In 2011, the CAO Vice President initiated a compliance appraisal of IFC’s financial sector investments in accordance with CAO’s Operational Guidelines. CAO initiated this audit on the basis that IFC’s Financial Intermediaries (FI) investments: i) represented over 40% of IFC’s total investment portfolio in 2011; and ii) were less known to and less understood by affected communities, and therefore less likely to be the subject of a community-submitted complaint. 

In 2011, CAO initiated a compliance audit of a sample of IFC’s FI investments. This audit was complete in September 2012 (2012 FI Audit Report). CAO concluded that IFC lacked a methodology for determining whether FI clients’ implementation of an Environmental and Social Management System (ESMS) achieved IFC’s core objectives of doing no harm or improving environmental and social (E&S) outcomes at the sub-project level. CAO also found that IFC’s E&S procedures were not designed to support broader E&S outcomes and that IFC needed to facilitate a self-sustaining cultural change within FI clients’ organizations to achieve this.

In response to CAO’s 2012 FI Audit Report, in 2013 IFC committed to i) formalize a continual improvement framework for managing the E&S performance of its FI business, ii) conduct formal outreach, consultation, and dialogue with key stakeholders, and iii) strengthen its advisory services to support regulatory, market, and client capacity for E&S risk management in emerging market financial sectors.

In 2014, 2015, and 2017, CAO published monitoring reports covering IFC’s actions in response to the 2012 report. These reports recorded actions taken by IFC to improve E&S risk management in FI investments. However, CAO kept the case open due to ongoing gaps in IFC’s approach to ensuring that FI clients were implementing IFC’s E&S requirements.

In 2020, following an external review of IFC and MIGA E&S accountability, CAO was advised to establish an endpoint for this monitoring process and to develop an advisory product on IFC’s application of its E&S policies to FIs.

In July 2025, CAO completed its fourth monitoring report which reviewed a sample of 25 FI investments committed between FY17 and FY22, focusing on higher-risk investments and those reflecting IFC’s more recent risk-reduction strategies, such as ring-fenced loans, which focus investments on targeted purposes, while excluding other higher-risk areas of the FI’s business.

The report noted that IFC’s long-term FI investments grew significantly, from US$4.5 billion annually in FY13 to over US$10 billion in FY24. Since FY17, FI commitments have made up the majority of IFC’s new investments. IFC managed these risks by requiring FI clients to implement ESMSs and, for higher-risk projects, to apply IFC Performance Standards (PS).

CAO’s fourth monitoring report highlighted continued improvements in transparency, accountability, and IFC’s allocation of E&S resources. IFC has initiated a process for the disclosure of sub-projects financed by private equity funds and begun rolling out processes for disclosing Category A and certain Category B sub-projects financed by commercial banks. 

More broadly, CAO notes improved knowledge of IFC’s FI involvement and better access to CAO by affected communities, often facilitated with the support of civil society organizations. Since 2011, CAO has received 31 eligible complaints about IFC FI-financed sub-projects, compared to one FI-related complaint before the audit.

IFC also increased its E&S staff dedicated to FIs from 2.5 full-time equivalents (FTEs) in 2006 to 30 FTEs in 2025, alongside structural changes such as embedding E&S staff in investment teams and creating an IFC E&S oversight function. 

Furthermore, CAO’s audit documented material improvements in IFC’s pre-investment E&S review and supervision of FI investments. IFC appropriately categorized E&S risks for all investments in the sample, in most cases required FI clients to apply the appropriate E&S requirements, and enhanced its FI supervision since CAO initiated this case in 2011.

However, CAO’s monitoring report also documented areas where IFC should focus its continual improvement efforts:

• The application of IFC’s E&S requirements by FIs represented a significant undertaking. While IFC’s Sustainability Policy recognizes the importance of FI capacity building, CAO concluded that IFC’s approach to preparing FIs for this task rarely addresses the fundamental changes necessary to adequately mitigate E&S risks and impacts at the sub-project level.
• In most cases where the PS applied, IFC did not consistently document and retain sufficient information about actual E&S performance at the sub-project level (except for private equity funds). As a result, for FI investments with higher E&S risks, IFC supervision often lacks sufficient evidence that FI clients’ ESMSs are effectively implementing the relevant PS and achieving the core objectives of the 2012 IFC Sustainability Policy (paras. 1 and 9), including doing no harm and attaining positive development outcomes.
• FI clients’ implementation of IFC’s E&S requirements remained inconsistent. CAO found poorly prepared due diligence reports, weak E&S Action Plans, and limited FI supervision of sub-projects, resulting in inadequate demonstration of PS implementation.
• IFC’s ring-fencing approach did not function as intended. Client reporting obligations are often insufficient for IFC to verify the use of funds, particularly in Tier II subordinated loans that provide general capital support but limit IFC’s leverage over E&S compliance.

Taking into account IFC’s improvements over the past 13 years as well as areas where further progress is needed, CAO has decided to close the case. Consistent with the recommendation of the 2020 External Review of IFC/MIGA’s E&S Accountability, including CAO’s Role and Effectiveness, CAO’s Advisory function is now engaging with IFC regarding its approach to FI investments.