Striking the Balance

Investors face growing pressure to reduce the negative environmental and social impacts of their investments. In trying to do so they are confronted with the question of how to interact with governments in the countries where they invest.

Both governments and investors—including international financial institutions, public funds, and private banks and companies—grapple with how to foster economic development without creating social or environmental harm. Past economic growth led to improved prosperity for millions, but caused environmental damage and suffering for those not positioned to benefit from the growing wealth. Governments and investors are now under strong pressure globally to ensure that economic growth supports rather than harms people and the ecosystems on which they rely.

Governments have set up rules and institutions to protect their people and natural resources. Unfortunately, many of these systems are still inadequate. Governments in developing countries, in particular, struggle to consistently ensure that investments in roads, power plants, agriculture projects, or other infrastructure do not result in undue social and environmental harm. If governance systems are weak, investors can help provide social and environmental protection.

International financial institutions like development banks now realize that environmental sustainability and social equity are vital to their missions of economic development. Many investors, including the World Bank, the Green Climate Fund, the European Bank for Reconstruction and Development, and several private companies are creating new social and environmental policies or updating old ones. A central question facing these investors is how to manage the relationship between their policies and the laws and institutions of the countries in which they invest.

The World Bank has in recent years experimented with several approaches to deal with the relationship between its own social and environmental risk management (“safeguard”) systems and those of its recipient countries. Its experiences offer valuable lessons for both the World Bank and other investors grappling with how to effectively work with national governments to reduce environmental and social risks. This report analyzes four of these approaches: the traditional safeguards approach, the “use of country systems” approach, the approach used for the World Bank’s “program for results” investments, and the approach used for the Bank’s development policy loans.