
The next step will be a convening at Stanford University in June to discuss the unintended consequences of impact investing, in the hopes of educating investors about existing development finance accountability frameworks and how they can be adapted to the impact investing sector.
Editor's note: Devex traveled to the Skoll World Forum with the support of the Skoll Foundation. Devex retains full editorial independence and responsibility for this content.