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When in 2006, the International Finance Corporation devised a set of social and environmental standards to govern its lending activities, some said these would limit the IFC’s capacity to expand. With a record $18bn in new investments in 2010, these people “have been proved completely wrong”, says Lars Thunell, the institution’s Swedish-born executive vice-president and chief executive.
“The standards have allowed us to do more business because they provide us with a risk management tool,” he says.
The IFC, part of the World Bank Group, invests in emerging markets and uses its advisory services and lending resources to help private enterprises expand their activities in local economies.
The standards, says Mr Thunell, allow the IFC to look at such activities through a social and environmental lens. “As a development institution, we have to recognise that companies in many of the countries we work in have practices that are not where they should be,” he says. “But they could be willing to work with us in getting their standards up to a better level.”
As a result of a recent review, these standards have been updated to incorporate requirements for greater disclosure and transparency about projects, including requests for prior consent from indigenous peoples and lower emissions levels.
Some have called for stronger human rights protections to be built in to the standards. However, the IFC argues that, rather than introducing a performance standard in this area, human rights are better addressed by being “fully mainstreamed” throughout the standards.
For Mr Thunell, a link between social and environmental and financial performance is emerging. “We see clearly that, for the companies that are not focusing on environmental and social standards, we have high credit losses and significantly lower return on our equity investments,” he says.
And he points out that, because they are likely to be adopted by signatory banks to the Equator Principles, as well as by export credit agencies and international finance institutions, the revised performance standards will have an effect beyond the institution’s own activities. “There will be a wave of adjustments based on the changes we have made,” says Mr Thunell.
However, as well as promoting sustainability standards in investments that also foster development, Mr Thunell sees the IFC playing a critical role in tackling big global problems such as food security and water stress. When it comes to shoring up the world’s food supplies, the IFC works across the supply chain, from smallholder farmers to the companies that process, package and deliver food.
In addition to loans for small farmers, the IFC has developed financial products such as weather insurance policies and products that help them reduce the uncertainty associated with commodity price swings.
And given that the missing factor in the food chain is often infrastructure – with about 40 per cent of food produced in developing countries perishing on its way to consumers – this is also a focus for the IFC, which is working to promote cold chains.
Closely related to food security is the issue of water scarcity, something to which the IFC has given close attention in recent years. “We can close [the water] gap but it has to be not only on the supply side,” says Mr Thunell. “The issue of water efficiency is also extremely important.”
For this reason, the IFC not only provides expertise to governments, but supports the expansion of private-sector companies, such as India’s Jain Irrigation, in promoting water efficiency.
Mr Thunell believes that, with budgets stretched, more multilateral agencies and non-governmental organisations will embrace this approach. “A lot of aid agencies are looking at how to give more support to the private sector,” he says. “And that’s a dramatic shift that’s taken place over the past two or three years.”