by Sara Munčs
It is not immediately obvious to most environmentalists the huge role that banks have to play in terms of achieving environmental goals. Banks, being the lenders of the money, have the power to set conditions on the money they lend. Of course, at the individual or small business scale, these conditions generally involve having a good credit rating and enough personal assets to potentially cover losses. When we look to larger scale businesses and projects these conditions start to become more demanding. The World Bank Group (WBG), among the largest financial institutions in the world, has been setting environmental conditions on their borrowers since the late 1980s.
The World Bank created its central Environmental Department in 1987 and issued its Operational Directive 4.00 on Environmental Assessment (EA) in October 1989 (1). This EA directive established a screening process undergone by all projects seeking loans, where projects posing serious or medium environmental risks (A or B category respectively) would have to undergo environmental impact assessments (1). This process has evolved and improved over time; today the International Finance Corporation’s (IFC) (one of the WBG’s member institutions) performance standards on Environmental and Social Sustainability are largely regarded as best EA practice (2). However, many ambiguities in the WBG’s EA policy have led some to question their dedication to the environment.
For one, while the WBG establishes the requirement for EA to take place and gives general guidelines and standards, it is the borrower that conducts the assessment at their own discretion (1,2). There is, therefore, room for the borrower to submit insufficient assessments and get their projects approved. Furthermore, these assessment requirements do not strictly apply to projects being funded by a financial intermediary (3). That is, when the bank funds smaller financial institutions, who play the role of intermediary between the WBG funding and the project, as is generally the case with micro, small and medium-sized projects or enterprises (SME), these projects are no longer screened directly by the bank and IFC performance standards are not a requirement (2,3). Many projects with environmental impacts can escape scrutiny in this manner. Finally the Bank, historically, has put more emphasis on mitigation measures than on pursuing alternative projects with less impact (1). This demonstrates an acceptance by the bank that development cannot take place without environmental damage: a position that should be accepted as a last resort not as an unavoidable truth (1).
The WBG does seem to be changing this idea though, as can be seen in the following video outlining their new environmental strategy, which was adopted in 2012.
The concept that real development cannot take place without some level of environmental security seems to be taking hold, and it is recognized that neglecting to account for environmental damages will only continue to exacerbate social and economic problems, particularly in the developing world (4). This position is even being accepted by smaller scale financial institutions as demonstrated by the increasing number of banks adhering to the Equator Principles for environmental and social risk management (5). The new environmental strategy proposes a number of actions to make the world greener, cleaner and more resilient, but what do they propose in terms of EA? Despite being an already existing tool that has a number of flaws, the answer to this question is “not much”.
Capacity building (as the usual go-to solution) is suggested, particularly to deal with the second problem that was mentioned about intermediary financial institutions. The WBG proposes to help financial institutions establish Environmental and Social Management Systems and to reach Equator Principle Member status. However, if one looks at Equator Principle membership it becomes obvious that institutions from developing countries are still lagging behind: only a handful of members are from Africa and none are from Asia with the exception of Japan (5). Granted this strategy has not been in place long, but clearly capacity building needs to be stepped up a notch.
What would have even more of an impact on EA and the environment than capacity building is, of course, not even acknowledged as a problem. It is clear that the WBG is playing the role of regulating authority for the EA’s conducted for the projects it finances: The WBG determines if an EA is required or not, has guidelines regarding how the EA should be conducted and makes the decision on whether the project will be approved for funding. However, the WBG is being lazy in this role and giving the proponents too much rein in how the EA is conducted. While general guidelines are given, project specific guidelines, similar to typical terms of reference documents would perhaps be more effective at ensuring the EA process is conducted properly. The WBG has to stop taking tiny, typical steps and make more drastic changes if they really want to support sustainable development.
1-Haeuber, R.(1992) “The World Bank and Environmental Assessment: The Role of Nongovernmental Organizations” Environmental Impact Assessment Review, Vol 12: 331-337.
2- IFC (2012) IFC Peformance Standards on Environmental and Social Sustainability.
3-Faubert, K. et al. (2010) “Environmental Assessment in Multilateral Development Bank Intermediary Lending” Journal of Environmental Assessment Policy and Management, Vol 12, No. 2: 131-153.
4-World Bank Group (2012) Towards a Green, Clean and Resilient World for All: A World Bank Group Environment Strategy 2012-2022.
5-Equator Principles Association (2013) “Members and Reporting” Retrieved from http://www.equator-principles.com/index.php/members-and-reporting