On the heels of two recent legal battles – the Jam v. IFC case, which led to the stripping away of IFC’s absolute immunity in U.S. courts, and the Juana Doe v. IFC case, in which the parties recently reached a landmark settlement – IFC and its defenders appear to be weaponizing the specter of legal risk to resist reform efforts that could improve the institution’s on-the-ground impact and decrease the likelihood of future litigation.
According to views expressed in a recent Devex article, for example, International Finance Corporation (IFC) leadership is concerned that directly providing remedies to people harmed by its investments would open the institution to legal liability, which would make it more risk averse when investing in fragile and conflict-affected countries. Such liability, they say, would prevent IFC from reaching its target of delivering 40% of its business to fragile and conflict-affected countries by 2030 and would deter staff from taking more risks in these environments. As a result, IFC is reluctant to provide remedies for people who are harmed by its investments.
This perspective does not match the reality on the ground – including in the countries that represent the other 60% of IFC’s aspirational portfolio – nor does it accurately identify or address the real source of IFC’s legal risk.
In reality, it is precisely the legal, reputational, and financial risks that are cited in the article in support of IFC’s refusal to remedy the harm that should in fact encourage IFC to commit to providing remedy to those harmed by its projects.
Ignoring the root causes of legal risk
The Jam v. IFC case confirmed that IFC is not above the law, and this is a good thing. After all, organizations that believe they are above the law act like it. In IFC’s case, legal risks are not being imposed by external sources but rather exist because of internal management decisions. The threat of future litigation should push IFC to address the root causes that led to it being sued in the Jam case in the first place – its own (undisputed) failures of due diligence, oversight, compliance, and enforcement and its refusal to remedy the resulting harm. Far from increasing legal risk, addressing these internal failures is IFC’s best avenue for avoiding future litigation.
Borrower non-compliance is an issue of IFC’s own making
The Jam litigation would not have been necessary if IFC had used its extensive contractual authority to compel the borrower to prevent, mitigate, or remedy the harm. The Jam case is not unique in this regard. In fact, CAO analysis noted that IFC and the Multilateral Investment Guarantee Agency (MIGA) made use of the leverage provided by contract provisions conditioning disbursements on compliance with Environmental and Social Action Plans in only 23% of CAO compliance cases where IFC/MIGA “considered a client’s E&S actions inadequate.” In many cases, IFC staff are not using – or are actively avoiding – the tools already at their disposal to prevent, mitigate, and remedy harm.
Modeling responsible business is a value added in fragile and conflict-affected countries
Implementation of E&S standards doesn’t just mitigate legal, reputational, and financial risk – it goes to the core of IFC’s mission and relevance as a development institution. IFC’s assurance that projects will meet its heightened standards – through capacity building, supervision, and enforcement – is a key IFC value-add, and this is all the more important in countries affected by fragility and conflict. IFC can play an important role in encouraging responsible business and preventing a race to the bottom in fragile and conflict-affected countries, which will lead to better development outcomes over the longer term.
As IFC has argued, investing in fragile and conflict-affected countries is indeed risky. Things will go wrong in these projects. If IFC management made more of an effort to align its activities with the work of the United Nations and OECD in promoting internationally recognized business and human rights standards, it would know that a business entity can take risks, minimize liability, and still act responsibly. The key is to put in place strong policies, appropriate due diligence throughout the project cycle, and a system to provide remedies where harm occurs.
IFC has developed reasonably strong E&S standards, even if they have not kept pace with the United Nations’ and OECD’s leadership. But if IFC is unwilling to ensure that projects meet its own standards, then it is neither aiding in project performance nor de-risking the project, and thus failing as a development institution. Indeed, IFC’s involvement may make matters worse, since borrowers can use IFC investment to greenwash harmful projects that are dismantling rather than developing the livelihoods of local stakeholders.
If communities are not left worse off, they will have no reason to sue
Lost in the discussion of the “risk” of providing remedy is any acknowledgement that under the current status quo, it is the communities that host IFC’s projects that are currently forced to bear all of the risk, without any remedy, despite having had virtually no say in the project. For example, a 2020 study by Nomogaia found that the IFC had applied its risk management standard (PS1) in less than half of its 2012-2020 portfolio and its Indigenous Peoples policy in only 1% of its projects – suggesting an effort to circumvent these standards.
Litigation is not communities’ preferred option
If IFC takes remedial action when its investments cause or contribute to harm, communities will have little incentive to undertake costly and time-intensive litigation against IFC. The Jam lawsuit, for example, would not have been filed if IFC had taken remedial action – as the CAO repeatedly recommended – to address the harm to the project’s neighbors.
Failing to provide remedy tells host communities that the only option for redress is to sue IFC – a message that is quite dangerous to IFC’s reputation and bottom line.
Still awaiting the flood
If IFC’s claim that compensation will lead to a flood of complaints sounds familiar, it is because IFC made the same argument throughout the Jam litigation. The Supreme Court rejected this argument at the time, and sure enough, five years on from the 2019 Supreme Court decision, no such flood has materialized.
Nor will it. While CAO cases do not represent all instances of harm, the fact that CAO cases comprise a small percentage of IFC investments (1.2% of the IFC portfolio as of July 2019) and CAO recommends remedial action in only a subset of those cases indicates that the “flood of complaints” claim is overblown.
If we do see the flood IFC fears, it will be because IFC’s remedy and accountability crisis is far worse than currently realized – making the provision of remedy all the more necessary.
It’s time for a new approach at IFC
We urgently need a shift in how IFC views remedy. IFC leadership has a responsibility, in line with international standards, to ensure that its staff do not think of remedy as a failure, but rather as an essential part of the development process.
Providing remedy will help ensure that communities are not left worse off by the projects intended to benefit them. It will improve development outcomes. It will minimize IFC’s reputational risk. And it will be far less expensive and destructive to IFC’s legitimacy and reputation than litigation.
