The ‘greening’ of development finance

More multilateral banks weighing environmental, social impacts before funding infrastructure projects in developing countries

In 2017, Rayyan Hassan went to the Asian Infrastructure Investment Bank’s annual meeting to criticize its practice of financing coal-fired power plants in developing countries. His plan to confront bank officials for funding projects that exacerbate climate change and harm nearby communities was derailed, but in a good way.

Hassan was preempted by Jin Liqun, president of the China-led bank. Liqun announced that the AIIB would stop financing coal-fired power plants in its 109 member countries.

“The announcement was definitely a surprise,” said Hassan, who is executive director of the NGO Forum on the Asian Development Bank, which the Charles Stewart Mott Foundation supports. “I was going to read a statement blasting the bank for financing coal-fired power plants.”

In May 2021, the Asian Development Bank took similar action. Officials at the Japan-led bank, which provided $42 billion for energy projects in Asia between 2009 and 2019, said it would stop financing coal mining, coal-fired power plants, and upstream oil and gas projects, which include exploration and production.

A growing number of banks are adopting finance exclusion lists that prohibit funding for coal or upstream oil and gas projects. The lists are an important tool for encouraging the transition from fossil fuels to renewable energy sources.

Banks are increasingly using exclusion lists, coupled with strong environmental and social standards, to guide lending in developing countries. The standards aim to protect communities and ecosystems in the path of energy and infrastructure projects.

Because multilateral banks like the AIIB and ADB fund projects in numerous countries, their actions have global consequences. The World Bank Group’s 2018 decision to stop funding upstream oil and gas projects and shift $1 billion annually to renewable energy projects was a prime example: The impacts will ripple through the bank’s 189 member countries.

Mott grantees waged a successful, 5-year legal battle to protect Indigenous fisheries in the Peruvian Amazon River.
Photo: Rolando Mondragon DAR

“Persuading even a single multilateral development bank to change its position on funding for energy and infrastructure projects can improve the lives of millions of people,” said Niruban Balachandran, an Environment program officer at Mott.

“Our grantees’ work has resulted in several banks rebalancing their energy portfolios to support more wind and solar projects,” Balachandran said. “It’s a tectonic shift that will benefit communities in developing countries and help address the global climate crisis.”

Mott has supported efforts to reform international development finance since the late 1980s, providing more than $105 million in grants for the work. The goal: Shape international investment policies for energy and infrastructure projects in ways that protect people and the environment in developing nations.

The work is complex, time-consuming and happens mostly out of the public eye. But the results can be significant. The standards and exclusion lists have been used to protect Indigenous communities, safeguard fragile ecosystems and decrease the use of fossil fuels, which contribute to climate change.

Balachandran said it’s possible to have economic growth in developing countries without causing social or environmental upheaval. “One of the keys to achieving this,” he said, “is having multilateral banks gather input from communities affected by infrastructure and energy projects before construction starts — especially Indigenous peoples and other vulnerable populations.”

Efforts to reform international development finance have produced meaningful change over the past decade. Several publicly funded, multilateral banks have decreased or eliminated funding for coal-fired power plants and oil and gas exploration; some also increased lending for renewable energy projects. Recent highlights, in addition to changes at the AIIB, ADB and World Bank Group, included the following:

  • In 2019, the European Investment Bank announced it would stop financing fossil fuel projects and shift $1.2 trillion to renewable energy, energy efficiency and green infrastructure projects.
  • The Inter-American Development Bank announced in 2019 that it would stop financing coal-fired power plants and oil and gas projects in its 26 member countries, all of which are in Latin America and the Caribbean.
  • Following protests by Mott-supported organizations, the Bank of China in 2019 suspended work on the $1.8 billion Batang Toru hydroelectric dam on the Indonesian Island of Sumatra. The dam was slated to be built in the world’s only known habitat for the Tapanuli orangutan, a critically endangered species.
  • Also in 2019, the China Development Bank adopted a framework for harmonizing environmental and social governance standards for the massive Belt and Road Initiative, which has already received over $190 billion in loans for 600 infrastructure projects across the globe. The change was a response to groundbreaking research by the Mott-supported Global Development Policy Center of Boston University. Researchers there documented the soaring environmental, economic and social costs associated with fossil fuel projects in the Belt and Road Initiative.
  • Earlier this year, a Peru Supreme Court ruling changed the review process for publicly funded infrastructure projects, including the $94 million Amazon Waterway Project, because government agencies weren’t consulting local communities before approving them. The controversial dredging project would have impacted the Amazon River system and harmed fisheries that support Indigenous communities.

Each year, government-funded multilateral banks collectively pump over $100 billion into developing countries to finance power plants, hydropower dams, roads and other infrastructure projects. Those types of banks date to the 1940s, when the World Bank Group was established to help Europe rebuild after World War II. It was the first multilateral development bank and eventually expanded lending to other continents.

Multilateral banks can drive much-needed economic growth, but poorly planned projects can disrupt Indigenous and traditional communities, displace nearby residents and damage vital ecosystems. In recent years, many advocacy groups that work on development finance issues have shifted their focus from fighting individual projects to challenging policies at banks that finance work in multiple countries.

Portrait of male Sumatran orangutan hanging in a tree Pongo abelii in Gunung Leuser National Park, Sumatra, Indonesia.

Mott grantees halted construction of the Batang Toru Dam in Indonesia. The project would have decimated the only known habitat for the Tapanuli orangutan, a critically endangered species.
Photo: Anton Petrus/iStock

“Our new avenue of advocacy is making sure financing moves into the right places and that banks follow the social and environmental safeguards they’ve adopted,” Hassan said. “We want money invested in the right places, we want it invested in renewable energy, and we want banks to invest in development that is inclusive.”

Mott-supported organizations also have used the courts to protect the rights of Indigenous and traditional communities in the path of infrastructure projects. The recent Peru Supreme Court ruling involving the China-financed Amazon Waterway Project culminated a 5-year legal battle. It required all government agencies to consult potentially affected communities before approving public service projects — such as roads, airports, waterways and power transmission lines — that could affect their lifestyles and livelihoods.

“Peru’s Indigenous communities feel more protected as a result of the Supreme Court ruling,” said Cesar Gamboa, executive director of DAR Peru, which Mott supports. “It was a message to national authorities that they have to follow this ruling and consult with Indigenous communities.”

Traci Romine, an Environment program officer at Mott, said some development banks continue to fund energy and infrastructure projects that disrupt communities and harm the environment. But she said efforts to reform international development finance have made considerable progress in recent years.

“The tide is turning,” Romine said. “More banks are implementing exclusion lists that end financing for coal-fired power plants and upstream oil and gas development in developing countries.”

She said the organizations that Mott supports have worked across institutions, for decades in some cases, to get those restrictions in place, adding: “Their work is inspiring, complex and never-ending.”

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