Representatives from hundreds of DFIs are gathering at the Finance in Common Summit on 19 and 20 October 2021 to strategize and coordinate on ways to advance sustainable development. The COVID-19 crisis is driving attention to the need for a more just and inclusive recovery, with many in the private sector expanding how they think about sustainability to include a renewed focus on inclusiveness and social justice. Now is a critical moment for DFIs to create a compelling and actionable vision for how they will advance the Sustainable Development Goals (SDGs), including reducing poverty and promoting food security. To achieve these goals, DFIs must improve their investments’ performance on human rights.
Land-based investments carry significant social and financial risks
Progressive environmental, social, and governance (ESG) standards recognize the importance of community involvement in decision-making but can be challenging to implement in practice. While land and natural resource investment projects often promise the potential to reduce poverty, their negative impacts can have the opposite effect for the communities located near investment sites. This concerning dynamic occurs despite the right of communities to shape decisions about when and how an investment happens. In particular, power asymmetries between communities and operating companies can undermine the potential for meaningful consultation and sustained dialogue.
To be an empowered counterparty, each community needs the same access to information and legal and technical assistance that is readily available to companies. For example, communities need support to:
- understand the highly technical contents of environmental impact assessments and permits
- deliberate and make collective decisions in an inclusive manner
- make use of grievance mechanisms when a harm occurs
To improve outcomes for local communities, DFIs must require their clients to ensure that affected communities can access support from lawyers, scientists, and other experts to participate fully in investment processes. Facilitating independent support will not only protect communities, but also stands to benefit companies. Making such support available can help companies to build trusting relationships with host communities and to obtain – and maintain –social license to operate.
Operating companies that fail to appropriately engage communities, on the other hand, face the tangible risk of costly disputes with communities that can cause operating delays, project failure, and accompanying financial and reputational risks:
- Tenure risk could massively increase operating costs – as much as 29 times over a normal baseline scenario – and even cause outright abandonment of an up-and-running operation.
- Companies that rate poorly on human rights can expect the incidence of material credit events (such as halts to operations, regulator inquiries or enforcement actions, and lawsuits) to be up to 60 times higher than for companies with good performance ratings.
- A 2021 report showed that the financial damage due to social risk is four times higher than the cost of proactive risk mitigation. By setting aside as little as 2% of the initial project costs, investors can avoid losses due to delays and conflict that reduce the net value of the investment by 25% to 35% on average.
DFIs can strengthen ESG and risk-adjusted return by enabling community access to independent technical support
DFIs have made some advances in their ESG performance and set important norms on community rights as part of their due diligence practices. Performance standards include requirements for consultation and community participation, and DFIs and their clients alike have established accountability mechanisms to resolve grievances. Yet implementation gaps remain and community participation in decision-making about the investment project continues to be a major blind spot.
Enabling communities to access independent technical support can address these gaps, leading to more inclusive decision-making and responsive project design, and preventing avoidable conflicts. Giving communities a meaningful say in the investments that affect them is also crucial to aligning investment with the SDGs. More responsive investment processes that address their concerns can advance a wide range of broader development objectives, creating more economic opportunities for rural communities (SDGs 1 and 2) while encouraging more sustainable land use (SDG 15) and water management (SDG 6). Communities who receive support can better access and understand information about the project and engage more effectively in sustained dialogue with operating companies.
DFIs can use their leverage to secure support for all affected communities by requiring their clients to:
- make sure communities have independent legal and technical support as a guiding principle in ESG standards and a compliance requirement in due diligence and auditing procedures – access to support is particularly important at key moments such as initial consultations and during dispute resolution and grievance redress processes
- earmark a small fraction of the loan amount to cover the costs of community support
These requirements would signal a clear commitment to participatory processes while establishing mechanisms for compliance and monitoring that are sustainable over time. In addition, these commitments would reinforce and support the implementation of DFIs’ existing performance standards. Finally, they could also improve investments’ bottom line by preventing harm to communities and addressing disputes and grievances proactively before they escalate.
Toward a pooled fund for community technical assistance
To be effective and viewed as legitimate, technical support for communities needs to be directly accountable to communities and procured and financed in ways that preserve independence from operating companies.
We’re aiming to build the architecture for a pooled fund for community legal and technical support. The fund would function as an independent facility that would receive contributions and pay out grants for communities to get the support they need. Doing so can help to connect communities to qualified local support providers while maintaining independence. It would also enable DFIs to easily check compliance with requirements for meaningful consultation while offering a third-party mechanism for monitoring on-the-ground implementation of ESG standards.
DFIs’ important sustainability mandates make them uniquely placed to identify and advance modes of investment that respect community rights and promote sustainable development. Yet on the current trajectory, they risk leaving many project-affected communities behind. One critical measure within reach for DFIs is to lead by example and require their clients to cover the cost of community technical support.