What does the IDB Group do to improve the environmental and social impact of private investment?

by IDB Group private sector specialists*

The IDB Group applies a variety of tools while projects are being designed and implemented to ensure the beneficial social and environmental impacts of their projects with private sector clients.

Nowadays, many firms are realizing that pursuing business objectives and achieving social and environmental impact are mutually reinforcing.  Private businesses and the entities that finance them have been developing various tools to:

• Make investment decisions based not only on financial returns but also on positive social and environmental impacts
• Better communicate the multidimensional development impact of their investments, and
• Ensure that their investments are producing the expected development impact.

One good example of tools developed by private business organizations is GIIRS (Global Impact Investing Rating System). Used mainly by impact investors to assess the social and environmental impact of investee companies and funds, it focuses on the areas of Consumer, Governance, Workers, Community, and Environment.

International financial institutions (IFIs) supporting private sector investments, including multilateral development banks (MDBs) such as the Inter-American Development Bank, have also developed development assessment rating/scoring tools.  For instance, the European Bank for Reconstruction and Development (EBRD) is carrying out Transition Impact Assessments, which provide five-scale ratings in several areas, including competition, market expansion, transfer and dispersion of skills, and demonstration effect.

The IDB Group also uses ex ante development effectiveness tools for its private sector windows. These include assessment tools such as:

• The Development Effectiveness Matrix (DEM) for the IDB’s non-sovereign guaranteed (NSG) operations
• The Development Impact and Additionality Scoring (DIAS) System for the Inter-American Investment Corporation (IIC)
• The Quality for Effectiveness in Development (QED) for the Multilateral Investment Fund (MIF).

These tools indicate a project’s alignment with corporate and country strategies, based on the common evaluation framework of the multilateral development banks, and taking into account the existing scoring/rating tools developed by others.

The development impact assessment rating/scoring tools used by private businesses and IFIs have several common features to better serve their objectives:

• Ratings/scores are produced for several different dimensions, resulting in overall rating/score.
• Ratings/scores are produced and updated throughout the project life cycle.
• Ratings/scores are produced based on either quantitative or qualitative criteria, depending on the nature of indicators.
• To ensure objective rating/scoring, there is a system in place, such as independent validators.

In addition, some of the tools have explicit threshold scores/ratings that must be met for the financing to move forward.

The IDB Group has been applying its ex ante tools to its private sector operations since 2008.  During this period, the IDB Group’s windows have exchanged experiences about implementing these tools and the knowledge derived. The tools have also been constantly evolving. As a result:

• Significant attention is being devoted to considering various aspects of development effectiveness when the project is first proposed.
• Project teams have stronger incentives to improve project design to enhance the focus on environmental and social benefits.
• Monitoring and ex post evaluation of projects are being facilitated, as steps have been taken to strengthen ex ante analysis on development impact and ensure the availability of relevant information.

Several key lessons have been learned and challenges have been identified, particularly related to the design and application of the tools:

• Challenge. When issues related to development effectiveness emerge during the implementation of projects, the ratings/scores are downgraded; however, they sometimes do not trigger remedial actions unless there is concern about the creditworthiness of the finance.
  • Lesson. The rating/scoring tools could be complemented by concise analysis of the latest development results to enhance the project team’s awareness of emerging developmental issues.

• Challenge. Clearly defined rating/scoring criteria, particularly those based on predetermined quantitative measures, facilitate the rating/scoring and increase common understanding of the tools. At the same time, excessive emphasis on the quantitative criteria may focus project analysis too narrowly.
  • Lesson. Unique features of projects can be rated/scored better using qualitative criteria. A good balance needs to be struck between quantitative and qualitative criteria, and reasonable comparability among those scores needs to be ensured.

• Challenge. The more dimensions that are included in tools, the smaller the distribution of the scores, resulting in a narrower range and less analytical power.
  • Lesson. Care must be taken in the design of tools (such as rating/scoring criteria and weights) to ensure that final scores are distinct across projects. In addition, project teams and validators should not hesitate to report scores at the extreme ends of the scales, when warranted, rather than to dilute scoring by grading projects in the middle range.

• Challenge. There is an inevitable tension between project teams and rating/score validators. This may become more acute if project ratings/scores are incorporated into the performance evaluation of project teams.
  • Lesson. It is important to ensure a mutual understanding that scoring should be considered in broad ranges (scores between 5.0 and 7.0 would be grouped within a “Satisfactory” range, for example), rather than minutely differentiated scores; and that there are more aspects to ex ante development assessments than mere scoring.

Taking into account these lessons learned, and to further enhance their development effectiveness, the IDB Group’s private sector windows are working together to consolidate their development effectiveness tools into unified tools. These tools will be implemented under the IDB Group’s private sector reform initiative, once the IDB’s non-sovereign guarantee operations are integrated into the Inter-American Investment Corporation.

Despite methodological and procedural challenges, the growing desire by private businesses to be more inclusive and sustainable and to measure their impact will inevitably increase the importance of development effectiveness rating/scoring tools for both private business and their financiers.

The global development community should also continue to exchange experiences in implementing these tools so that we can improve them further.

 

To learn more about the IDB Group’s ex ante development effectiveness tools for its private sector windows, see:

Development Effectiveness Matrix (DEM). Chapter 2, “Non-Sovereign Guaranteed Operations,” in the IDB’s 2014 Development Effectiveness Overview.

Development Impact and Additionality Scoring (DIAS). “Framework for Measuring Development” document on its website

 Quality for Effectiveness in Development (QED).  Annex 3, “Quality for Effectiveness in Development (QED) Results 2013,” in  MIF’s Development Effectiveness Report 2014.

 

*Ichiro Toda, Urlike Haarsager, Viviane Azevedo, Helio Bertachini, Joanne Riley, and Claudia Gutiérrez