U.S. Environmental Protection Agency, Final Mandatory Reporting on Green House Gases Rule,https://www.epa.gov/climatechange/emissions/ghgrulemaking.html. ↩︎ From September to November 2009, the International Finance Corporation (IFC) is conducting an initial scoping of issues to improve in its updated sustainability policies. The following analysis recommends ways to improve IFC’s coverage of four key issues:Climate changeEnvironmental and social impact assessmentCommunity engagementHuman rightsDownload the PDFStrengthen IFC’s commitments to address climate change.Science and policymaking on climate change have advanced exponentially since adoption of the 2006 Performance Standards. IFC currently has only a limited number of climate change requirements for clients within Performance Standard 3 on Pollution Prevention and Abatement, and makes no mention of anycommitments for IFC itself in the Sustainability Policy.IFC’s policies only require projects with “significant emissions” to quantify greenhouse gas emissions(GHGs). “Significant emissions” refer to projects that emit at least “100,000 tons CO2 equivalent per year forthe aggregate emissions of direct sources and indirect sources associated with purchased electricity for ownconsumption.” To address existing policy gaps, we recommend that IFC:Commit to institution-wide measurement and reduction of greenhouse gas emissionsUnder the current policies, IFC makes no institution-wide commitments to mitigate climate change. Theupdated Sustainability Policy should reflect commitments to measure and publicly report GHG emissionsacross IFC’s portfolio.Expand requirements for clients to measure and report on their projects’ greenhouse gas emissionsThe following modifications to Performance Standard 3 are necessary to reflect developments in GHGaccounting since 2006:Reduce the threshold for GHG accounting from 100,000 tonnes CO2 equivalent per year to 25,000tonnes. This is the level being proposed as the threshold for U.S. greenhouse gas regulations.1Expand the scope of direct emissions beyond purchased electricity, to also include steam, heating,and cooling. Under the current Performance Standards, only direct sources associated with powerproduction for the project require quantification.Remove the option for clients to offset GHG emissions. Instead, require clients to conduct anoverall assessment of options for best available low-carbon technologies. By doing so, IFC will gaincomparative advantage in promoting energy efficiency, renewable energy sources, alterations ofproject design, and other mitigation technologies.IFC’s clients should also quantify GHG emissions for direct and indirect land use change resulting fromprojects. This is particularly important for land intensive projects such as forestry, agriculture, mining, oil andgas, and hydropower.A large percentage of IFC’s portfolio consists of lending to financial intermediaries. These financialinstitutions, too, should account for GHG emissions as a condition of IFC financing. WRI’s recentpublication on GHG accounting for financial institutions provides guidance on applying accountingprinciples to the financial sectorIncrease support for clean energy alternativesThe IFC continues to support fossil fuel-intensive projects, even as the World Bank Group prepares to play aleading role in financing the UNFCCC response to climate change. Fossil fuel energy has long-term costs thatimpact human health as well as the environment, and the IFC should help its clients consider the full costsassociated with such projects—through GHG accounting and options assessment.Furthermore, the IFC could demonstrate its commitment to combat climate change by offering to subsidizethe additional costs of pursuing clean energy options in order to “level the playing field” between fossil fueland renewable energy technologies.Assess the human rights impacts of climate change-related projectsHuman rights will affect the broader range of IFC climate change activities. As the IFC supports greenhousegas mitigation by investing in cleaner projects, financing is likely to be channeled towards biofuel projects(which often displace poor communities from agricultural land), forest management (which can affectcommunities’ access to water, food, and cultural resources), and large hydropower. As the IFC helpscountries adapt to unpreventable impacts of climate change, certain activities may have human rightsimplications—such as forced resettlement from flood-prone areas, and potential for discrimination in whichcommunities receive disaster relief assistance. IFC climate change standards should assess the potential forthese risks.Improve environmental and social impact assessments.In many ways, the environmental and social impact assessment (ESIA) is the cornerstone of the IFCPerformance Standards. If used correctly, the ESIA helps clients to identify a project’s environmental andsocial risks, and to develop a plan to manage or avoid those risks. However, IFC has not indicated that itplans to review the effectiveness of ESIA implementation. To improve ESIA effectiveness, IFC shouldincorporate the following into Performance Standard 1:Assess impacts on ecosystem servicesThe IFC currently requires clients to identify impacts to ecosystem services (the benefits that people obtainfrom ecosystems) within the ESIA process, but only if significant impacts on biodiversity are identified.Ecosystem services cover a much broader range of issues—such as cultural services which could includeburial or ceremonial grounds, ecotourism, provisioning services such as timber or fresh water, and regulatingservices such as water purification and erosion control. Applying an ecosystem services approach across allESIAs will help clients to assess the true costs and benefits of the project, and to design compensationpackages that cover the full cost of impacts.Assess the development impacts of proposed projectsIFC requires that clients develop alternative project designs based on these risks, and then justify whichoption was chosen. However, IFC should require clients to analyze a “no project” alternative within theimpact assessment as well, as required for Category A projects in the World Bank’s Operational Policy 4.01.This would serve to provide affected communities with information they need in order to be informed. Thiswould also allow IFC to more accurately assess the development outcomes of its investment, by providing aclearer picture of the tradeoffs inherent in project development.Clarify requirements for community engagement.The Performance Standards require clients to engage communities throughout the life of projects, in order toensure that affected communities have a voice in project design and implementation. However, the currentrequirements do not provide clear guidance, and leave clients with a great deal of discretion. In many recentCompliance Advisor Ombudsman (CAO) complaints, an underlying tension appears to be ineffectivecommunity engagement.Clarify the requirements for community engagementThe table below [see PDF] lists IFC’s community engagement standards and when each of these is applied. The use ofsuch a wide variety of standards reduces accountability to affected communities. How do communities knowthey have participated in “free, prior and informed consultation” rather than mere “consultation”? How docommunities know when “broad community support” exists? Clients and communities would benefit from aclearer set of community requirements.IFC should present these requirements in three, more accessible categories:First, the Performance Standards should present the minimum community engagement requirementsnecessary for all affected communities. These include principles such as timely disclosure of information,consultations in a culturally appropriate manner, responsiveness to community concerns, access to grievancemechanisms, and regular reporting back to communities.Second, the standards should present minimum community engagement requirements for indigenouspeoples. These include the principles mentioned above, as well as respect for customary rights to land andnatural resources, consent obtained prior to key project decisions, necessary time set aside for traditionaldeliberations, and disclosure of information in a culturally appropriate manner.Third, the standards should provide specific requirements for when clients must use enhanced communityengagement. For example, negotiations—rather than consultations—may be necessary when a projectimpedes on communities’ rights to land or natural resources, or when the potential for conflict is high.Strengthen “broad community support” to protect communities’ rightsThe IFC’s Sustainability Policy requires that projects with potentially significant, adverse impacts and projectsthat affect indigenous peoples must have “broad community support” in order to receive IFC financing. TheIFC currently determines at the time of Board vote whether broad community support exists for projectswith significant impacts or that affect indigenous peoples.Several concerns prevent this standard from effectively protecting the rights of affected communities. Forexample, broad community support can exist even if the community is unaware that they have expressedsupport. Furthermore, IFC does not disclose its justifications for its assessment of the existence of broadcommunity support. IFC also draws evidence of broad community support almost exclusively from theclient’s documentation, which presents a conflict of interest.For this standard to be credible, the IFC must disclose the evidence for its determination that a project hasbroad community support. IFC should also take steps to ensure that communities are aware of this standard,and that stakeholder groups have the opportunity to knowingly provide or withhold their support.Strengthen “good faith negotiations” to protect indigenous communities’ rightsIn 2007, the UN General Assembly adopted the Declaration on the Rights of Indigenous Peoples, whichenumerates current expectations for respecting indigenous rights. In particular, the Declaration requires free,prior and informed consent of indigenous peoples for activities affecting them. The IFC, however, has notyet updated the Performance Standards to ensure consistency with the Declaration.For projects that affect indigenous peoples, IFC requires its clients to enter into “good faith negotiations”with affected peoples, and also to obtain broad community support. Together, these requirements could beequivalent to the principle of free, prior and informed consent with further adjustments:Where governments have made indigenous rights commitments under international law, such asthrough ratification of ILO Convention No. 169, there must be evidence that indigenouscommunities have provided their free, prior and informed consent before the IFC providesfinancing.For projects already underway when IFC becomes involved, there must be evidence thatgovernments or previous project developers undertook a process of good faith negotiations whengranting concessions.Negotiations must be free from coercion, prior to the commencement of project activities or IFCdisbursement, and informed through access to information and technical assistance.The investment cannot go forward if good faith negotiations do not lead to a successful agreementwith the communities.The outcome of negotiations must be a binding agreement that has been approved by the indigenouscommunity.Develop clear guidance on brownfield projectsIn cases where IFC finances a project that is already underway, there is no policy or guidance on how it willassess the quality of the pre-existing community engagement, and how it will, therefore, ensure that its clientsdeliver quality community engagement. Clear guidance on brownfield projects is particularly important inplaces where there has been a history of community opposition to development projects or where conflictsare ongoing. Further IFC guidance is needed, such as:Internal procedures for assessing pre-existing community engagement.Guidance on how to operate in areas of pre-existing community conflict.Separate standards for greenfield and brownfield projects, where relevant.Modification of the existing broad community support standard to also be applicable to brownfieldprojects.Integrate human rights considerations into IFC operations.The IFC cannot fulfill its poverty alleviation mandate without considering the structural causes of povertythat human rights help to protect against—such as discrimination, exclusion, lack of accountability, andabuses of state power. Throughout the review, IFC has explicitly acknowledged the need for a moresystematic approach to human rights. The human rights landscape has changed in the past three years,particularly due to the work of John Ruggie, the UN Special Representative on business and human rights.Professor Ruggie’s work has helped establish an international norm that companies are responsible forrespecting human rights in their activities.Ensure that the standards are consistent with Ruggie’s frameworkWhile the IFC has no direct obligations under international human rights law, it is important that IFC doesnot support any activities that would contravene human rights norms for companies.In his 2008 report to the UN Human Rights Council, Professor Ruggie introduced a widely-acceptedframework to help companies conduct appropriate due diligence in order to meet their responsibility torespect human rights. Key elements of any human rights risk management system include: (1) a companywidehuman rights policy; (2) human rights impact assessment; (3) tracking and reporting on implementation;and (4) access to remedies. Further steps are needed to ensure that the Performance Standards are consistentwith Ruggie’s framework, including:Require clients to incorporate key elements of human rights impact assessments listed below intoenvironmental and social impact assessments.Require a comprehensive human rights impact assessment for certain projects, such as Category Aprojects and those with potentially significant human rights impacts.For lending to financial intermediaries and other forms of indirect finance, require clients to developan internal human rights policy.Monitor IFC-financed projects to ensure that those voicing opposition to the project or raisingclaims with the accountability mechanisms do not face retaliation.Ensure that local communities are aware of IFC involvement in projects that affect themMany communities are not aware that the IFC has financed a project affecting them. This is increasinglyproblematic as the IFC supports projects through indirect finance. Furthermore, those communities thatknow about IFC involvement are often not aware that the CAO exists. The IFC does not require its clients toinform affected communities about this mechanism. Further steps to help address this problem include:Require clients to disclose that projects have received financing from the IFC, regardless of whetherthe IFC finances a project directly or indirectly.Require clients to disclose the existence of the CAO to affected communities.Assess human rights impactsESIAs often fail to anticipate human rights violations of IFC investments. The IFC has developed a draftguide to “human rights impact assessment,” which has been road-tested with several companies. Manyenvironmental and social impact assessments already address a wide range of human rights challenges, butadding human rights components to these assessments would enhance risk management. Examples of humanrights issues that clients should, but often do not, assess:Identification of duty bearers and rights holders.Discrimination against or disproportionate impacts on minorities and marginalized groups.Areas of tension and potential conflict by favoring certain stakeholders’ interests over others.Availability of conflict resolution mechanisms for local communities to seek redress.Whether conditions are in place for meaningful consultations, such as access to information,appropriate timing for consultations, inclusiveness of minority groups, and freedom of communitiesto express opinions without retaliation.Gaps in enforcement of local laws that may require additional protection.Legacies of past development projects and unsettled human rights claims.Apply John Ruggie’s framework to IFC’s indirect financeIncreasingly, the WBG invests indirectly in project developers and financiers, rather than investing directly ina specific project. For example, almost 40% of the IFC’s portfolio consists of lending to financialintermediaries. The IFC also increasingly participates in trade finance and asset management. In theseinvestments, the IFC has less operational control over the project, and is less able to monitor use of fundsthat might be disbursed across several different projects.Currently, the IFC applies the performance standards when lending to financial intermediaries that havehigher-risk portfolios. For all financial intermediaries, the IFC requires companies to create companyenvironmental and social risk management systems, although the requirements for these systems are vague.Many private financial institutions have already adopted human rights policies, in line with Professor Ruggie’srecommendations for all companies. Similar requirements for IFC clients would help to strengthen humanrights protections in its indirect finance portfolio.