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SA’s developmental finance bodies fall short on transparency

1 June 2020 at 12:06 pm

This article was first published in the Daily Maverick.

How well do SA’s two developmental finance institutions, the Industrial Development Corporation and the Development Bank of South Africa, measure up to best-practice international standards? Not well at all, according to their published documents.

Amid a severe economic crisis induced by the coronavirus pandemic, financing and investment by developmental finance institutions (DFIs) are crucial enablers of economic recovery.

DFIs must ensure that recovery is executed through development which respects social, environmental and human rights standards, to deliver a transition that is just and a future that is sustainable.

As embodied in 350Africa’s Just Recovery principles, the goal should be for sustainable development and a just transition to emerge from the Covid-19 crisis. Solving one crisis should not lead to another.

DFIs can promote a Just Recovery by ensuring the companies and projects they choose to finance and invest in comply strictly with social, environmental and human rights standards.

DFIs are guided in their investment decision-making by their internal policies. These policies serve as potent tools that can direct capital towards more socially responsible, fair, and sustainable projects and activities, encouraging a transition to a low-carbon economy to limit the harm associated with climate change.

Internal policies should require a strategy to transition to a low-carbon economy. Such strategies, if founded in science and based on real commitment, can ensure the transition for workers and communities to jobs that are safe and dignified, while protecting the environment.

As a social justice organisation working towards the realisation of environmental justice, the Centre for Environmental Rights (CER) recognised this potential and sought to understand the policies of DFIs in South Africa.

In collaboration with 350.Africa, CER launched a report that assesses the investment policies of the Development Bank of Southern Africa (DBSA) and the Industrial Development Corporation (IDC) against social, environmental, and human rights standards.

The study compares the DBSA and IDC with four international DFIs, the European Investment Bank (EIB), Africa Development Bank (AfDB), New Development Bank (NDB) and the Netherlands Finance Development Company.

The report, which focuses on two sectors, power generation and climate change, evaluates the extent to which the IDC and DBSA comply with international standards.

Partnered by research organisation Profundo, the CER study used methodology developed for Fair Finance Guide International (FFGI) to assess the DFIs against social, environmental, and human rights standards in terms of seven themes: transparency and accountability, climate change, human rights, gender equality, health, nature, and corruption.

The assessment considered publicly available material such as investment and finance policy documents, annual reports, websites and governance documents.

In terms of overall performance, the European Investment Bank (EIB) ranked the highest out of the six DFIs assessed, receiving the highest scores for transparency and accountability, nature, corruption, and climate change themes. Although it scored highest on most themes, the African Development Bank (AfDB) performed best in the financial sector analysis and tied with the EIB with a score of 7.7 for human rights.

The AfDB’s strong performance on all elements, except climate change and gender equality, demonstrates that African banks are capable of setting similar standards to their European counterparts despite differing developmental challenges.

Turning to the South African DFIs, the IDC came in last of the six DFIs assessed. It only achieved minimal scores for four of the nine themes, primarily because none of its formal policies were publicly available. The few points awarded to the IDC are based on information found in its Integrated Annual Report for 2019, but this information is limited and is often insufficient to award a score for compliance with international standards.

The exceptionally low scores awarded to DFIs that fail to disclose their finance and investment policies reflect the need for transparency in public institutions. The IDC’s finance and investment policies should be publicly available to ensure that beneficiaries of relief funds respect social, environmental, labour, and human rights standards. Disclosure will help the public determine whether it has a strategy in place to support a just transition to a low-carbon economy.

Despite several requests made to the IDC to disclose its policies, it failed to respond. After being informed that the opportunity to comment on the findings had closed, it provided its Board Charter, Code of Ethics and Business Conduct, but it failed to provide more pertinent policies such as its Environmental and Social Policy, Responsible Investment Policy, and Corporate Governance Framework for IDC Subsidiaries and Investee Companies.

It is also apparent that the IDC does not have a policy in place to sufficiently support the transition to a low-carbon economy.

The IDC discloses R11.7-billion of funding between April 2018 and March 2019, the period of CER’s assessment, in its Integrated Annual Report. While more than 20% of this was channelled to renewable energy, at least 14% of this went to coal-related companies and activities.

The DBSA’s disclosed standards put it in fourth place overall with a score of 3.6 against an average 4.0. It scored comparatively well for its policies on human rights and nature themes, and in relation to the power generation sector. However, its low score on its climate change policies brought its average down.

The primary reason for the DBSA’s low climate change score is that its publicly available policies fail to include or align with international standards. These policies do not include a measurable target for reducing its own greenhouse gas emissions, nor do they disclose the emissions and measurable reduction targets of the companies in which it invests.

The DBSA does not strive towards a carbon-neutral investment portfolio nor does it indicate any maximum threshold for restricting the financing and/or investing in fossil fuels.

It is not yet compliant with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), a United Nations initiative for companies to provide voluntary, consistent climate-related financial risk disclosure for investors and other stakeholders.

Notably, the DBSA’s Integrated Energy Sector Investment Framework – though mentioned in some other policies – is an internal document and not publicly available. It was therefore not possible to assess this policy.

The DBSA has demonstrated a clear increase in financing of “green energy” but falls short by not simultaneously showing the requisite shift away from the financing of fossil fuels such as coal. Its Climate Change Policy Framework does not include a measurable target to reduce finance for the fossil fuel sector.

As with the IDC, the DBSA was provided with an opportunity to comment on the provisional findings, but it provided only a partial response which was incorporated into the assessment.

Although DFIs must conduct their activities within the parameters of legislative mandates and government policy, they retain crucial decision-making powers. DFIs are ultimately responsible for setting the criteria with which companies and projects must comply to qualify for funding. They may also determine the conditions on which their funding must be used.

The DBSA and the IDC should rely more heavily on constitutional imperatives, South African public policy, and international best-practice standards to deliver improved outcomes to help South Africa better navigate a post-Covid-19 and climate-challenged world.

Daiyaan Halim is a researcher in corporate accountability and transparency at the Centre for Environmental Rights, CER; Ahmed Mokgopo is a divestment campaigner at 350Africa.