Millennium Challenge Corporation Advances Environmental and Social Standards

The Millennium Challenge Corporation (MCC) recently announced the formal adoption of the International Finance Corporation’s (IFC) Performance Standards on Environmental and Social Sustainability. The MCC has from its beginning taken a rigorous approach to environmental and social safeguards, and this amendment to its Environmental Guidelines is an important additional step forward. As it continues, the MCC should ensure that these new performance standards are supported by a strong and transparent implementation framework and should undertake a broader effort to fully incorporate poverty-environment links into MCC decision-making frameworks.

By adopting the best-in-class IFC standards, the MCC increases the likelihood that every project undertaken by partner countries with MCC funding will advance its mission of poverty reduction through sustainable economic growth without sidelining or generating unintended consequences for the very populations it intends to support. People living in poverty are most likely to depend on the environment for a substantial portion of their income [1] and are least likely to already have a seat at the table for decision-making about government development projects. This decision should also simplify compliance for partner countries by harmonizing MCC requirements with global standards.

These are important and laudable steps forward, reaffirming and strengthening MCC’s clear commitment to environmental and social sustainability. MCC’s Environmental and Social Performance team (recently renamed from “Environmental and Social Assessment”) deserves kudos for prioritizing this effort over the past year.

The work isn’t done yet, however. There are a number of questions that MCC should ask itself—if it hasn’t already—and MCC’s champions in the administration, congress and civil society should pay close attention to the answers. We divide these questions into two categories—those focused on ensuring strong implementation of the new performance standards and those focused on taking a more up to date approach to the links between poverty and environment in MCC decision-making frameworks.

Ensuring a Strong Implementation Framework

The adoption of high quality safeguard policies does not ensure, by itself, risk reduction. Without a strong implementation framework, partner countries have little incentive to pursue strong standards. What type of implementation framework will ensure that these new, stronger performance standards translate into better on-the-ground results? Clear and well-communicated answers to the following questions are needed:

What formal policies are in place at MCC that will ensure adequate application of the standards? In terms of content, the IFC standards are clearly high-quality. In the IFC context, the standards themselves are embedded in a sustainability framework that includes a formal policy statement and a transparency component. The MCC’s Environmental Guidelines play a somewhat parallel role to the IFC formal policy statement, including a strong statement [2] adopting the standards that is almost exactly parallel to the IFC’s own formal policy statement. But, at the same time, there are caveats in the MCC guidelines (e.g., “to the extent consistent with these guidelines and any applicable additional guidance issued by MCC from time to time”) that may allow exceptions.

What is the division of responsibility between the MCC and developing country implementers for meeting the standards? The guidelines state quite clearly that “the projects MCC finances under a compact will be developed and implemented in a manner consistent with the [IFC] environmental and social performance standards.” But the MCC itself doesn’t implement projects itself—partner governments do—so ensuring that this directive happens is actually quite complex. It appears that the MCC (just like the IFC) is well-positioned to ensure that the client has an environmental and social management system in place, but it isn’t as clear how they will actually ensure that the performance standards are adequately implemented. Admittedly, there are real tensions between developing country ownership of projects and strong oversight by the MCC—but this seems like a pretty big implementation gap. When will due diligence be performed by MCC? At what level of detail? What will happen if due diligence standards are not being met? What mechanisms are in place to allow third parties to bring complaints to the MCC—not just the client country—if it appears that standards are not being implemented sufficiently? What are the accountability mechanisms? These are important questions that MCC will need to address more transparently as it begins to implement this new policy.

What is the operational role of environmental and social specialists during compact development? The Environmental and Social Performance (ESP) team at the MCC generally gets involved early in compact development and has a respected seat at the table. But is their role one of providing advice, or do they have formal authority in decision-making? For example, if ESP specialists provide input to the compact development team suggesting that a project is high risk, can that recommendation be overturned by others on the team? This issue is down in the weeds, but is a critical loophole that was identified by the Compliance Advisor Ombudsman (the accountability mechanism for the IFC) as one of the main reasons for poor performance standard implementation in the case of IFC loans to Wilmar Group for establishment of palm oil plantations in Indonesia.

Incorporating Environment in MCC Decision-Making Frameworks

Even a strong and well-implemented risk-reduction program can’t achieve what is required for truly sustainable poverty reduction through economic growth. As a recent fact sheet on Environmental Sustainability in MCC programs explained, “the environment and natural resources must be valued and managed well to achieve economic growth and poverty reduction”—in other words, a “do-no-harm” safeguards approach isn’t enough. How could MCC decision-making frameworks shift to more fully incorporate consideration of the economic value nature provides to people? One way is to start by answering the following three questions:

Is a better indicator needed for the country selection process to rate whether countries manage their natural wealth sustainably for the benefit of people? The current Natural Resources Protection indicator measures whether a country is protecting at least 10 percent of each terrestrial biome within its borders. This is a narrow concept of natural resource protection that focuses solely on the area of land formally categorized as protected and misses how these and other landscapes may be sustainably managed. Landscapes that are protected on paper may not in fact be well-managed, and much of the natural resource base of a country may lie outside these areas in working landscapes such as forests, streams, agricultural areas and fisheries. In the years since this indicator was adopted, there have been advances in assessing the value of ecosystem services and natural capital that could allow a much more sophisticated approach. The Millennium Ecosystem Assessment, the World Bank and TEEB project have each estimated the value of natural wealth and/or ecosystem services for countries around the world—but to date, no annual indicator is available.

How could the MCC more explicitly and systematically consider natural wealth in its constraints analyses? The MCC’s publically available guidance on constraints-to-growth analyses makes no mention of valuing and accounting for natural wealth. Including this calculation could impact which sectors and projects move to the top of the list as the biggest constraints to growth. More explicitly including a valuation of natural wealth within constraints-to-growth analyses will no doubt require a little outside-of-the-box thinking and be very context specific. But as the pioneer of analyses at the cornerstone of the Presidential Policy Directive on global development and the Partnership for Growth program, it is incumbent upon the MCC to ask the hard questions to ensure that these analyses are considering the full range of economic constraints to growth—including things like environmental degradation.

How and when can the MCC include the economic value of natural wealth and the environment in its program evaluation processes? The MCC assesses the economic impact of its projects by calculating an economic rate of return (ERR) and invests only in projects that return greater than 10 percent to beneficiaries. Truly pursuing “green growth” will require measuring the “green” side of growth—by estimating and including in the ERR calculation the returns that projects generate by avoiding environmental degradation or by rehabilitating natural wealth. These projects can lower heath care costs, improve water quality and security, increase agricultural productivity and safeguard traditional sources of income—all very real economic growth and poverty reduction outcomes. The MCC’s guidance on calculating ERR leaves the window open for including these impacts, but they are rarely included in practice, and there is no policy or guidance that encourages capturing these benefits. Granted, this is not methodologically simple. However with clearer guidance to make this a priority for calculation of ERRs process, the MCC could update its ERR analyses to better reflect the full suite of economic returns from its projects—even those that may be harder to measure.

In summary, the MCC deserves real kudos for strengthening its environmental and social standards by adopting the IFC performance standards. But this is no time to rest. There is still much to do to ensure that these new performance standards are supported by a strong and transparent implementation framework and to take consideration of the environment beyond a safeguards approach to operationalize the recognition that environment and poverty truly are intertwined in MCC’s partner countries.

[1] For examples, see: the World Resources Institute’s 2005 report “The Wealth of the Poor;” and the 2010 Synthesis Report by The Economics of Ecosystems and Biodiversity (TEEB).

[2] Compare IFC Policy on Environmental and Social Sustainability, Paragraph 22: “IFC will only finance investment activities that are expected to meet the requirements of the Performance Standards within a reasonable period of time. Persistent delays in meeting these requirements can lead to loss of financial support from IFC.” to the following paragraph in the MCC Environmental Guidelines: “MCC seeks to ensure, through its due diligence and implementation oversight efforts, that Compact activities it finances are implemented in accordance with the requirements of the IFC Performance Standards. MCC will only support Compact activities that are expected to meet the requirements of the IFC Performance Standards within a prescribed timeframe.”