An important key to IFC’s success has been embracing good governance and sustainability principles in the way we do business and the way we select the companies to finance. Over the past sixty years, IFC systematically built up knowledge and experience and created its own standards and methodology, which have become recognized as global benchmarks for environmental, social and governance risk management in the private sector.
In the last ten years, we estimate that $4.5 trillion in project finance across emerging markets has adhered to IFC’s Performance Standards and Corporate Governance Methodology or principles inspired by this guidance. The voluntary adoption and application of these standards is testimony to what is now broadly accepted— environmental, social and governance considerations are central to business and economic success.
To expand the application of sustainability standards across entire financial systems of emerging markets, IFC has updated and expanded its methodology, to encompass environmental and social issues into corporate governance practices.
The core tool of the Methodology is the IFC CG Progression Matrix, which can guide companies, investors, regulators, corporate governance evaluators, and other stakeholders in assessing and improving a company’s governance framework in relation to environmental and social issues. It emphasizes the importance of continuing progress—rather than static minimum standards—in corporate governance and sustainability practices of a company.
The Matrix focuses the assessment along six parameters—commitment, the structure and functioning of the board of directors, the control environment, disclosure and transparency, treatment of minority shareholders, and governance of stakeholder engagement (which expands the traditional definition of stakeholders to include civil society and communities affected by a company’s operations).
The key update of the Methodology covers significant developments in corporate governance since the 2008 financial crisis, where corporate governance shortcomings, particularly in the area of control environment (internal audit, internal controls, risk governance and compliance) interrupted economic growth. Additionally, the methodology is revised so as to assess environmental, social and governance practices in an integrated fashion. For example, the parameters on corporate commitment, the structure and functioning of the board of directors, and disclosure and transparency were updated to include provisions on board oversight of E&S issues, better sustainability reporting, and ESG leadership. Also the methodology around the control environment incorporated provisions on the review of integrated environmental and social risk management systems as part of the company’s controls, audit, risk and compliance functions. Additionally, a sixth parameter on governance of stakeholder engagement was added because the engagement of stakeholders (including contracted workers, primary supply chain workers, suppliers and contractors, local and international NGOs and CSOs) is of such importance that it warrants being an integral part of a sustainable company’s corporate governance.
The Methodology is a response to the growing trend among investors who are paying more attention to the way companies manage environmental, social, and governance matters comprehensively. Investors are concerned about how companies are addressing long-term value creation and working to build a better ESG framework to serve all stakeholders. The Methodology is designed to help both investors and companies assess progress and improve in these respects.
As a major investor in emerging markets, IFC is applying this Methodology to its own investments. IFC will also apply this integrated approach beyond the companies we invest in. IFC will utilize it in its ESG advisory services work with regulators and stock exchanges—to help them apply higher disclosure standards to corporate listings, reporting requirements, and other disclosure obligations to grow sustainable financial markets.
For more information about our corporate governance work around the world, visit www.ifc.org/corporategovernance.
For more information about our sustainability work, visit www.ifc.org/sustainability.
December 2018