Researching Development Finance Institutions

What is a development finance institution?

Development finance institutions are banks that aim to alleviate poverty and spur economic development. While their focus is development, many also earn a profit.

Governments control development finance institutions. Some, like the World Bank, are multilateral, meaning they are controlled by many governments. Bilateral institutions like France’s Proparco are controlled by one government. Shareholder governments fund these banks with public money, often from taxes collected from their citizens.

Why are development finance institutions important?

Development finance institutions are important pressure points for advocacy. They often have relatively strong social and environmental standards for their investments. Because of their development mission, they tend to be sensitive to the reputational risks of being associated with projects that cause harm.

Many have independent accountability mechanisms, where people affected by their investments can file complaints. (For a list of development finance institutions that have independent accountability mechanisms, see here.)

For these reasons, finding a development finance institution in a project’s investment or supply chain can be transformational for advocacy.

How do development finance institutions support harmful projects?

Development finance institutions can provide support to projects in many ways. Unlike other types of actors described on this website, which tend to focus on one type of investment such as shareholding or lending, development finance institutions may be found in any part of a project’s investment chain or supply chain. They might be a shareholder, a lender or an insurer. Or they may provide financial or technical support to a government entity involved in the project, including for feasibility studies. Development finance institutions can either be directly involved in a project or might be separated from the project by several layers of business relationships.

In research, development finance institutions are easiest to uncover when they directly support a project, such as providing a loan for the development of a mine. Uncovering development finance institutions in these cases is relatively straightforward because the relationship is simpler to trace.

However, when researching harmful projects, a development finance institution is more likely to be indirectly involved and thus harder to identify. This is because development finance institutions are increasingly outsourcing their funds to third parties in the financial sector, such as commercial banks, insurance firms and investment funds. These third parties referred to as “financial intermediaries” invest the development finance institution’s money as they see fit, often with limited oversight and transparency.

To take a hypothetical example, a development finance institution might become a shareholder in a commercial bank in Indonesia. After receiving that investment, the bank might provide finance to an energy project harming local communities.

Why are these indirect relationships important?

Many development finance institutions require the financial intermediaries they work with to adhere to their social and environmental standards. Many also require the end users of this money the projects that receive funding from the financial intermediary to also follow these standards. In the Indonesia example above, both the bank and the energy project should apply the development finance institution’s social and environmental standards.

If the project causes harm to people and the environment, it is likely in breach of these standards. This allows people affected by the project’s harms to file a complaint to the development finance institution’s independent accountability mechanism. These complaints can be a powerful advocacy opportunity. For more information on using independent accountability mechanisms in advocacy, see:

How do you know if a financial intermediary complaint will be found admissible?

Every independent accountability mechanism has different rules on what kinds of complaints it will admit. But because using financial intermediaries is a relatively new phenomenon, the admissibility rules at most mechanisms don’t take these complex, multi-layered relationships into account. They were written during an era when direct relationships were the norm. The burden is on affected communities to interpret these admissibility rules and apply them to something they were not designed for: complex, multi-layered and often opaque relationships involving financial intermediaries.

In general, for a complaint to be found admissible with most accountability mechanisms, the development finance institution must be “materially” (which is another way to say financially) linked to the project causing harm. In other words, there must be active financial relationships at all levels from the development finance institution, through to the financial intermediary, and on to the project. This may involve several or more layers of business relationships. In the Indonesia example above, the development finance institution must be a current shareholder in the bank, and the bank’s loan to the project must be active, for a complaint be found admissible.

This is the baseline for admissibility with most accountability mechanisms. There are likely to be other factors considered as well, such as the types and sizes of the transactions, how many layers of business relationships separate the development finance institution from the project causing harm, and whether the development finance institution put any restrictions on how the financial intermediary could use its money (a concept known as “ringfencing”). Because there are no set rules on these concepts, these factors must be judged on a case-by-case basis.

To get a sense of the many factors the International Finance Corporation’s accountability mechanism assessed when it received a complaint from Kenya, see this blog post written by Accountability Counsel.

Before filing a financial intermediary complaint, it can be helpful to look at that development finance institution’s policies on financial intermediaries. Note that not all institutions have such policies. For a list of those that do, see here.

Ultimately, predicting whether an accountability mechanism will accept a financial intermediary complaint can be difficult. After you’ve done the research and analysis, you may still not know for sure how the complaint will be assessed. The best approach may be to file a simple complaint first, setting out the evidence you have gathered, to test whether it will be found admissible. Complainants can always follow up with additional information -including adding more complainants if the admissibility finding is positive.

It may also be helpful to consult with an organization that has experience helping communities file financial intermediary complaints, such as Inclusive Development International, Accountability Counsel, Center for International Environmental Law and Recourse.

How do you identify development finance institutions?

Uncovering development finance institutions isn’t always straightforward. You may uncover them through the normal course of your research. But because they’re such important pressure points for advocacy, it’s always a good idea to do a focused search for them after you’ve completed your investment and supply chain research, just to be sure you haven’t missed anything. The following tools can help you do that.

  • Inclusive Development International’s Development Bank Investment Tracker searches the investments of 17 development finance institutions that have independent accountability mechanisms.
  • Direct support: To identify direct development finance institution support for your project, type in the name of the project into the search bar. You can also do separate searches on the names of the companies developing it. You’ll then need to closely read the relevant project documents that come up in this search. This should help you uncover any direct support being provided by development finance institutions.
  • Indirect support: To search for indirect support through financial intermediaries, you must first complete your investigation of the project’s investment and supply chains. Once you have done this, you can type in the names of key project actors you have identified – the lenders, insurers, buyers and others – into the Development Bank Investment Tracker one by one. If there are any private equity funds that hold shares in the company or project, type those in, too.
Tip

Private equity funds are the most common type of shareholder to receive support from development finance institutions. Moreover, for structural reasons, they’re also the type of shareholder that is most likely to create an active financial link with a development finance institution. When you have a complete list of shareholders from your investment chain research, it is best to conduct searches on only the private equity funds – and not the other types of shareholders in the Development Bank Investment Tracker.

  • Development finance institution project pages: The Development Bank Investment Tracker searches the investments of 17 development finance institutions we consider to be strong pressure points for advocacy. To search for investments made by other institutions, you must go to that institution’s website. Most have searchable databases with details about investments. For instance, the Japan International Cooperation Agency, which is not in the Development Bank Investment Tracker, discloses its investments here.
  • Requests for information: Many development finance institutions are required to comply with internal access to information policies. (For example, see the International Finance Corporation’s policy here.) Many have an information officer in charge of handling requests from the public. If there is a key piece of information that is not publicly available, you can write to that person to request it. Some institutions will require a formal request and others will accept an email. Make sure you look at the organization’s policy for access to information to ensure your request is not dismissed unnecessarily.
Tip
There is a chance that a request for information could alert the development finance institution to a pending complaint to its independent accountability mechanism. This may compel the development finance institution to end the financial relationship prematurely, thus closing the door on an important advocacy opportunity. Make sure you weigh the pros and cons before submitting your request.
  • Other sources: Use Google to search for references to development finance institutions in sources such as news articles and press releases. Searching for the project or company name along with the name of a likely development finance institution can yield results. Note that not all online sources are reliable. If possible, you should seek to corroborate information found online from unofficial sources with official sources, such as disclosures from the development finance institution or official requests for information. For tips on using Google, see here. 
  • Company regulatory disclosures: If the company developing the project – or the financial intermediary in question – is publicly traded, it must regularly disclose important information about itself to the public, sometimes including the identity of shareholders. Filings such as annual reports, offering prospectuses, and Statements of Changes in Beneficial Ownership can shed light on a company’s shareholders. These documents can be found on the websites of the relevant stock exchange, the relevant financial regulatory body, or the company itself.
For a step-by-step example of how Inclusive Development International uncovered the involvement of the International Finance Corporation in a mine in Guinea, see:

USEFUL RESOURCES

Accountability Counsel’s list of development finance institutions that have independent accountability mechanisms

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