Maximizing IFC’s Leverage for Investment Impact

IFC’s ability to influence its clients can make a big difference to its environmental and social (E&S) impact as a global development finance institution. A new report from CAO’s advisory team suggests ways IFC can better use its leverage to meet its E&S policy obligations, reduce reputational risk, and protect communities and the environment.

In the world of development finance, investors like IFC apply E&S requirements to ensure projects they support are environmentally and socially sound and aligned with sustainable development goals. Using leverage over clients throughout a project’s lifetime enables investors to hold clients to these requirements, put their own E&S commitments into practice, avoid project-related harm, and secure timely remedial action when problems do arise. 

Sources of leverage can include contractual terms agreed during pre-investment due diligence, financing arrangements that tie disbursements to client E&S actions, and trust-based relationships with corporate investees. CAO’s new advisory report uses over a decade of case history to assess how IFC uses these levers across its investments and recommends ways to apply them more consistently and effectively.

IFC’s Leverage Deficit

To fulfill its Sustainability Policy, IFC requires clients to comply with Performance Standards for E&S risk avoidance, management, and mitigation. CAO’s case analysis demonstrates that wielding leverage effectively can make the difference between client compliance and non-compliance with these requirements, and reveals a concerning “leverage deficit” in IFC’s current approach as observed in CAO cases.  

Leveraging IFC’s Influence to Enhance Environmental and Social Outcomes draws its insights from 59 IFC projects, including 34 that generated community complaints to CAO¹, as well as interviews with IFC operational staff and best practices from other development finance institutions (DFIs). Analysis of CAO’s compliance cases, in particular, found multiple instances where IFC failed to exert contractual leverage over clients when E&S failings occurred. In other cases, IFC lost leverage by waiving clients’ E&S commitments or disbursing funds in a single tranche before such commitments were completed. For example, in 38% of debt investments reviewed (11 of 29), IFC disbursed the loan in a single tranche rather than tying release of funds to client completion of measures in project E&S Action Plans. 

This approach has created a leverage deficit, with real world impacts. CAO’s analysis found that IFC’s influence diminishes after funds are disbursed although leverage is often most needed in a project’s later phases to address ongoing or emergent E&S risks. Community impacts and complaints often emerge years after a project begins, yet IFC is left with limited means to secure client action to mitigate impacts or take feasible remedial measures. Moreover, recent CAO cases demonstrate how lack of leverage can undermine IFC’s capacity to remediate harm through corrective Management Action Plans (MAP), which are Board-approved responses to CAO findings. 

A Roadmap for Enhanced Leverage

CAO's new report is designed to support IFC's efforts as it reviews its existing approach to leverage and operationalizes its Remedial Action Framework for addressing project-related harm. IFC provided extensive feedback on the report, which establishes four chief areas of concern and identifies practical ways of using existing systems to address these challenges. These include:

• Strengthening leverage during pre-investment due diligence, including by implementing IFC’s recently strengthened E&S Review Procedures, improving the quality of project E&S Action Plans, and assessing client E&S capacity before committing to an investment
• Closing leverage gaps, including through systematic use of clear E&S requirements in client contracts and strengthened systems, controls, and incentives for project teams
• Expanding IFC’s leverage toolbox through tailored approaches such as financial incentives for strong client E&S performance, inclusion in client contracts of indemnity provisions and financial resources to provide remedy for E&S impacts, and project disclosure requirements 
• Formalizing IFC’s leverage strategy, including by mandating a leverage assessment before investment, and embedding E&S client actions and enforceable obligations to provide remedy into client contracts. 

CAO believes this roadmap will enable IFC to operationalize remedy for communities and cement its role as a leader in sustainable investment. Against a backdrop of increasing IFC mobilization of private sector capital for development projects – often in fragile and conflict-affected settings – this focus on leverage is particularly important and timely. “Expanding IFC’s toolbox for securing and exercising leverage will not only enhance the environmental and social performance of its projects, but also ensure that the Remedial Action Framework is applied effectively to address project-related harm,” says Janine Ferretti. 

Among development finance institutions in general, the report finds that few have adopted an integrated E&S leverage strategy with tools such as contract terms instead used in isolation. “This argues for a more deliberate approach to leverage,” says Julia Gallu, the report’s lead author. “Investors should be asking: are we putting ourselves in a position two or three years down the line when something really important arises and we have no leverage left?” 

CAO hopes the findings of this report will help guide more regional and global investor institutions to adopt unified leverage strategies and embed explicit remedial obligations in client agreements to the benefit of people and the environment.

¹ All cases were approved between 1993 and 2024. The majority were more recent cases, approved under the 2012 IFC Sustainability Framework. These projects were selected to reflect IFC’s portfolio composition across sectors, regions, E&S risk categories, and investment products.