When exiting investments, MDBs must address negative impacts of projects on communities
What happens when the private sector arms of Multilateral Development Banks (MDBs) exit their investments without addressing negative impacts and project-related harms, thus leaving project-affected communities without proper remedial actions? We examine seven IFC and IDB Invest cases to draw specific recommendations for how MDBs can exit projects and investments in a responsible manner.
This piece was co-authored by Katelyn Gallagher, Campaigns Director at the Bank Information Center (BIC); Carolina Juaneda, LAC Program Manager at BIC; Sarah Dorman, Staff Attorney at the Center for International Environmental Law (CIEL); and Carla García Zendejas, Director of the People, Land & Resources Program at CIEL. It was cross-posted on BIC’s website.
The private sector arms of the World Bank Group and Inter-American Development Bank Group, the International Finance Corporation (IFC) and the IDB Invest, respectively, provide businesses operating in developing countries with access to capital in the form of loans or equity. These investments by Multilateral Development Banks (MDBs) are intended to aid development and require businesses to adhere to the Banks’ standards. But what happens when these institutions close out their investments and move on to other projects?
MDBs quietly exit problematic projects
In several IFC and IDB Invest-financed projects, we have seen a troubling tendency: When problems arise within a project, often these institutions divest from projects before remedying negative impacts or project-related harm. This leaves affected communities without proper recourse, even in cases where the MDBs’ accountability mechanisms have found the institution to be in non-compliance with its own standards. By divesting from such projects, MDBs lose their leverage with clients. The abdication of responsibility by MDBs is concerning because it leaves communities to bear the full cost of project-related harms, while the MDBs dissociate themselves from the problems their investment generated. Responsible exit is not an issue that is included in the IFC’s performance standards or the IDB Invest’s Sustainability Policy, and there is no clear framework or policy that project-affected people — or management at the institutions themselves — can refer to or rely on.[1] MDBs, including the IFC and the IDB Invest, must examine how they are divesting from projects and what can be done to develop a framework for divesting in a responsible manner that contributes to remedial actions for any harm caused by their projects.
Cases revealing a pattern of divestment and early exit
A number of recent cases show that the IFC and the IDB Invest are exiting projects discreetly and prematurely before their respective accountability mechanisms, the Compliance Advisor Ombudsman (CAO) and the Independent Consultation and Investigation Mechanism (MICI), can finish investigating complaints that affected communities have brought regarding these projects. For example, this has happened in three IFC-supported projects: equity investments in Titan Cement in Egypt and Condor Gold’s mining project in Nicaragua, as well as a loan for the Alto Maipo Hydroelectric Project in Chile, which also received financing from several other development finance institutions, including the IDB Invest. Most recently, the IDB Invest exited the Ituango Hydroelectric Project (Hidroituango) in Colombia in early 2022, even as the MICI’s investigation of the community’s complaint remained ongoing. Each of these projects caused severe and residual environmental and social harms that the affected communities now face alone, lacking remedial actions from the MDBs and their clients who are responsible for these negative impacts.
For instance, despite the CAO’s findings that the IFC was in serious violation of its Performance Standards for the Titan and Alto Maipo projects, the corresponding management action plans contain no concrete actions to address the projects’ negative environmental and social impacts on communities. This was due in large part to the fact that the IFC had already divested and given up its leverage. In Nicaragua, Condor Gold had targeted community members with criminalization, harassment, surveillance, and threats. When the IFC quietly divested in the midst of the CAO’s compliance appraisal, it left community members at even greater risk of reprisal in a context where they feared for their safety if they continued to raise concerns. One community leader who made a public announcement about the divestment was forced to go into hiding with his family after riot police descended on his home, physically and verbally harassing family members who were present at the time. In Colombia, Hidroituango has caused the forced displacement of thousands of people, damaged biodiversity and surrounding ecosystems, undermined the livelihoods of numerous communities in the region, and exacerbated violence in an area of ongoing armed conflict. After hearing that the IDB Invest was considering exiting HidroItuango, project-affected community members wrote to the President and Board of the IDB to request that the IDB Invest work with them to develop a responsible exit plan, emphasizing that the IDB’s responsibility to address harms caused by the projects it finances does not cease upon repayment of loans; to date, the IDB Invest has not provided affected communities with information about concrete steps it plans to take to ensure responsible exit or to address the harms already caused by this project.
Moreover, in other cases, even after the CAO has completed investigations and confirmed non-compliance with the Performance Standards, the IFC has divested[2] and left communities to bear the brunt of the IFC and its clients’ actions. In Guatemala, the IFC supported two hydroelectric projects, Canbalam in Santa Cruz Barillas (2008) and Santa Rita in Corbán (2012), via financial intermediaries. Despite the CAO’s findings, the IFC Management deflected responsibility for the identified impacts, contending that the harms identified in Santa Cruz could not be attributed to the project and claiming that communities in Santa Rita skipped to the compliance phase without first attempting to solve the issues with the company. The communities still have not received remedy to address the persistent residual project-related harms in the territories, such as criminalization of community members and negative economic and social impacts on families’ way of life.[3]
Are the MDBs learning and incorporating the lessons of failed experiences to avoid the repetition of past shortcomings?
It is a positive sign that the recently approved MICI compliance report on another hydroelectric project in the Ixquisis micro-region of Guatemala, which found non-compliance by the IDB Invest in eight different areas, includes a recommendation with language around responsible exit. Recommendation 29 of the MICI report establishes that in case of exit from these projects, the IDB Invest should exit responsibly, creating a responsible exit plan that takes into account the findings, conclusions, and recommendations of the MICI report. It also clarifies that the plan should be developed in consultation with communities.
While communities impacted by the Canbalam project have still been left without remedy for the harms they continue to face, as part of the management action plan responding to the CAO report for that project, the IFC committed to reviewing the way that it exits projects. The IFC is also in the midst of a broader review of its institutional accountability frameworks and processes that included a review of the CAO’s policy, and it is also looking at institutional options for providing remedy in the case of harm.
MDBs must seek to exit projects responsibly
As the IFC, the IDB Invest, and other institutions examine how their policies and practices can be improved to strengthen accountability, we offer the following recommendations for how MDBs can exit projects and investments in a responsible manner:
- Analyze and draw lessons from current “exit” practices to understand where they can be improved.
- Create a comprehensive remedy framework, including responsible exit, that is based on the UN Guiding Principles and OECD Guidelines and draws lessons from OHCHR’s 2022 report Remedy in Development Finance: Guidance and Practice.
- Develop an institutional remedy fund to facilitate a consistent and coherent approach to remedy in all projects, including and especially when the MDB divests or exits a project early.
- Develop institutional policy and guidance that directs staff on how divestment or early exit can be conducted more responsibly.
- Build leverage into contracts from the initial investment, including requirements for clients around divestment and commitments to remedy harm after divestment or early exit.
- Initiate consultations about possible plans and scenarios for divesting or exiting projects early with communities (including any who have initiated complaints processes) at least 12 months prior to divestment or as early as possible.
- Include project-affected communities and CSO supporters as stakeholders in the design and implementation of exit plans and remedial actions. Such plans should include measures to prevent, avoid, and mitigate significant environmental and social risks and harm that have not been effectively remedied and that will continue after the MDB’s exit.
- Publish the information about the divestment or exit on the MDB’s website and update relevant project pages to reflect the accurate project status, immediately after divestment happens.
- Issue a divestment or exit note to explain the main commitments from the client to address environmental and social issues following the divestment. This should include, for example, ongoing or anticipated impacts that the client should address and monitor. If there is a corrective action plan prepared by the client to address non-compliance issues, the divestment or exit note should also mention the main actions included in that action plan, etc.
[1] At the moment, the only international policy instruments that have addressed the issue of responsible exit are the United Nations Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises. The Principles and the Guidelines recommend taking the necessary steps to stop, prevent, and mitigate the harms. The UN Principles particularly put emphasis on leverage and mention that “leverage may be increased by, for example, offering capacity-building or other incentives to the related entity, or collaborating with other actors”. The OECD Guidelines establish the need to build leverage from the beginning of the relationship between the parties, stating that “having the prospect of disengagement on the table from the beginning of – and throughout – the business relationship can potentially increase the company’s chances of successfully addressing adverse impacts without having to completely disengage from a relationship.”
[2] In both projects, IFC supported financial intermediaries (FIs), which both pulled out of the Canbalam and Santa Rita projects.
[3] In both Santa Cruz Barillas and Santa Rita, the communities are concerned that the lands acquired by the projects remain in the hands of the commercial banks that participated in the financial package of the projects, meaning they can sell them at auction, and new projects could come with new impacts on the communities.
This blog was posted on March 10, 2022.