On a small island off the coast of South Korea, the world’s newest multilateral bank – the China-led Asian Infrastructure Investment Bank (AIIB) – is meeting until Sunday 18 for its second-ever annual general meeting. While the bank’s first AGM in Beijing last year was mainly a back-slapping affair to celebrate its establishment, this year’s AGM marks the true test of what kind of investor the AIIB will be, and what that means for the future of Asia and the world.
AIIB President Jin Liqun repeatedly says that the bank aims to be “lean, clean and green”. And two decisions that the AIIB’s board will take will test that aspiration to its very limits.
First, the AIIB’s directors will approve the bank’s new Energy Sector Strategy. In a leaked copy of that strategy seen by chinadialogue, the AIIB explicitly commits to the Paris Climate Agreement and the United Nations’ Sustainable Development Goals. This is good news for both climate and energy access for poor communities.
However, many in civil society are worried that the strategy does not specifically stop the AIIB from financing coal. For example, 31 civil society organisations (CSOs) in India wrote to the AIIB, “We remain deeply concerned that the supposedly ‘green’ bank still may end up funding dirty fuels across Asia, including coal and gas thermal plants, as it does not exclude these. Other MDBs [multilateral development banks] have renounced coal funding, and the AIIB should not undermine this broader position.”
Don’t worry, the AIIB’s head of policy and strategy Joachim von Amsberg reassured CSOs at a meeting in London, December 2016: “Don’t judge us by our words but by our portfolio”. In other words, we should assess the AIIB’s commitment to be “lean, clean and green” not on its policies but on its investment choices.
Caught in the middle
Which brings us to the second key decision the AIIB’s directors will make: whether to invest US$150 million equity in the India Infrastructure Fund. This “hands-off” financing model, whereby a bank invests in a financial intermediary (FI) such as a commercial bank or infrastructure fund, which then on-lends to a subproject or client, is highly risky. There is growing evidence that social and environmental standards become quickly diluted and transparency is lost.
The AIIB’s proposed investment in the India Infrastructure Fund will be its second intermediary investment of this kind. The first was to Indonesia’s controversial Regional Infrastructure Development Fund. The AIIB already has standards relating to intermediary lending but they are not robust enough to prevent social and environmental harms or to “catch” high risk forms of lending – such as to coal.
The AIIB’s peer, the International Finance Corporation (IFC), has learnt this the hard way. Over half IFCs lending is through financial intermediaries and IFC itself invested in a vehicle also called India Infrastructure Fund back in 2008. This fund backed a massive coal plant in Odisha, which led local communities to file a formal complaint to the IFC’s watchdog, the CAO. Fully two thirds of the India Infrastructure Fund’s current energy clients are involved in massive coal plants and mines in India. The CAO’s investigation found that the IFC had breached every key environmental and social policy, including on disclosure, management of risk, due diligence and supervision.
The new head of the IFC, Philippe Le Houérou, recently recognised the high risks inherent in intermediary lending. For the first time, he pledged “we will reduce IFC’s own exposure to higher risk FI activity and apply greater selectivity to these type of investments, including equity investments.” The IFC also agreed to track its financial intermediary exposure to coal projects.
All this should be sounding loud alarm bells to the AIIB’s Board next week. Its decision on investing in the India Infrastructure Fund is a key test of whether it can learn lessons from its peers and make the right choices.
Contrary to Mr von Amsberg’s assurances, it is never going to be enough to focus only on the AIIB’s investment portfolio. The bank’s policies must also be robust enough to prevent harm to people and the environment. The AIIB board faces a crucial question: whether its new energy strategy, coupled with its Environmental and Social Framework, provide sufficient safeguards to “catch” high risk and high carbon sub-investments by intermediaries like the India Infrastructure Fund?
A new report published last month by India’s Center for Financial Accountability and BIC Europe flags areas where AIIB’s policies need tightening to close some dangerous loopholes. For instance, it should publicly disclose high-risk sub-projects; it should ensure it does not delegate all responsibility to its intermediary clients for applying its safeguards application. And it must be explicit that its Energy Sector Strategy applies across its direct and indirect lending portfolio. The report warns that as current policies stand, they are not sufficient to prevent the AIIB falling into the same traps that caught the IFC.
But another problem remains: policies are only as good as their implementation. And here is the inherent contradiction in President Jin’s aspiration to be “lean, clean and green”. Turning words into actions, and ensuring AIIB invests in a low carbon energy future, will require people. Not just project officers and investment managers, but experts in innovative infrastructure solutions, in social and environmental impact assessment, and perhaps most importantly, people on the ground where these projects are planned. Local context is everything. The AIIB cannot hope to figure out if it is meeting its laudable energy access goals just by measuring gigawatts generated, as it currently proposes to do. How can the bank track whether local communities that are bearing the brunt of the impacts of its projects are also getting access to the electricity being generated?
In its first year, AIIB has co-financed 75% of its projects with other banks, such as the World Bank and Asian Development Bank. By doing this, the AIIB says it wishes to learn lessons. That may be so. But it has also simply delegated responsibility to these partners to apply social and environmental protections and manage a project’s outcomes.
Already questions around this reliance on co-financiers are emerging. In Pakistan, for example, the AIIB is co-financing an extension to the Tarbela dam with the World Bank. Tens of thousands of people in the area were displaced by the previous Tarbela and Ghazi Barotha projects, and to this day, many remain without restitution for the harms they suffered. It is the World Bank that bears historic responsibility for those past projects. But the AIIB is relying on the World Bank to manage the environmental and social plans for the project. Yet as a co-financier that has committed to address past harms, the AIIB must bear equal responsibility for the project and its impacts.
Some of the AIIB’s shareholder governments have expressed concern in private that the bank is running before it can walk, that the AIIB board is being asked to approve high risk projects – such as the India Infrastructure Fund or the Myingyan gas power plant in Myanmar – before it has adequate policies and systems in place.
The AIIB’s public information policy is still “interim”, and desperately needs revision. It is currently ranked worst of any multilateral banks. Meanwhile the bank is still in the process of establishing its accountability mechanism that is vital not only as a means of remedy for communities that have suffered harm, but also for the institution to learn from its mistakes.
This week, the AIIB will face global attention. In the wake of the US administration’s withdrawal from the Paris Climate Agreement, it is more important than ever that President Jin and the AIIB board show the world the substance behind the slogans: that though it may be lean, the AIIB commits that its policies and practices will forge a low carbon and pro-poor energy future, and so be clean and green too.