Financing development: a civil society perspective - China Dialogue

Financing development: a civil society perspective

In the third of four reports focussing on environmental best practice for investors in the developing world, Aaron Goldzimer presents a guide to the impact assessments, reviews and standards that should guide good policy.

Civil society groups internationally agree that proposed development activities with the potential to significantly affect the environment should conform to accepted international good practice norms for addressing environmental impacts. Such tools can help emerging financiers strengthen their environmental regulations and policies.

At the same time, we must acknowledge the limitations of these tools and the negative impacts around the world from projects financed by institutions claiming to practice them. Acknowledgement of the contradiction, at times, between standards, practices and outcomes can provide opportunities for new financiers to emerge as a progressive force and move toward new, more effective institutional guidelines.

This dialogue begins with a discussion of current good practice mechanisms.

Environmental and social assessment for private sector finance, and for public support of private sector activities, has now been established worldwide for a third of a century, in industrialised nations as well as in developing countries. The defining Goals and Principles of Environmental Impact Assessment, issued by UNEP on January 16, 1987, were codified in the 1992 Rio Declaration on Environment and Development and ensuing conventions.

The extensive literature on environmental assessment and decades of practical experience support a clear international consensus on basic good practice principles for private sector, public sector, and mixed private-public undertakings. These good practice principles, laid out below, cover all stages of project development.


Screening is the evaluation conducted by the financing agency to determine whether or not a proposal should be subject to environmental assessment and, if so, at what level of detail. For instance, many financial agencies

1.      require categorisation of projects according to the severity of their prospective impacts (A, B, C, etc.);

2.      have illustrative lists of sensitive sectors to help determine that severity; and

3.      set specific requirements for environmental assessment and review commensurate with the severity of impacts.

Accordingly, a Category A project would require a full environmental assessment. A lower-impact Category B project would require a less comprehensive environmental review. And, shown to present no significant adverse environmental impact, a Category C project would not require an environmental assessment or review.

The environmental policies of many export credit agencies offer detailed guidance on how to screen a project for potential social and environmental impacts. The case impact analysis process of the United Kingdom’s Export Credits Guarantee Department (ECGD), for example, includes a questionnaire with 12 pertinent questions. Exporters need to indicate whether the goods and services being exported comply with British standards; whether the project in question is in one of 20 potentially damaging business sectors; whether it is located close to a protected site; and which core human rights treaties and fundamental conventions of the International Labour Organization the host country has ratified. A detailed list defines which projects classify as high potential impact (Category A) or medium or low potential impact (Categories B and C, respectively). The list indicates 15 issues and activities that mark Category A projects: major pollution of air, soil or water; impact on habitat important to endangered/protected species; work that directly affects public safety; involuntary resettlement; substantial job losses; effects on vulnerable groups; uncontrolled use of armed security forces; etc.

In spite of this effective prognostic mechanism, ECGD stresses that the case impact analysis process “is not a statement of what will be done in every case”, and that even a breach of international standards will not prohibit it from providing support to a project. Such discretion significantly weakens the policy’s value.

An instructive example of a developing-world export credit agency with more basic environmental guidelines is Turk Eximbank, which requires information that “should contain the positive and negative environmental impacts of the project, the parties involved and their roles, the identification of the project, including size, sector and aim, also the location of the project and whether it is close to sensitive areas.” The guidelines include an illustrative list of 26 sensitive sectors and areas that classify projects as Category A projects.

Another critical element of screening concerns the financial threshold which triggers the screening process. A US$10 million threshold is the increasingly accepted international standard, now widespread, adopted by the more than 50 international private banks adhering to the Equator Principles for project finance.

It is interesting to note that growing numbers of ambitious developing country banks – Banco Itau, for example, in Brazil – are not only adhering to the Equator Principles requirements, but go beyond them, in extending screening to all projects valued at 5 million Reales (about US$3 million) or more.

Specifying elements of the assessment or review

Good practice mandates a clear identification of an environmental assessment’s minimal requirements. Beyond a description of the project and the potentially affected environment, the environmental assessment generally includes the likely or potential environmental impacts of the proposed activity, including the direct, indirect, cumulative, short-term and long-term effects; a description of practical alternatives and an assessment of their impacts; and a description of measures to mitigate adverse environmental impacts of the proposed activity.

The French export credit agency COFACE has issued detailed environmental review requirements for three major environmentally sensitive sectors: thermal power plants, large dams, and oil and gas projects. The oil and gas guidelines, in turn, are divided into specific environmental requirements for extraction, transportation (pipelines), refineries, petrochemicals, and storage. The guidelines also identify a more rigorous “target” level of environmental compliance, and a still higher “best practice” standard which COFACE seeks to encourage.

The Swiss SERV likewise provides definitions of environmental impacts and issues to be addressed, such as biodiversity, world heritage or other protected areas, indigenous peoples, etc. For certain Category A projects, SERV requires a resettlement action plan, a separate evaluation of the environmental assessment by a consultant or an international financial institution, and comments from interested stakeholders.

In the case of hydroelectric power projects SERV gives special priority to associated environmental issues. It expects that the environmental assessment show “the extent to which the recommendations of the World Commission on Dams are fulfilled,” and suggests that this be done by an independent panel of experts or an independent consultant.

The international private bank HSBC applies the environmental assessment requirements of the Equator Principles to a broader range of investments and transactions than the Principles require. In addition, HSBC’s five separate sector guidelines and policies provide comprehensive, detailed environmental review requirements for forest land and forest products, freshwater infrastructure, the chemicals industry, the energy sector, and the mining and metals sector. These underscore HSBC’s commitment not to finance activities in environmentally sensitive no-go areas, not to finance “dams that do not conform to the World Commission on Dams Framework,” and to comply with International Finance Corporation (IFC) Performance Standards and Environmental, Health and Safety Guidelines where local standards are unsatisfactory.

Public consultation and disclosure

Public disclosure of information is quintessential good practice. UNEP’s defining Goals and Principles of Environmental Impact Assessment state: “Before a decision is made on an activity, government agencies, members of the public, experts in relevant disciplines and interested groups should be allowed appropriate opportunity to comment on the EIA.”

In China, new regulations on government disclosure of information, which took effect on May 1, 2008, aim to “ensure that citizens, legal persons and other organizations can obtain government information by lawful means, and increase government transparency.” The environment is listed as one of the sectors where transparency is required, allowing disclosure of environmental impact assessments and similar environmental documents.

The Japan Bank for International Cooperation’s environmental policy includes detailed provisions on the disclosure of information. As a principle, “JBIC welcomes information provided by concerned organizations and stakeholders.” Once a project has been screened, “JBIC discloses, as soon as possible, the project name, country, location, an outline and sector of the project, and its category classification, as well as the reasons for that classification.” For Category A and B projects, “JBIC publishes the status of major documents on environmental and social considerations by the borrowers and related parties, such as EIA reports and environmental permit certificates, etc. issued by the host government on the JBIC website, and promptly makes available the EIA reports etc.”

Many export credit agencies, including COFACE of France, EFIC of Australia, and Finland’s Finnvera, require that an environmental impact assessment be disclosed at least 30 days before decisions are made on project financing.

Standards and clarity

Good practice in environmental assessment requires clarity with regards to which standards are to be applied to various issues such as emissions, effluents, chemicals and pesticides, as well as which policies dealing with social consequences, such as impacts on indigenous peoples or resettlement. Some financial institutions apply whichever are more stringent – the host country’s or international standards. The latter often means World Bank/International Finance Corporation standards (contained in the World Bank Pollution Prevention and Abatement Handbook, and IFC Performance Standards) or, where appropriate, standards of regional multilateral development banks.

Most major export credit agencies commit to World Bank standards; some commit to still more comprehensive standards. Australia’s EFIC, for example, incorporates both World Bank standards and any higher standards it is required to adhere to under international conventions ratified by the Australian government. French COFACE projects within the three especially sensitive environmental sectors of oil, dams, and thermal power are benchmarked explicitly against the sectoral standards of the World Bank Group, the World Health Organization, the World Conservation Union and the European Union.

More than 50 private international banks – including a growing number of developing country banks – also commit, under the Equator Principles, to apply World Bank/IFC sectoral environmental and health guidelines for project finance transactions of US$10 million and above. A growing number of international private banks such as HSBC, Citigroup and JPMorgan Chase extend these requirements beyond project finance to most transactions greater than US$10 million where the proceeds of the transaction are known to support the project in question.

Environmental and social management

A key outcome of the environmental assessment process is the development of an environmental management plan (action plan) to address the mitigation issues identified in the assessment and relevant sector-specific policies (e.g., resettlement, etc.).

The more than 50 Equator banks are committed to ensuring that borrowers prepare a binding action plan for both Category A and B projects and a social and environmental management system to implement the Action Plan during the construction and operation of the project. Like a number of developing country private banks, the Banco Cuscatlan Group, a regional Central American bank headquartered in El Salvador, though not a signatory to the Equator Principles, requires the preparation of an environmental action plan for sensitive projects.

Some leading international private banks such as HSBC, which operate in developing countries, are more explicit. The OECD export credit agencies also commit, through the OECD Common Approaches, to the preparation of an Environmental Management Plan for Category A projects.

Halting a project

True good practice depends on an effective mechanism which ensures that support for a project will be halted or refused if environmental conditions are not met.

Equator Principle banks are committed to denying loans “to projects where the borrower will not or is unable to comply with our respective social and environmental policies, procedures, and standards that implement the Equator Principles.” Likewise, the Cuscatlan Group will reject financing if the proposed project or activity is found on its exclusion list (which corresponds to the IFC exclusion list) or if the environmental risk is high and there are no known solutions to mitigate the negative impacts.

HSBC goes beyond the Equator Principles in its screening thresholds and in other ways. Category A and higher risk Category B projects require prior consultation, including disclosure of the Environmental Assessment “in local language and in a culturally appropriate manner.” The bank will default a loan if an Environmental Management Plan “is breached, much the same if any other agreed loan term was not respected by the borrower.”

A number of major export credit agencies, such as Australia’s EFIC, have clear rejection policies for exports/projects that do not meet their explicit environmental standards. China Exim explicitly states that “projects that are harmful to the environment or do not gain endorsement or approval from environmental administration will not be funded.”

Finally, some public and private international banks and financial institutions explicitly report on projects they refuse to support because they do not meet environmental requirements. The U.S. Overseas Private Investment Corporation has done so since 2004. One project was rejected in 2004 and four in 2005, in Peru, Morocco, Ecuador and Ghana. Citigroup’s 2006 Citizenship Report mentions its rejection of support for a Category A hydroelectric project in Latin America.


Requiring or establishing a monitoring system to ensure implementation of mitigation measures or of the environmental management (action) plan is an important element of good practice.

JBIC’s Environmental Policy includes strong provisions on monitoring. The policy makes clear that information about project implementation must be provided by the borrowers; that JBIC will conduct its own investigations if necessary; that JBIC welcomes information about project implementation from third parties, including civil society groups; and that JBIC encourages project sponsors to take appropriate action if necessary. If their response is not appropriate, JBIC will take action according to the loan agreement, “including the suspension of disbursement”.

A growing number of private banks and export credit agencies have committed to additional elements of good practice in environmental and social assessment, including:

1.      Requiring some form of Independent Review of at least Category A assessments;

2.      Requiring that measures to be undertaken in environmental and social management (action) plans be included as binding conditions of loan covenants;

3.      Establishing categorical exclusion lists of certain kinds of exceptionally harmful activities and projects they will not support; and

4.      Special programs to give more favorable financing terms for renewable energy, greenhouse gas mitigation measures, and other environmentally friendly technologies.

The ethics policy of Belgium’s Ducroire/Delcredere encourages exporters “to abide by the social norms mentioned in the OECD’s Guidelines for Multinational Enterprises.” But following the guidelines is not mandatory; applicants only have to certify that they know about them. The Netherlands’ Atradius also requires applicants to confirm that they have taken note of the OECD Guidelines and that they “will make every effort to incorporate these guidelines” into their operations.

Several export credit agencies have excluded certain products from coverage by their services. The US Exim Bank excludes 54 pesticides and 30 industrial or consumer chemicals that have been banned or severely restricted by the US Environmental Protection Agency from coverage by export credits. Austria’s OeKB, Germany’s Hermes, and Switzerland’s SERV exclude the export of arms and/or nuclear technology from coverage. By law, SERV also has to take the principles of Swiss development policy “into consideration” for exports to poorer developing countries.

Environmental policies are only as good as their implementation. The policies of many financial institutions, including some of the good practice language presented in this document, suffer from a lack of assured compliance.

Several financial institutions, including at least one export credit agency, have created accountability and grievance mechanisms to strengthen compliance with their environmental policies and to handle complaints by affected parties. The Japan Bank for International Cooperation, like the World Bank and other multilateral development banks, has created an accountability mechanism in the form of an office of examiners, which aims to promote compliance with the Bank’s environmental policy.

Emerging financiers should not simply adopt the established rules. They are developing their own standards and policies at a time when the weaknesses and gaps of the existing rules have clearly come out. They should use this chance to learn form the experiences of other institutions, and leap-frog existing institutional guidelines to create new mechanisms. Doing so would allow them to claim a leading role for developing nations in overcoming historical problems associated with international lending and investment practices.


Aaron Goldzimer is a social scientist focussing on environmental reforms in international financial institutions. He works for the Environmental Defense Fund.

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