June 25-26, 2018, the Third Annual Meeting of Asia Infrastructure Investment Bank (AIIB) was held in Mumbai, India. Board of Governors has approved a new membership application from the Republic of Lebanon, bringing AIIB’s total approved membership to 87. Representatives from governments, financial institutions, businesses, CSOs and media convened to exchange ideas regarding “Mobilizing Finance for Infrastructure: Innovation and Collaboration.” G:HUB attended the Annual Meeting and exchanged with AIIB management team on environmental, social and climate risk management of AIIB investment.
2018 AIIB Third Annual Meeting, Source: AIIB.org
Update on AIIB
Since its establishment, the AIIB has been gradually establishing and improving its governance mechanism and investment policies. It has published and implemented Environmental and Social Framework and Energy Sector Strategy. Public Information Interim Policy and Complaints Handling Mechanism were also officially published this year after public consultations. In May 2018, the AIIB launched public consultation on Draft Transportation Strategy. In 2017, S&P Global Ratings rated the AIIB as ‘AAA/A-1+’, its highest possible rating.
At current stage, the AIIB mainly conducts co-financed projects with other multilateral development banks (MDBs). Since 2017, the AIIB has approved stand-alone projects. By June, 2018, the AIIB has approved 28 projects with over 5.3 billion USD of loans in total. These projects include 12 energy projects, two water projects, one telecom projects, one urban project and one multi-sector project. There are also four projects where the AIIB supports financial institutions such as IFC emerging Asia Fund, the Indian National Investment and Infrastructure Fund, Indian Infrastructure Fund and Indonesia Area Development Fund to mobilize more investments in promoting infrastructure development in the area.
Graph 1. AIIB's Investments in Infrastructure (By Sector)
Data Source: AIIB website (As of June, 2018)
As the AIIB’s largest borrower, India has received approvals for 7 projects with a quarter of the investments going to Category A projects, which has the highest environmental and social impact risk.
Graph 2. AIIB’s infrastructure investments by region
Data source: AIIB website (As of June, 2018)
As a new member of the multilateral development banks, ‘innovation’ is a key word during the AIIB’s third annual meeting. At the parallel forum, representatives of member states, MDBs and Civil Society Organizations (CSOs) discussed ways to mobilize the private sector to participate in infrastructure investments to meet the huge demands in Asia, including policy continuity, innovative modalities of cooperation and mobilization of private sectors. According to the forecast of the Asian Development Bank, the Asian infrastructure investment demand will reach $26 trillion by 2030. Therefore, mechanism reform is necessary to attract more private investors to participate in the financing of infrastructure projects.
Following the 2017 annual meeting, the AIIB management team further the exchange with CSOs during the third annual meeting. Representatives of CSOs from Bangladesh, the Philippines, India and China provided feedbacks on environmental and social impacts, information disclosure and compliant handling mechanism, and inquired about how the AIIB would ensure their investments align with Paris Agreement. Jin Liqun, the president of the AIIB, stated that the AIIB will look into the projects regarding the effectiveness of the compliant handling mechanism and emphasized that, just like CSOs, the AIIB also pays close attention to the environmental and social risk management of the projects. The AIIB also introduced the internal carbon pricing in the reviewing process of projects, where the AIIB evaluates the viability of the projects when carbon price is counted into the projects, based on each country’s carbon emission targets.
What does it mean for MDBs to be “green” in the Post-Paris Era?
As Asia is the fastest growing region in terms of infrastructure demand and carbon emissions in the future, the AIIB plays an important role in contributing to the implementation of the sustainable development goals and the Paris agreement on climate change. As a MDB in the post-Paris era, the AIIB regards “Lean, Clean and Green” as its core values. Although the definition of “green” remains unclear, the AIIB states in its Energy Sector Strategy that “Bank’s support to countries will be aligned with their national energy investment plans/strategies, including their NDCs under the Paris Agreement”. During this year’s annual meeting, the president Jin Liqun reiterated that environmental and social sustainability is a fundamental aspect of AIIB’s support for infrastructure development. Recognizing the need to address the economic social and environmental dimensions of sustainable development in a balanced and integrated way, the AIIB will also adhere to the principles of sustainable development at the stage of identification, preparation and implementation of their projects.
However, in terms of formulating specific investment policies, the AIIB still needs to gradually refine its targets and roadmap of its climate and environment-related investment policies and release a clear signal of economic decarbonization. Taking the Energy Sector Strategy as an example, the strategy does not specify the time frame for its application or the timeline for its next revision. It is necessary for the AIIB to fully understand the trend of energy transition of member states. Moreover, the AIIB should examine and revise the Energy Sector Strategy in 2020 based on the 2050 long-term low greenhouse gas emission development strategies that each country is expected to submit by 2020. The AIIB should also set up detailed implementation roadmap with specific timelines.
In terms of project implementation, the AIIB’s current projects mainly focus on energy infrastructure, most of which on natural gas, hydropower, oil and gas pipelines. There are still limited renewable energy projects, especially those small-scaled distributed photovoltaic projects that can meet regional energy needs. One of the challenges, the AIIB admits, is that the projects submitted by member states remain dominated by traditional infrastructure projects with just a few of projects related to renewable energies. In addition, the capital volume of distributed project investment is small and does not meet AIIB’s requirement of investment scale. We believe that the AIIB could adopt innovative project assessment and screening mechanisms, to encourage member states to develop more renewable energy projects, which could leverage more capital in renewable and low-carbon areas through consistent political signal. At the same time, the AIIB should formulate specific energy sector policies based on the Energy Sector Strategy and make detailed guidelines on technologies, emission standards and clean production to ensure that the selection, approval and implementation of investment projects are consistent with the strategy.
Meanwhile, in the implementation of the information disclosure and complaint handling mechanism, being “lean” is not necessarily an advantage for the Bank. In particular, the complaints from affected communities did not receive prompt and effective responses in some projects that AIIB engaged through financial intermediaries. Some project documents do not specify the exact locations of the projects, thus CSOs cannot monitor and evaluate whether the benefits described in the project are actually received by the local communities. These problems could dampen AIIB’s environmental and social risk management. We believe that while adhering to the principle of “lean”, the AIIB should ensure the effective implementation and supervision of its policies. Especially for projects implemented by financial intermediaries, the AIIB should still guarantee the effective channels for affected communities to raise complaints, resolve the complaints timely and effectively, and urge the intermediaries to improve the environmental and social risk management of their projects.
There is also a noticeable gap in the agenda setting of the third Annual Meeting, where sustainability is seldom present in discussions on investment and financing. In seminars between finance ministers of member states and representatives of multilateral financial institutions, the discussions mainly focused on improving policy stability, formulating innovative financial instruments and cooperation modalities. In the two seminars - “sustainable infrastructure” and “accelerate low carbon transformation” about low carbon transformation pathways from the perspectives of sustainable development and climate change, it is noticeable that most speakers were international advisors of the AIIB or representatives from CSOs, while senior management staff responsible for governance and investment are absent. Thus, there was limited exchange on how to incorporate sustainable development and climate change into the investment decisions. We believe that investment and financing and sustainable development should be integrated in public discourse to ensure that environmental, social and climate risks can be substantially factored into the cost-and-benefit considerations of investments.
In the past three years, the AIIB has made some progress in mechanism setting, investment policies and project development and implementation. We recognize the Bank’s active communication with the stakeholders and its openness towards comments and feedbacks. As a new MDB, the AIIB could provide the world with a new and innovative pathway towards the sustainable infrastructure development, as the world is transitioning towards a low-carbon and sustainable economy. As Luxembourg is hosting the Fourth Annual Meeting in 2019, we look forward to the AIIB to transforming the “green” core value into a specific roadmap and quantifiable indicators as soon as possible through forming more detailed policies, ensuring effective implementation and stakeholder engagement. In this way, the AIIB could play a leading role in exploring an innovative way toward sustainable infrastructure development and green finance governance.