IFC’s Performance Standards define our clients' responsibilities for managing their environmental and social risks. © Penonomé
When Real Infrastructure Capital Partners LLC (REAL LRIF) and renewable-energy company GEMEX first considered investing in two 50-megawatt wind farms in Mexico, they understood that there were risks beyond the hoped-for number of breezy days falling short of estimates. In fact, managing potential environmental, social, and corporate governance-related risks—like security issues that plagued the region—was crucial to the success of the project.
So, to protect their investment, they adopted an environmental management system, appointed an environmental and social (E&S) manager, and developed extensive stakeholder mapping, engagement, and grievance procedures. They also initiated biodiversity assessments and monitoring for birds, bats, and butterflies within a certain radius of the wind farms.
While GEMEX was already strongly committed to environmental, social, and corporate governance risk management, the company was required to adhere to IFC’s Performance Standards for this project because of its partnership with one of IFC’s private-equity investee companies, REAL LRIF. As GEMEX executives became more familiar with our Performance Standards, they saw results—like the benefits that followed opening communication channels with stakeholders and local communities. GEMEX now plans to voluntarily implement IFC’s standards for all future projects.
GEMEX is hardly the first company to recognize that it can do well by doing the right thing. More and more investors now examine environmental, social, and corporate governance performance as an indicator of how well a company is run—and what its long-term prospects promise. Nearly 90 percent of IFC’s clients believe that our environment, social, and governance support is key in helping them reach their long-term business goals.
Research supports the same conclusion that GEMEX came to: sustainability affects the bottom line. Corporate practices that follow clear, strong environmental and social standards can help companies manage risks effectively and help identify and take advantage of opportunities.
In a recent review of 800 IFC clients, we found that companies with good E&S performance tend to be more profitable than clients with weaker E&S performance. Clients with high E&S scores also outperformed the MSCI Emerging Market Index—an index created to measure equity-market performance in global emerging markets.
IFC works with private-equity funds in emerging markets because they can have a significant impact on company growth and job creation. The trainings and guidance we offer to them educate leaders on how to screen potential companies, manage resources prudently, and engage in an effective dialogue with stakeholders. Our training can also help identify opportunities for companies in new markets. IFC’s private-equity investments have generated an estimated 300,000 new jobs over the last 10 years.
Following our Performance Standards helped GEMEX deliver on its energy commitments to a private customer—on time, within budget, and in a socially responsible manner that exceeded local requirements. Steve Pearlman, Managing Partner of REAL LRIF, says that IFC’s Performance Standards “elevated the level at which GEMEX operated and made [the company] much more credible with other development finance institutions and international banks.”
But good practice standards aren’t relevant only for projects financed by IFC. They are sought after, accepted, and applied worldwide. During the past decade, an estimated $4.5 trillion has been invested in emerging markets in accordance with these standards, or principles inspired by them. Our work in building capacity and awareness in partners—including financial institutions—will lead to more responsible financing in emerging markets. Our goal is to eventually bring these practices to the entire emerging-market financial sector.
To do this, IFC provides free, open source information on market-friendly standards and practices with case studies and resources for companies, governments, civil society organizations, and others.
IFC’s FIRST for Sustainability website offers support for financial institutions to integrate sustainability into their policies, practices, and services. Since its launch in July 2011, the website has been accessed over 300,000 times.
The World Bank Group’s Environmental, Health, and Safety Guidelines (EHS) are another practical tool for applying E&S standards to projects. The guidelines have been downloaded 65,000 times in the past year, and are used by leading private sector companies. In 2016, the government of Myanmar used the EHS Guidelines as a basis for its new pollution prevention regulations.
Pearlman, the REAL LRIF Managing Partner, believes that IFC’s Performance Standards have permanently changed global business. “If you want to be a certain size player,” he says, “this is just the international standard of how things are done.”
To learn more about IFC’s Performance Standards, visit www.ifc.org/sustainability.
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Published in July 2017