CAO Compliance Audit of IFC's Financial Sector Investments

On February 5, 2013, the World Bank Compliance Advisor Ombudsman (CAO) released its audit of IFC's financial sector investments, together with IFC's official response.

• The CAO Audit of a Sample of IFC Investments in Third-Party Financial Intermediaries, October 10, 2012 can be found here.
   
• The IFC's Response to the Report on Audit of a Sample of IFC Investments in Third-Party Financial Intermediaries, January 31, 2013 can be found here. 


• The CAO Appraisal of IFC's Investment Projects in the Financial Sector, June 27, 2011 report can be found here.

The key CAO findings summarized in this post are derived from the CAO's press release. 

I will discuss these findings along with the IFC's approach to environmental and social risk management in Financial Intermediary relationships in future posts. Read on for the summary of the report...

OVERVIEW:

In 2011, the CAO VP initiated a compliance appraisal of IFC’s financial sector investments. CAO analysis had indicated that IFC’s less visible activities in the financial sector are a risk for IFC since their funding potentially causes environmental and/or social harm.

CAO identified 844 separate financial sector investments and reviewed their respective Board Papers. CAO then refined the sample and audited 188 investments related to 63 clients. IFC has constructively interacted and engaged during the audit, while respecting CAO’s independence and integrity.

KEY FINDINGS:

• IFC has processed the majority of its investments in the audit sample in compliance with the applicable environmental and social policy and procedural requirements. The additional IFC environmental and social staff resources allocated from 2008 have had a significant positive effect on the level and quality of client engagement and compliance. The procedures applied by IFC to its clients for screening subclients are aligned, and in compliance, with intentions stated in Board Papers and strategies focused on increasing financial penetration by investing in intermediaries.


• However, IFC does not have a methodology for determining whether its principle requirement on clients — the implementation of an environmental and social management system—achieves the core objective of ‘doing no harm’ or improving environmental and social outcomes at the subclient level. This means that IFC has no quantitative or qualitative basis on which to assert that its financial intermediation investments achieve such outcomes, which are a crucial part of its strategy and central to IFC’s Sustainability Framework.


• CAO further finds that IFC procedures are not designed to support the broader environmental and social outcomes that are commensurate with IFC’s prominent leadership role as a promoter of environmental and social responsibility. Achieving those broader objectives would require IFC to expand its approach. IFC would need to focus on facilitating a self-sustaining cultural change within its clients’ organizations. This approach would be more aligned to the aspirational objectives within IFC’s Sustainability Framework, as well as the expectations of stakeholders.

The CAO has made further observations and conclusions which it hopes will support IFC in addressing this central tenet of its analysis. These include: Providing more of a leadership role in the development of international standards and in supporting existing initiatives in reporting and disclosure; ensuring consistency with other Development Finance Institutions (DFIs); achieving clarity in terms of the environmental and social risks it is seeking to manage; and developing its analysis and approach to resource deployment.

IFC TOOLKIT:

• IFC’s focus on the SEMS does not necessarily achieve a broader management and cultural change process.
• IFC’s environmental and social requirements have not been adapted for FM clients.
• IFC’s approach to environmental and social requirements has precluded a structured approach to assessing two key elements of a successful environmental and social program: Client capacity and commitment.
• Standardized implementation requirements do not accommodate different levels of E&S development.

IFC STRATEGY:

• IFC’s environmental and social processes and results do not fully correspond to IFC’s corporate message.
• IFC applies two different concepts of environmental and social risk: Do No Harm and Credit Risk.
• IFC has three different types of environmental and social objectives.

IFC STANDARDS:

• Despite interaction between IFC and other DFIs, differing standards are a burden for clients.
• IFC has further opportunities to encourage the adoption of a shared vision and industry standards.