James Shepherd and Lauren Rogge of Blake Dawson explain how international lenders are increasingly recognising the need for accountability when financing energy projects.
International financial institutions are critical in promoting sustainable development. Amongst these, the World Bank is the leader in influencing development paths. The World Bank was first to adopt social and environmental standards as part of its lending practices, but now such standards are commonplace amongst international financial institutions.
In this article we trace the development of the safeguard policies at the World Bank and identify some recent developments at other international financial institutions which highlight an increasing recognition of accountability, particularly in the context of energy sector lending.
The safeguard policies
Mechanisms to guard against the negative consequences of projects are particularly important in the energy sector, where projects can have significant and long-term environmental and social impacts. Following concern over its role in controversial infrastructure projects during the 1970s and 1980s, the World Bank has developed the safeguard policies with key social and environmental objectives including:
• protecting vulnerable communities;
• promoting sustainable use of natural resources; and
• encouraging greater community participation.
In essence, the safeguard policies impose a number of requirements on the World Bank before financing is approved and when projects are undertaken, the most important of which are:
• environmental assessments of pro-jects before financing is approved;
• compensation for people involuntarily resettled for projects;
• protection for certain procedural and substantive rights of indigenous people when projects impact their lands.
Until 2006, the safeguard policies applied across the World Bank group to both the public sector and the private sector lending arms. In 2006, however, the International Finance Corporation introduced a single policy on social and environmental sustainability, and eight performance standards divided equally among social and environmental issues. In 2007, the Multilateral Investment Guarantee Agency followed suit in adopting new social and environmental policies.
The World Bank group was first to establish accountability mechanisms of this type, but now all international financial institutions integrate environmental and social considerations into their decision-making processes to some extent. Similar policies have been adopted by commercial banks that have no development mandate and are reflected in the Equator Principles (a benchmark for assessing and managing social and environmental risks in project finance in the private sector).
 Evaluation of the safeguard policies In September 2010, the World Bank’s Independent Evaluation Group released a study of the accountability mechanisms entitled Safeguards and Sustainability Policies in a Changing World. Overall, it found that policies have been effective in avoiding or mitigating adverse impacts in high-risk projects although the implementation of the safeguard policies has strongly focused on enforcing compliance at the expense of engendering strong client ownership. The evaluation highlighted a need to improve thematic coverage of the safeguard policies and to enhance disclosure and independent verification of monitoring and supervision reports to ensure accountability. The climate change impacts of a project are to be taken into account by the World Bank during the environmental assessment phase as required by the safeguard policies, but the financing of carbon-intensive projects raises broader questions about the World Bank’s lending strategies in the energy sector. Whilst it may not stem from a shortfall in the safeguard policies, funding by the World Bank group of carbon-intensive projects is steadily increasing. The Bank Information Centre recently reported that from fiscal year 2006 to fiscal year 2010, World Bank group lending for fossil fuel based projects increased from $1.5 billion to $6.2 billion. 2010 was a record year, with $4.4 billion worth of funding for coal projects alone, including the controversial Medupi project in South Africa and, on average, the World Bank group channels twice as much funding into fossil fuel industries than into renewable energy and energy efficiency combined. Recent developments Around the same time, the Board of Directors also approved the 2009 Energy Policy which is designed to: It aims to help its member countries to provide reliable, adequate and affordable energy for inclusive growth in a socially, economically and environmentally sustainable way based on: The ADB has also announced that starting in 2013, it will increase its target of clean energy investments to $2 billion a year. There have also been important developments in the private sector. In its recently released Annual Review and Sustainability Report 2010, Westpac, a leading Australian bank, announced that it is seeking to “avoid involvement in transactions which support the establishment or long-term continuation of inefficient and high emitting assets into the future”. This is reflected in the sustainable finance position statement which was released by Westpac in September, in which it also announces that it will seek to “finance the development of clear energy solutions and best practice pollution controls”. These developments follow criticism by Greenpeace of Australia’s “big four” banks (including Westpac) which have invested more than $5 billion into coal mining, transport and coal-fired power generation over the past five years and only $0.78 billion into renewable energy. The future Indeed, some nongovernmental organisations are already beginning to argue for the complete withdrawal of international financial assistance to the fossil fuel industry. As projects in the energy sector are critical for developments paths, finding a way to reconcile the conflict between the reliance on fossil fuels for economic development and reducing global emissions will be a key challenge for international financial institutions in the future. The views in this article are those of the authors and do not necessarily represent those of Blake Dawson. To download the Asian-Counsel Article click here |
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