CAO Releases Compliance Monitoring Report of IFC’s Environmental and Social Risk Management in its Financial Intermediary (FI) Portfolio
Washington, D.C., August 5, 2025 – The Compliance Advisor Ombudsman (CAO), the independent accountability mechanism for the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA), has released its fourth and final monitoring report on IFC’s efforts to improve environmental and social (E&S) risk management in its financial intermediary (FI) portfolio. The monitoring report follows up on IFC’s response to CAO’s 2012 compliance audit of IFC’s financial support to intermediaries such as commercial banks, non-banking financial institutions, insurance companies, and private equity funds. The report documents improvements in the environmental and social risk management of IFC’s FI investments while noting areas for continued improvement.
CAO’s monitoring report reviewed a sample of 25 FI investments from Fiscal Years 2017 to 2022, focused on higher-risk investments and IFC’s recent risk-reduction strategies like ringfenced loans, which focus investments on targeted purposes while excluding higher-risk areas of the FI’s business.
The report documents continued improvements in transparency, accountability, and IFC’s allocation of E&S resources in relation to its FI investments. IFC now discloses sub-projects financed by private equity funds and has begun processes for disclosing Category A and some Category B sub-projects financed by commercial banks.
More broadly, the report 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 has also increased its E&S staffing for FI investments from 2.5 Full-Time Equivalents (FTEs) in 2006 to 30 FTEs in 2025 and made structural changes such as embedding E&S staff in investment teams and creating an IFC E&S oversight function.
While the monitoring report documents material improvements in IFC’s pre-investment E&S review and supervision of FI investments, it also outlines areas where IFC should focus on continual improvements in FI clients’ application of E&S requirements. The monitoring sample indicated that:
- While IFC recognizes the importance of FI capacity building, IFC’s approach rarely addresses the fundamental changes necessary for FI clients to adequately mitigate E&S risks and impacts at the sub-project level.
- Except for private equity funds, where IFC requires its FI clients to apply the Performance Standards, IFC did not consistently document and retain sufficient information about actual E&S performance at the sub-project level. As a result, for FI investments with exposure to higher E&S risks, IFC supervision often does not provide sufficient evidence that client E&S management systems are resulting in effective implementation of relevant Performance Standards.
- FI clients’ implementation of IFC E&S requirements to sub-projects is inconsistent, with poor FI due diligence reports, poor E&S Action Plans, and limited FI supervision of sub-projects.
- IFC’s ringfencing approach is not functioning as intended. FI client reporting obligations are often insufficient for IFC to adequately 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.
CAO initiated the compliance review in 2011 when IFC’s FI portfolio made up over 40 percent of IFC’s total investments. CAO’s analysis had indicated that IFC’s activities in the financial sector could potentially give rise to environmental and social concerns. Since FI activities are less known and understood by affected communities, community-submitted complaints regarding project-related harm were less likely.
CAO’s subsequent audit report, which analyzed 188 IFC investments related to 63 FI clients, found that IFC lacked a method to assess whether clients’ implementation of an Environmental and Social Management System (ESMS) achieved the goals of avoiding harm and improving E&S outcomes, and that IFC’s procedures were not designed to drive broader E&S improvements in their FI investments. In response, IFC committed in 2013 to strengthen its FI E&S framework, engage stakeholders, and enhance advisory services to build regulatory, market, and client capacity for E&S risk management. In 2014, 2015, and 2017, CAO published monitoring reports covering IFC’s actions in response to the audit.
Following this final monitoring report, taking account of 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.
More information about this case, including the final CAO Monitoring Report and other case reports, is available at the links below:
Case webpage
