contact: policy@ghub.org
The inaugural meeting of the Board of Governors of the Asian Infrastructure Investment Bank (AIIB) will be held in January from the 16th to the 18th this year, Before which, On December the 25th, 2015, 17 prospective founding nations, including China, South Korea, Australia, the UK, etc., have approved the Articles of Agreement of the Asian Infrastructure Investment Bank(AIIB Agreement) and submitted approval letters. The 17 countries jointly hold 50.1% of the total shares. Thus, AIIB was formally established. In the initial period, AIIB will mainly finance sectors including energy and power, transport and telecommunications, rural and agricultural infrastructure, water supply and treatment, environmental protection, urban development and logistics, etc.
Opportunities and Challenges facing AIIB
Greenovation Hub (GHUB), a Chinese environmental NGO expressed welcome to the formal establishment of AIIB. Firstly, AIIB would promote the construction of infrastructure in developing economies in Asia, which would supplement the role played by Asian Development Bank (ADB). Secondly, the establishment of AIIB would benefit China by expanding its overseas trade and investment, while facilitating its “One Belt and One Road” initiative. AIIB serves as a key juncture in the “Going Global” strategy of China’s financial sector, indicating that China is playing a larger role in making international financial rules. Now that international financial institutions like International Monetary Fund (IMF), the World Bank and ADB are initiated and dominated by developed countries, the establishment of AIIB would provide potential and opportunity to China and other developing countries to raise their voice and strengthen their influence on global economic governance.
However, there are also challenges to overcome. AIIB will face pressure from the US and Japan, the world’s largest and third largest economies respectively, which have been adopting wait-and-see attitudes. In the operational level, AIIB is also faced with the issues which should be promptly resolved, like a governance mechanism, cooperation models and internal coordination, etc. In particular, AIIB’s policy on the establishment of environmental and social safeguards framework has drawn attention from the international community. In August, 2015, on a press conference in Georgia, Mr. Jin Liqun, AIIB’s president-designate, said that AIIB would set up wise mechanisms and making high-standard policies and, besides ensuring investment efficiency, it would also strictly abide by environmental and social policies of various investing countries. In order to respond to concerns of the international community on the lending standard of the new investment bank in a detailed manner, in early September, AIIB released the draft of the Environmental and Social Framework (referred to as “Framework”) and launched a stakeholders’ video conferencing consultation process, which ended on October the 23rd, 2015. The video conferencing consultation process was also heavily criticized by the international civil society community as to not being inclusive and inadequate in collecting the diverse inputs from vulnerable communities across the region.
Suggestions on AIIB's Environmental and Social Framework draft
GHUB is glad to see that President Jin proposed that AIIB would be “lean, clean and green”. The promise indicates that China, by initiating the establishment of AIIB, is willing to participate in and actively play a leading role in global financial governance. However, we believe there remain some issues which need to be improved in terms of the content of the draft and the procedure of consultation:
Firstly, on details of the draft,
-
The draft proposed the vision of “support for green economic growth”, promoting investment in energy efficiency, clean production and renewable energy sectors. But it does not mention the investment policies on the highly-polluting, resource-oriented sector and infrastructure sectors, especially the sectors tending to have negative environmental and social impacts, like railway, road, hydropower energy, oil, cement, iron and steel, coal and nuclear power, etc.
-
The draft is in line with the usual practice of international financial institutions on categorization of investment Operations. However, on management measures and standards, it is not so excellent as international common practices and also does not meet the existing domestic regulatory requirement on environmental protection. In detail, for Category A Operations[1] which are likely to have significant adverse environmental and social impacts that are irreversible, diverse or unprecedented. AIIB requires the Client to conduct an environmental and social impact assessment (ESIA) or equivalent environmental and social assessment for each Category A Operation and to prepare an environmental and social management plan (ESMP), which is included in the ESIA report for the Operation. For sectors which would pose significant risk to the environment and society, only weapon and military industry is included in the exclusion list for lending. For Category B Operations, AIIB does not strictly require an environmental and social assessment prior to project approval at the board level, thereby only requiring the Client to conduct a review of environmental and social implications of the Operation through a promissory ESMP, which would likely lead to approval of many high-risk Category B Operations without critical pre-project assessment on environmental and social impacts at the design phase. Therefore, we suggest that AIIB make a binding requirement of environmental and social impact assessment applicable to all Category B Operations. For financial intermediary (FI) Operations, provision 20 under “cooperation with development partners” makes clear that AIIB “seeks to cooperate with them with a view to adopting a common approach to appraisal, environmental and social management requirements, monitoring and reporting regarding the Operation”, yet without relevant provisions requiring assessment on FI Operations and categorization of such Operations into A and B. This would likely make Operations with originally weak environmental and social policies still able to receive financial support from AIIB. Therefore, we suggest that AIIB make more detailed rules on categorization of FI Operations.
-
There is no clear direction on how the bank will tackle cases of non-compliance to the Framework requirements by borrowers. In basic terms this suggests that a submission of an ESMP by the borrower to AIIB would in effect revoke AIIB from any binding responsibility on implementation of the framework on the ground. The draft currently entails borrower countries (in case of sovereign loans), the private sector and FIs to conduct self reporting on the framework implementation without clear check-and-balance mechanisms set by AIIB for oversight. To this end, the draft fails to provide a clear recommendation/solution on cases of future framework and ESMP non-compliance for Cat A, Cat B and non-categorized FI projects.
-
The draft should make clear rules that assessment of environmental and social impact should be conducted prior to categorization of investment Operations in order to launch an investigation into “direct, indirect, cumulative and induced impact on potentially-affected areas” as well as make assessment on “the risks and impacts the Associated Facilities[2] may present to the project” regarding categorization. For Operations with significant impact, it should set up a sufficiently long period (more than 120 days prior to review by the Board of Directors) for consultation with affected communities and civil societies and release of a drafted report for environmental assessment.
-
The existing exclusion list[3] of the draft is ambiguous. ADB has made a clear rule that “The following do not qualify for Asian Development Bank financing”, while AIIB’s rule is that “AIIB does not knowingly finance an Operation that…” . We suggest that AIIB, in its exclusion list, make clear that it does not support sectors with significant impact on the environment.
-
The draft has not included gender issues into all standards and procedures and also has not clearly cited or required all Operations (including Operations of banks’ clients, related organizations and financial intermediary institutions) to abide by standards on labor rights. We hope it to make clear elaboration in a new safeguard framework.
-
The draft has shortcomings in arrangement of information disclosure and transparency. The draft requires its clients to make information disclosures, but has no requirement on its own obligation of information disclosure. It would only release some materials provided by clients on its external website to ensure its “support” to the client to perform obligation of information disclosure. The draft only requires clients “to disclose relevant information about environmental and social risks and impacts of the Operation”, but does not mention whether AIIB should make disclosure on Operation-level information, client profiles and information on residents’ complaints in affected communities. The draft also does not make clear on how many days should the proposed Operation be announced in advance, how many days should be arranged for public consultation as well as follow-on arrangement post each consultation.
Secondly, on the consultation process of the draft, GHUB hopes to see that AIIB could actively respond to the concerns of the international community and domestic society on environmental and social governance; conduct effective communication with stakeholders and civil societies and provide at least two rounds of consultation and its timetable; provide process for public consultation and increase the scope and improve the methods for such consultation, especially the face-to-face exchange; diversify the languages used in consultation by adopting local languages or providing translation/interpretation services during consultancy so as to facilitate the participation by residents from local communities that might be affected by Operations; besides being released on AIIB’s official website, such information should also be released through various media organizations and channels to ensure a transparent and fair consultation process that respects gender difference and cultural diversity.
Lastly, the draft could not ignore the establishment of AIIB’s independent grievance mechanism. Since AIIB only requires the Client to establish, in accordance with the applicable ESSs, a suitable grievance mechanism to receive and facilitate resolution for concern, there would be a lesser standard compared with international common practices. GHUB suggests AIIB should establish strong accountability and grievance mechanisms and make such mechanisms independent from the bank’s management with the director appointed directly by the Board of Directors. The Board of Directors must make commitment to ensuring the higher standard of environmental and social safeguard policies and applying them in dealing with complaints about the Operations. Before the draft is finalized and approved, a grievance mechanism should be released to solicit public opinions. From past international practices, the environmental and social impact assessment and strong accountability from local communities that are affected by the Operations (including complaints about Operation and right of relief) are critical to lowering investment risks in development financing, ensuring long-term investment benefit as well as demonstrating the responsibility. The World Bank, ADB and other key multilateral development banks, the European Investment Bank, and development banks of the world’s major countries have set up independent grievance and accountability mechanisms.
GHUB recognises the challenges faced by AIIB’s decision-makers and management team in founding a new international multilateral financial institution which requires them to meet borrowers’ diversified demands, improve the bank’s operating efficiency, and take the concerns of the international community on various governance-related issues into consideration. These challenges could also render opportunities for AIIB’s decision-makers and management team. AIIB does not need to simply copy the so-called “highest standard” from traditional financial institutions, but should encourage and pay much attention to consultation and consultancy with stakeholders, make further progress and breakthrough based on full respect for and experiences learnt from relevant standards and best practices and innovate in shaping a system suitable for present and future situations, so as to respond to the global demand for a sustainable and inclusive development.
Notes:
[1]AIIB assigns each proposed Operation to one of the following four categories：Category A. An Operation is categorized A if it is likely to have significant adverse environmental and social impacts that are irreversible, diverse or unprecedented. Category B. An Operation is categorized B when it has a limited number of potential adverse environmental and social impacts; the impacts are not unprecedented, and are neither irreversible nor cumulative. Category C. An Operation is categorized C when it is likely to have minimal or no adverse environmental and social impacts. Category FI. An Operation is categorized as FI if it involves AIIB financing to or through a financial intermediary (FI).
[2]Associated facilities (Associated Facilities) are activities that are not included in the description of the Operation set out in the agreement between AIIB and the Client providing for the financing of the Operation, but, in the judgment of AIIB, are: (a) directly and significantly related to the Operation; (b) carried out or planned to be carried out, contemporaneously with the Operation; and (c) necessary for the Operation to be viable and would not be constructed or expanded if the Operation did not exist.
[3]Exclusion List refers to those operations that AIIB does not knowingly finance. They mainly include trade in wildlife, weapons, etc. AIIB determines its exclusion list strictly in accordance with the recognized laws and conventions and domestic laws of each country.
For Further Reading:
Announcement: Observation on China’s Oversea Investment Opening Remark
The Update on AIIB Progress- Environmental and Social Framework
Asian Infrastructure Investment Bank Draws Global Attention
The Review and Update of the World Bank’s Safeguard Policies
POLICY CENTRE – GREENOVATION HUB
Greenovation Hub is a grassroots environmental NGO with a global outlook. G:HUB Policy Centre promotes the development and implementation of sound climate and environmental friendly policies through conducting in-depth analysis and research, as well as fostering dialogue among stakeholders, to drive China's green transition towards a sustainable, equitable and resilient future, contributing to the reduction of global ecological footprint.
Wechat: 气候与金融面面观
