Billion dollar hydroelectric dams. Miles of highways. Oil and gas exploration. Such large-scale energy and infrastructure projects in the developing world and in sensitive eco-regions such as the Amazon rainforest often are promoted as bringing modern development to people in need. However, they also frequently present significant environmental risks and social and economic challenges for those living in the projects’ immense shadows.

For nearly three decades, the Charles Stewart Mott Foundation has supported efforts to ensure that the institutions financing these projects:

• Adopt and adhere to responsible development policies and practices.
• Are held accountable for the negative social and environmental impacts of the projects they fund.
• Contribute more directly to poverty alleviation, the well-being of communities and healthy, natural environments.

One of the areas the Mott Foundation’s Environment program focuses on is international finance for sustainability. The Foundation’s grants in this area have totaled more than $105 million since 1988.

Photo: Paul Weinberg / Africa Media Online

Infrastructure and energy projects, such as the Matla coal-fired power plant (left) in Mpumalanga, South Africa, can present significant challenges for the people they’re intended to serve. Mott grantees are engaging the financial institutions that fund such projects in supporting more sustainable development practices, like the Bangui Wind Farm (right) in Ilocos Norte, Philippines.

Photo: Rey Carbonell

In this Q&A, Mott Program Officers Traci Romine and Sandra Smithey reflect on that grantmaking and the important changes — and challenges — in the field.

Mott: Can you give us a quick primer on development financing?

Traci Romine: Most major infrastructure and energy projects in poor countries are financed by publicly funded international financial institutions, or IFIs. An example is the World Bank, which was launched by members of the international community in 1944 to help European countries rebuild their post-World War II economies. It soon began making loans for development projects elsewhere around the world and since has been joined by IFIs focusing on specific regions, such as Africa and Asia.

Today, these IFIs significantly influence regional economies, populations, natural resources and environments in developing countries — and not always for the better.

For nearly three decades, nongovernmental organizations or NGOs — including many Mott grantees — have partnered with communities in developing countries to improve the environmental and social standards of development finance. They’ve also worked to ensure IFIs achieve their stated collective mission of alleviating poverty and protecting the global environment.

Mott: Mott has worked in this area for 26 years. Why so long?

Sandra Smithey: Achieving meaningful policy change is often a slow process. Taking the long view with our grantmaking allows us to help build grantees’ capacity, deepen their expertise and increase their flexibility to address policy issues in relevant, timely and lasting ways.

The importance of this approach is clearly evident in our work related to development finance, where impacts generally unfold over decades. Our commitment to staying the course has helped the field minimize the negative social and environmental impacts of development finance, while maximizing the positive economic benefits of development in countries that need it most.

Mott: How did Mott’s funding evolve?

Smithey: Our grantmaking began in the 1980s. We championed public participation and accountability by IFIs, and the development of environmental and social safeguards to guide public development finance. Much of this work was done by NGOs based in the U.S., Europe and Japan, because those countries provided the bulk of the IFI’s budgets.

By the early 1990s, Mott grantees successfully helped push through the first global environmental and social safeguard policies to be adopted by the IFIs. However, implementation of those policies and enforcement of standards were major challenges.

Our grantees were among those leading the charge that resulted in the World Bank’s adoption in 1992 of a formal inspection panel, which provided a way for communities negatively impacted by World Bank-financed projects to voice their concerns and seek solutions.

Romine: During this same time frame, we recognized the need to build the capacity of NGOs in developing countries to monitor the implementation of development projects. We began helping NGOs in South America establish their financial and institutional bases, and link with similar groups in the U.S. and Europe.

Smithey: In 1996, we began supporting efforts to track what the private sector was investing in development projects in poor countries. This “follow-the-money” strategy focused on addressing the growing stream of project funding from export credit agencies and private banks. Much of that funding was for projects that even the IFIs opposed because of the environmental and social risks involved. Our grantees were among those who began pushing private sector sources to meet the same standards required by the IFIs.

Mott: Can you share a few success stories from that early grantmaking?

Romine: One example is a 1992 case before the World Bank’s inspection panel that led to resettlement benefits for more than 50,000 people forced from their homes by construction of the Yacyreta hydroelectric dam, located on the border of Argentina and Paraguay. The case also required the governments of those countries to reassess plans for lessening the project’s environmental damage.

Smithey: We also funded early dialogue between NGOs and private banks on the social and environmental risks associated with investment in large-scale projects. Those discussions laid the groundwork for the Equator Principles, a set of guidelines crafted by several international banks in 2003 for the purpose of managing the environmental and social risks related to development financing. To date, 79 financial institutions in 39 countries have adopted the principles.

Mott: Has the field changed in recent years?

Smithey: By the mid-2000s, the nature of development finance was evolving. The fiscal crises in the United States, Europe and Japan — the three traditional finance sources for the IFIs — and the ensuing global recession prompted the need to identify new funding streams for the field.

This sparked major geopolitical shifts in the development finance landscape. New governmental groups, such as the Group of 20 and BRICS — the latter made up of Brazil, Russia, India, China and South Africa — are now asserting leadership in the field, with issues of energy and infrastructure at the forefront of their agendas.

We’d anticipated these kinds of changes would occur closer to 2020. Instead, the future essentially rocketed forward by a decade, with lending by national development banks in BRICS countries increasing significantly in the past five years.

Romine: We’re also seeing more lending for energy and infrastructure projects in fragile ecosystems, and a disturbing number of those projects fail to meet the hard-won global standards. Many of these projects also are unable to demonstrate success in poverty alleviation or equitable development.

An example of these trends is investment by the Brazilian National Development Bank for projects in the Amazon rainforest. The bank is pouring money into energy, infrastructure and extractive industries, such as mining, at unprecedented rates. Our grantees are at the forefront of efforts to minimize the negative impacts of those investments.

Smithey: Similarly, since 2009 investments in developing countries via the China Development Bank and Export-Import Bank of China have surpassed the annual combined investments of all other public finance sources around the world. Our grantees have taken a lead role in mapping Chinese banks’ lending and in engaging them on environmental and social impacts.

Green Climate Fund

The Green Climate Fund was established in 2009 by the United States, Europe and large, emerging-market countries, such as China and Brazil, to help developing countries access the financial resources to reduce their greenhouse gas emissions and adapt to the consequences of climate change.

Several Mott Foundation grantees have since contributed to the fund’s design and helped develop guidelines for meeting environmental and social standards. On May 21, 2014, the fund’s board announced an agreement on the “essential requirements” that will effectively operationalize the initiative, which is expected to start underwriting pilot projects in 2015.

Governments in developed countries, including the United States and several countries in Europe, have pledged a total of $100 billion a year to finance the fund through 2020.

The Green Climate Fund was established in 2009 by the United States, Europe and large, emerging-market countries, such as China and Brazil, to help developing countries access the financial resources to reduce their greenhouse gas emissions and adapt to the consequences of climate change.

Several Mott Foundation grantees have since contributed to the fund’s design and helped develop guidelines for meeting environmental and social standards. On May 21, 2014, the fund’s board announced an agreement on the “essential requirements” that will effectively operationalize the initiative, which is expected to start underwriting pilot projects in 2015.

Governments in developed countries, including the United States and several countries in Europe, have pledged a total of $100 billion a year to finance the fund through 2020.

Mott: How has this shaped Mott’s current and future grantmaking?

Smithey: In 2012, we engaged our grantees and other experts in exploring the opportunities and challenges facing the field. Based on that input, we decided to focus special attention on the World Bank and the development and implementation of new global standards for IFI lending.

We’re also funding work that closely monitors the development of the Green Climate Fund, an international mechanism designed to help developing countries mitigate and adapt to the impacts of climate change.

Romine: In the context of new economic powers wielding increasing influence over global development finance, the program will focus on strategies to democratize and strengthen environmental and social policies governing national development banks in Brazil and China. This will allow us to build on existing relationships and networks in Brazil, and build the capacity of NGOs in China to positively impact that country’s financing practices in developing countries.

Finally, we continue to fund efforts to monitor and minimize the negative effects of South American investment policies, particularly in the areas of infrastructure and energy. The work by Mott grantees is demonstrating how our global strategies support social and environmental impacts at the ground level.