Dirty palms: European Development Banks need better due diligence and accountability to prevent human rights abuses

On Monday this week Human Rights Watch (HRW) released a new report detailing human rights abuses in the Democratic Republic of Congo committed by the palm oil company Feronia. The agribusiness company has received financial support from four European development institutions: the UK’s CDC, Dutch FMO, German DEG and Belgian Bio.

The report’s launch event, hosted by specialist law firm Leigh Day in London, started with a captivating account by the report’s author, Luciana Tellez-Chavez, and provided for a lively discussion on the need for better human rights due diligence and accountability of European development banks.

I was invited to present Bankwatch’s work on Multilateral Development Banks (MDBs), such as the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD). MDBs are considered standard-setters in the world of development finance, as their policies represent the wide consensus among shareholding countries on how sustainable finance should safeguard people and the environment.

As both Bankwatch experience and the HRW report show, a lot more is to be desired with regards to development banks’ human rights policies and their implementation. After enjoying decades of immunity and obscurity, development banks now increasingly face the risks of reputational damage and legal challenges. By the same token, the ever more critical scrutiny of MDB’s effectiveness to deliver on their development mandates is now threatening the status quo in Europe’s development finance architecture.

Redress, accountability and immunity of MDBs

The discussion at the Dirty Palms launch event was going back and forth between the question of how to ensure redress for the palm oil workers and communities in DRC and the broader question of MDB’s accountability and immunity. What happens, if the rights of workers and communities are not properly safeguarded? Can public finance institutions be held accountable for the lack of proper oversight and prevention of human rights abuses committed by their clients? What are the contractual obligations imposed on clients and can they be strengthened to ensure due respect for human rights? Should MDBs’ legal immunity be lifted if they systematically fail to ensure that their investments “do no harm”? How to address the risk that if more responsible lenders tighten their standards, clients may just look to less scrupulous sources of finance?

MDBs have internal accountability mechanisms that should provide for both institutional lesson learning, as well as for justice and redress for harm done by their investments.

Some lessons are never learned though. For example, when it comes to the rights to information and participation of affected people. For decades, complaints about the lack of transparency and meaningful consultations have fallen on deaf ears. Banks and their clients continue to hide behind confidentiality excuses that often lack a real basis in law or could easily be circumvented by clauses in contracts on information disclosure. In this day and age, though, when affected people are increasingly aware of their rights and communication technologies are enabling information sharing far and wide, hiding human rights abuses has become close to impossible.

If MDB’s safeguards policies were implemented properly and their accountability mechanisms were effective, there would be no need to challenge their legal immunity in national courts by people whose rights were violated.

As it was pointed out by one of the speakers at the event, Simon Milnes of Twenty Essex, there were good reasons why immunity was granted to international organisations in the first place. Primarily, MDB’s immunity was meant to shield them from interferences of states and thus preserving their independence. Immunity was also needed to overcome a practical difficulty of subjecting MDBs to varying rules in the multiple jurisdictions where they operate.

Immunity was never meant to equate impunity. If MDBs are systematically failing to ensure adequate protection of human rights, they have to face the consequences. The US Supreme Court ruling in February this year on the Jam vs IFC case may come to be seen as a wake up call for MDBs. They can no longer hold on to anachronistic privileges of full immunity when causing destruction and dispossession under the banner of development. They have to reform the way they do business, respond to grievances, remediate destroyed ecosystems and restore livelihoods.

The future of the European financial architecture for development

The discussion organised by Leigh Day couldn’t be taking place at a better moment. The Foreign Affairs Council of the EU discussed the changes that are needed to the European financial architecture for development on the very day the HRW report was publicly released and media in the UK, Germany, the Netherlands and Belgium was airing its findings.

Earlier this year the EU Council has set up a high level group of wise persons, who in October produced the report “Europe in the World: The future of the European financial architecture for development”. The session at the Foreign Affairs Council this week saw the president of the EBRD, Suma Chakrabarti, argue that the EU must strengthen multilateralism not circumvent it, while the president of the EIB, Werner Hoyer, stressed the EU’s need to strengthen its strategic autonomy in development.

The two banks will follow up with additional argumentation and the EU’s Economic and Financial Affairs Council (ECOFIN) is expected to issue a decision on the way forward on its meeting on 5 December. Meanwhile, the EBRD is busy preparing a new five year strategy that its Board of Governors should approve at the bank’s annual meeting in London in May 2020.

This is not the first occasion on which the EU had tried to rethink its development finance architecture. In 2010, there was a proposal for merging the EBRD and the EIB, in order to avoid overlaps in geographical coverage and to improve the effectiveness of investments. This time around, however, Brexit is raising urgent questions about UK’s shareholding in the European MDBs. The EIB can see shrinking of its capital base with UK exiting, while the shareholdings of the EU and its member states at the EBRD will decrease from 64 per cent to little over 50 per cent.

Brexit is not the only motivation for the reform of the EU’s development finance. The MDB’s Billions to Trillions initiative to mobilise investment for the implementation of the Sustainable Development Goals by 2030 requires from development finance to be more effective. And last but not least, the climate crisis requires an urgent and just response by directing significantly more resources to a zero carbon transition, climate mitigation and adaptation in industry, cities, food production, supply chains etc.

Moreover, as MDBs have ventured into fragile states and conflict areas, the weaknesses of their human rights and environmental safeguard frameworks have become painfully obvious. The current state of affairs is very well exemplified by HRW’s new report: labour rights violations, extreme poverty, adverse health impacts, environmental degradation, lack of transparency, inadequate grievance handling and lack of accountability. That’s not what development looks like, is it?

Whatever option the EU Council will settle for eventually, the future European Development Bank and National Development Banks will need to be better equipped to protect people and nature. In the twenty-first century human rights, ecocide and climate chaos are no longer “the price to pay” for development.