The International Finance Corporation (IFC), the division of the World Bank that lends to private corporations, is expanding its profile in the agribusiness sector. In the second part of this Sustainability Watch, Ben Cooper examines IFC lending through third parties.

As it increases its lending to the agribusiness sector, the International Finance Corporation (IFC), the division of the World Bank which lends to private companies, has become a potentially valuable source of investment capital for smaller agricultural enterprises for whom other means of finance are not available.

However, this area of the IFC’s activities is by necessity conducted indirectly through financial intermediaries (FIs), which has proved a controversial issue for the institution.

As an organisation allocating public funds, there is rightly an expectation of a high level of transparency and accountability concerning where IFC loans go and for what purposes they are used. In particular, campaigners have raised concerns over the environmental and social sustainability of some IFC-backed initiatives, not least as it steps up its activities in the agribusiness sector.

“The number of agriculture-related projects or food security-related projects is increasing, and that’s a specific strategy from the IFC, and so I think there’s increasing worry about what is the focus of those projects and who’s benefiting from them and who’s not benefiting from them,” says Peter Chowla of the Bretton Woods Project.

However, as the IFC’s remit involves lending to companies large and small and far and wide, there is an inherent challenge in ensuring a consistent and adequate level of scrutiny and control as funds are dispersed.

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Moreover, as the IFC expands its involvement in agribusiness, its efficiency in reaching smaller-scale borrowers is particularly important, not least in the context of the focus in the food security debate increasingly being placed on smallholder agriculture.

There is broad agreement on the key role smallholders have to play across a range of stakeholders including UN institutions, NGOs and the corporate sector. For instance, in the lead-up to World Food Day last October, the World Economic Forum (WEF) stated: “Smallholder farmers are critical to advancing agricultural transformation, improving food security and achieving broader development goals.”

The WEF added, however, that smallholder agriculture is “a risky operation” due to “weather, health, financing and price shocks”. It stressed the importance of allowing the smallholder sector to invest in sustainably boosting productivity and improving resilience to market shocks.

“Innovative insurance and financing instruments are required to encourage farmers to take productivity-enhancing risks, such as adopting new technologies and high-value crops,” it said.

If ever there were a time for the channelling of World Bank funds through financial intermediaries to smaller agricultural enterprises in the developing world to come into its own, it is now.

In that context, it is no surprise observations in February by the World Bank’s own watchdog – the Compliance Advisor Ombudsman (CAO) – regarding the IFC’s degree of scrutiny on environmental, social and governance (ESG) and lending through third parties has been greeted with some consternation by NGOs.

The CAO audited 188 investments concerning 63 clients. It concluded the majority were “in compliance with the applicable environmental and social policy and procedural requirements”. It said the additional resources IFC had allocated from 2008 had had “a significant positive effect on the level and quality of client engagement and compliance”. However, it found that 10% were non-compliant.

More worryingly perhaps, it said the IFC “does not have a methodology for determining whether its principle (sic) requirement on clients – the implementation of an environmental and social management system – achieves the core objective of ‘doing no harm’ or improving environmental and social outcomes at the sub-client level”.

The CAO report continued: “This means that IFC has no quantitative or qualitative basis on which to assert that its financial intermediation investments achieve such outcomes, which are a crucial part of its strategy and central to IFC’s Sustainability Framework.”

The CAO panel concluded the IFC procedures were “not designed to support the broader environmental and social outcomes that are commensurate with IFC’s prominent leadership role as a promoter of environmental and social responsibility”. Achieving those objectives would require the IFC to “expand its approach”, the CAO said, and to facilitate a “self-sustaining cultural change within its clients’ organisations, in order to be “more aligned to the aspirational objectives within IFC’s Sustainability Framework as well as the expectations of stakeholders”.

In its official response, IFC said its work through financial intermediaries provides “much-needed access to finance for millions of individuals and micro, small, and medium enterprises that we would never be able to reach directly”. It said it “looked forward” to continuing to work with the CAO and other stakeholders on further improvements.

While an IFC spokesperson suggests to just-food that “a 90% success rate” is “very high by any audit standards”, Chowla strongly rejects any suggestion the CAO audit represents a relatively clean bill of health. 

“I think the IFC response is completely disingenuous,” Chowla says. “The CAO audit says that there are concerns about half the IFC portfolio because of the way the Sustainability Framework is applied to financial intermediaries. Essentially the IFC has no knowledge of the environmental and social impacts on the half of its portfolio that goes to the financial sector.”

The IFC spokesperson concedes there is more work to be done. “We recognise we can do more and we’re working to strengthen both our development impacts and how we approach environmental and social risk management. It isn’t ‘case closed: we’re 90% compliant let’s move on’. We continue to engage not just with them (CAO), but with our financial intermediaries and with Bretton Woods as to how we best move forward.”

Arguably, in allowing the IFC to reach greater numbers of small-scale borrowers, notably smallholders and co-operatives, lending through financial intermediaries has the potential to be precisely the catalyst for sustainable development enshrined in the precepts of the World Bank. 

The challenge appears to be how to diffuse these monies efficiently and productively through a diverse portfolio of financial intermediaries while guaranteeing complete transparency and accountability and ensuring all the lending being undertaken meets recognised ESG criteria. 

While that challenge is being addressed, the IFC’s profile in the international food arena is likely to continue to rise, either for good or not so good reasons.

Whether with regard to direct or indirect lending, the contentious debates in the agri-food sector over issues such as land entitlement, environmental degradation and the impact of export-orientated commodity agriculture on farming communities and local supply chains will provide some interesting judgment calls for the IFC as it expands in this area. Nevertheless, provided the requisite controls and safeguards are developed and successfully deployed, expanding in the agribusiness sector offers the IFC an opportunity to do considerable good.