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Strong safeguards are needed when investing public money via private financial intermediaries

Added 25 Jan 2018
You wouldn’t just hand your money over to someone else to invest without asking them what they were going to do with it, would you? If you were a public body, at the very least you’d want to make sure it wasn’t used in a way that damaged the environment or undermined human rights.

Increasingly, however, there are concerns that development finance institutions (DFIs - government-backed institutions that invest in private sector projects in developing countries) - are lending money to private sector financial intermediaries (FIs) to invest in infrastructure projects in developing countries - without ensuring that proper environmental and social safeguards are in place. These intermediaries - private commercial banks, private equity funds and infrastructure funds - are essentially go-betweens deciding how and where public money is spent, and who gets to spend it.

A recent open letter from 30 civil society organisations to the Asian Infrastructure Investment Bank (AIIB) points out that the bank invested in three financial intermediaries last year and has plans for more in 2018. Such third-party investments, the signatories warn, carry “significant risks - in particular around clients’ adherence to environmental and social safeguards.” Furthermore, the letter cites research which found that 130 projects funded through intermediaries in 24 countries “are causing or are likely to cause serious environmental harms and human rights violations.” These projects cover a range of high-risk sectors including energy, industrial agriculture, mining, transportation, infrastructure, and even private military contracting.

Calls by CSOs for disclosure and accountability in DFIs’ investments via the financial sector are not new for many of us. Faced with a critical 2012 report from its own accountability watchdog, the International Finance Corporation (IFC) - the private investment arm of the World Bank - took steps to mitigate potential reputational damage. The IFC has had to recognise the pitfalls of relying on ‘hands-off’ financial intermediaries and has committed to reducing high-risk lending - whilst at the same time increasing investments in more responsible, sustainable projects such as climate mitigation and SMEs owned by women.

Now campaigners want the AIIB not only to follow the IFC’s first steps towards reducing high-risk investments, but to vastly improve on them, by “putting in place robust policies and systems around financial intermediary investments to ensure transparency, accountability and efficient channels of communication with all stakeholders.” In particular, the letter calls on the AIIB to commit to:
  • Scrutinising the existing project portfolio and pipeline of proposed FI clients to ensure that all projects are in line with the bank’s policies and strategies; 

  • Ensuring that the proposed FI client has in place a robust environmental and social management system before the investment is approved; 

  • Reviewing the track record of the FI client in applying the environmental and social framework and making this assessment public; 

  • Ensuring that FI clients require sub-projects to apply AIIB’s relevant environmental and social standards and take remedial actions should they fail to do so and cause environmental or social harms; 

  • Monitoring the proposed client’s social and environmental due diligence and supervision of its investment; and 

  • Ensuring FI sub-project affected communities have access to redress, including through the AIIB’s accountability mechanism. 

The AIIB has yet to respond. But it is clear that handing over money without caring about human rights and environmental impacts – which can be major problems in infrastructure projects - simply isn’t good enough. When investing public money via the private financial sector, development finance institutions have a duty both to be transparent about projects financed by third-parties and to meet the highest social and environmental standards - if not, they will fall short of the requirements for an institution that serves development objectives.