Recommendation 16

HM Government · verbatim extract Accepted

The Government agrees that poverty reduction must be central to BII’s investment decisions. BII contributes to poverty reduction by making investments that align with its three strategic objectives: to support productive, sustainable, and inclusive development. The objectives are translated into BII’s investment decisions via BII’s Impact Score. As outlined in response to Recommendation 8, all three objectives are aligned to the UN Sustainable Development Goals and support poverty reduction. Investing through intermediaries is an important part of a DFI’s ability to deliver impact. It enables the provision of smaller levels of financing; supports the development of local institutions; helps raise wider market standards by supporting funds to meet BII’s requirements for responsible investment; and mobilises third-party capital into funds investing to support development. The Government agrees that BII should have appropriate oversight and monitoring of its investments, including investments in intermediaries (Recommendations 10a and 10c). The FCDO already ensures BII has strong oversight of its investments by agreeing BII’s Policy on Responsible Investment as part of the five-year strategy process. The Policy sets out the Environmental, Social and Governance and Business Integrity requirements for Session 2023–24 BII investees which are based on legal requirements as well as guidance from international frameworks such as the IFC Performance Standards; ILO Core conventions; OECD and UN conventions on combating bribery; FATF and Basel standards on anti-money laundering; and draws from the UN Guiding Principles of Business and Human Rights. Where investees do not meet BII’s requirements under the Policy on Responsible Investing, BII will either not proceed with the investment or agree a legally binding action plan for addressing gaps which are then monitored post-investment. The parameters along which a financial intermediary can invest BII’s capital are set out at the point of investment in a legally binding limited partner agreement. As explained in the response to Recommendation 9, BII monitors its investments into businesses, banks and funds by formally assessing the performance of its investments on a quarterly basis. BII also has a range of other formal oversight mechanisms, including a seat at - and often chairing – an investment fund’s board, advisory committee or investment committee; receipt and review of regular reporting on the performance of the fund and its investments; participation in ESG committees; the right to review initial and high-risk due diligence undertaken by the fund on its underlying portfolio investments; requirements for the fund to report adverse events; and visits to the fund’s portfolio companies to review implementation. Ministers are therefore satisfied with the processes that BII has in place to ensure investments made through intermediaries comply with BII’s key policies. For example, any intermediary BII invests in as part of the current strategy period must comply with the UK’s Fossil Fuel Policy, which BII has also adopted. BII investees are legally required to comply with BII’s policies relevant at the time BII makes its investment. It is not possible to apply new BII policies to historic investments made in previous strategy periods. BII has strong oversight of its investments through its regular engagement, including its investments in financial intermediaries. The Government does not fully support Recommendation 10b). Ministers and BII recognise that tax receipts are fundamental to the ability of governments in development countries to fund public spending and stimulate sustainable development. BII monitors and publishes taxes paid and other fiscal contributions made by its investee companies as part of its development impact measurement programme. BII’s investee companies paid $1.79 billion in tax in 2022 and have paid over $12 billion since 2018. BII’s preference is to invest directly in a country or region where an investee company is located. BII uses intermediate jurisdictions only when it is needed to attract foreign investment or to ensure adequate protection of UK taxpayers’ money (due to weak legal, regulatory and tax systems in some developing countries). BII only invests through funds that are domiciled in jurisdictions that are compliant with international tax transparency standards, as monitored by the OECD’s Global Forum on Transparency and Exchange of Tax information. Ministers believe that the IDC’s recommendation would lead to less foreign direct investment flowing to developing countries, thereby delivering lower impact and potentially reduced tax revenues, and is satisfied with BII’s existing procedures and safeguards. BII is committed to maintaining best practice of multilateral and development finance institutions in this area. Session 2023–24