Policy


Policy

European DFIs share similar mandates and operate in comparable markets, sometimes on their own and often together. They want to act as role-models for private investors that seek to invest in developing markets, but also pave the way in applying high business, environmental and social standards, and in explaining the development outcomes of their projects. European DFIs have always sought to put their expertise at the service of positive development impacts and ensure their activities support the growth of healthy markets. DFIs intend to continue to build on their successes and shared approaches to demonstrate the relevance and effectiveness of private sector finance in developing countries.

Nanno Kleiterp, Chairman EDFI

Shared policies

Environmental and social standards

Responsibly managed companies play a vital part in achieving a sustainable environmental, social and economic development. EDFI members assist their clients in improving their environmental practices (reducing greenhouse gas emissions, renewable energy development), social practices (improving working conditions, fight against discrimination), and governance (fight against corruption, transparency of information…).

This year, we are celebrating the 10th anniversary of the Declaration on Principles for Responsible Finance, coined the “Rome Consensus”. These Principles, applied by all members when co‐financing projects, especially underline that the respect for human rights and environmental sustainability is a prerequisite for any financing by EDFI institutions. EDFI members encourage their investee companies to gradually work towards international best practice norms and standards, and to promote the same standards throughout their supply chains, e.g., with their contractors.

The EDFI members have agreed on Harmonized Environmental and Social Standards for any mutual financing activities. These standards encompass:

  • Environmental and Social Category Definitions
  • Requirements for Environmental and Social Due Diligence
  • An Exclusion List

These standards are all reviewed regularly. Benchmarks for the EDFI members are the UN Declaration of Human Rights, the ILO Core Conventions and the IFC Performance Standards on Economic and Social Sustainability and associated Environmental and Health & Safety Guidelines.

Development effectiveness

DFIs and IFIs working with the private sector have diverse mandates, structures and shareholders. This also means they use many different systems to track development outcomes. The clients they share often bear an unnecessary burden resulting from their specific reporting requirements.

Efforts towards harmonisation began in 2008, leading to the formation, 4 years later, of a Working Group on Indicator Harmonization gathering over 20 IFIs. They agreed to benchmark indicators for private sector investment operations and seek best practices for shared adoption. The IFIs involved reviewed over 400 indicators while the Working Group grew to include 25 IFIs. In October 2013, they signed a Memorandum of Understanding (MoU) during the annual Private Sector Round table at the IMF-World Bank Meetings, and agreed on a first set of 27 indicators from different sectors. An Addendum to the MoU, signed in the fall 2015, harmonises the definitions of 38 indicators for private sector operations (HIPSO). The memorandum is the conclusion of a wide consensus reached through an iterative consultation process involving many experts and stakeholders from different IFIs and international institutions and represents an important step towards a global standard to measure and report on impact results.

Standardised indicators enable a more efficient, consistent and timely analysis of projects’ impact results and a facilitated collaboration between the public and private sector. They also enhance the sharing of best practices and lessons learned among the different institutions and improve the assessment and coordination of their development efforts.

Finally, clients also benefit from the harmonisation of the reporting standards, as it eases the administrative burden and saves them precious time.
More information on https://indicators.ifipartnership.org

Taxation

European DFIs often operate in challenging institutional environments, where inadequate foreign investment protection laws, dispute resolution mechanisms, judicial enforcement and regulation of foreign exchange transactions increase investment risks substantially. DFIs must take appropriate action to mitigate these risks in a responsible manner, while respecting the sovereignty of countries to decide on their tax policies and regimes. European DFIs recognise that taxation has become a key component of the development of sustainable and responsible businesses, and that the issue of tax avoidance is an increasingly complex problem internationally, given the globalization of value chains and the existence of competing tax systems. International coordination has gradually intensified to develop and enforce tax transparency standards for instance through the launching of the Global Forum on Transparency and Exchange of Information for Tax Purposes in 2009.

European DFIs commonly use intermediary jurisdictions called offshore financial centers (OFCs) when structuring investments because a substantial number of their target countries do not possess the legal, judicial, regulatory and financial infrastructure to accommodate the requirements of institutional investors seeking to invest in the private sector in developing countries. They have established a working group in 2011 to develop and maintain shared guidelines for transactions involving European DFIs and entities domiciled in OFCs. The working group’s role is to review these guidelines with the aim of further harmonising the EDFI approach to investing through intermediary jurisdictions. It concluded that European DFIs commonly participate in investment structures involving OFCs when this fits the purpose of mobilising private finance towards developing countries and thereby helps to fulfil their development mandates.

However, responsible taxation practices extend beyond appropriate usage of OFCs, hence the need to take a more holistic approach and constantly revise these guidelines and commitments. Therefore, the working group is now in the process of developing a set of principles to be endorsed by EDFI members for their approach to responsible tax practices. These principles should be finalised by the end of 2017.

EDFI closely monitors the activities and reports of supervisory institutions such as the OECD, the Global Forum on Transparency and Exchange of Information for Tax Purposes and the Financial Action Task Force.

Blended finance

Donors and DFIs, including all the institutions in the Private Sector Roundtable, share a goal to mobilise more private capital towards developmental priorities. Scaling up the use of blended finance in the private sector – the strategic use of concessional finance along DFI and commercial investment – has now become a key driver in pursuit of the SDGs.

The private sector development institutions adopted a set of five principles for the use of blended finance in 2013: additionality, crowding-in, commercial sustainability, reinforcing markets, and promoting high standards. These principles have been enhanced with more detailed guidelines developed by a working group representing DFIs. They include how to promote commercially sustainable solutions using minimum concessionality. They also state the need for high social, environmental, and governance standards. The working group also agreed to exchange best practices, pilot a data-gathering exercise, and examine case studies to support the development of these enhanced principles. Other institutions are welcome and encouraged to join these efforts.

The 15 European DFIs are also part of the Blended Finance Taskforce, which also includes the OECD Development Centre and Convergence. This taskforce seeks to bring influential thinkers from the private sector to a pivotal question in global development: how to bring about a step-change in the mobilisation of private investment in developing countries. The taskforce aims to increase private sector engagement on these issues (institutional investors, regulators, philanthropists) and to raise the profile of blended finance as an excellent mechanism to achieve the SDGs well beyond the typical development policy and development finance circles.