Assessing the EBRD 20 years on

12 May 2011, Environmental Finance

The European Bank for Reconstruction and Development has an explicit environmental mandate. But, 20 years after its creation, how is it doing? There’

The European Bank for Reconstruction and Development (EBRD) is this year celebrating 20 years of operations in the countries of the former Eastern Bloc. Uniquely among multilateral development banks, the EBRD is mandated to promote transition to market economies and multiparty democracy, but less well known is that it is also obliged “to promote in the full range of its activities environmentally sound and sustainable development”.1 After two decades, it seems appropriate to take a look at how the EBRD is doing with this essential part of its mandate, whose importance is growing over the years as an increasing number of governments and international organisations are acknowledging that development as a goal needs to be redefined if humanity is to survive resource and climate challenges.

The bank’s transition and sustainability mandate allows it great flexibility in how it defines environmental sustainability. While the bank has consistently put considerable effort into defining – and recently into re-defining – economic transition, with environmental sustainability, it has never defined the final outcome.

On environmental sustainability, the approach taken by the EBRD has been primarily to align itself with EU environmental standards and goals. The bank has mainstreamed environmental sustainability into its operations through:

specific investments aimed at environmental goals (such as energy efficiency or wastewater treatment plants);
excluding investments into certain sectors forbidden by national or international law (asbestos, driftnet fishing etc) and limiting investments in certain controversial sectors, most notably by restricting its investments in the nuclear sector to decommissioning and safety improvements; and
its project appraisal process, ensuring that projects meet EBRD environmental standards.

Following EU standards would help bring the transition countries towards the same environmental standards as western economies and thus improve the performance of many sectors in those jurisdictions. However, this is not enough. For one, in certain cases, transition countries have environmental advantages compared to western countries, such as lower waste production, lower food miles and higher agricultural biodiversity. These are poorly measured or understood and need to be studied and encouraged, rather than being allowed to decline and then having to be redeveloped later. Furthermore, western countries themselves have still not taken sufficient measures to address challenges such as climate change, biodiversity loss, soil erosion or exhaustion of natural resources.

If the EBRD wants to achieve environmental sustainability, it needs a vision and strategy of what this model would entail. Additional efforts need to be made to bring together successful policies from different countries and regions, which are so far dispersed, in order to develop such a vision and strategy. Of course, this problem goes much, much wider than the EBRD, but the bank also needs to assume responsibility for it: in the absence of a clear direction, the EBRD risks investing scarce public funding towards contradictory goals.

If the EBRD wants to achieve environmental sustainability, it needs a vision and strategy of what this model would entail

Setting aside for a moment the need for a more ambitious vision of environmental sustainability, the EBRD is already making some progress through the approaches outlined above. In terms of its specific environmental investments, the most positive trend is its relatively high level of energy efficiency lending since its Sustainable Energy Initiative was launched in 2006. Depending on the criteria used for the inclusion of projects in the energy efficiency category, from 2006–09 the bank lent between €2.1 billion ($3.1 billion) and €3.2 billion in this field.2

In a region where the average amount of energy-related emissions per unit of GDP is about two and a half times that of the EU-15 and 50% higher than the world average3, such work is vital. The selection of individual energy efficiency projects sometimes needs to be improved, however: at the ArcelorMittal plant at Kriviy Rih in Ukraine, an EBRD evaluation identified after the bank loan was made that there is “limited scope for energy efficiency gains at Soviet-style steel mills, as those were built to use cheap energy from external supplies and are not designed to capture and recycle waste gases”.4 Nevertheless, provided that there is enhanced project appraisal on energy efficiency projects, there is considerable scope for their further expansion by the bank.

EBRD tableUnfortunately, the good work done in energy efficiency is undermined by some of the bank’s other investments. Coal mining in Mongolia for export to China, the world’s largest carbon emitter, comes to mind. EBRD operations in Mongolia commenced in 2006 and since then four out of a total of 12 signed projects in the country have involved coal mining. The EBRD justifies this investment by claiming to add value through increasing private sector participation and improved business conduct. However, it is far from clear why a public bank should use its scarce resources to help companies extract coal more efficiently for sale to China.With just one wind farm investment of €476,000 to its name in Mongolia, the EBRD has a long way to go before its renewables investments begin to register on the same scale as its coal investments.

Indeed the bank’s overall lending for renewables pales in comparison with its lending for fossil fuel-based projects (see chart). Moreover, EBRD lending for fossil fuel-based projects actually increased significantly between 2006 and 2009.5 Considering last year’s calls from the G-20 to phase out fossil fuel subsidies6 and the April 2011 European Parliament call for the EBRD’s fellow public bank, the European Investment Bank, to phase out fossil fuel investments, the EBRD appears to be going in the wrong direction.

It is often argued that a fossil-fuel phase-out in the EBRD’s region of operations, where some countries are oil and/or gas rich, is not going to happen any time soon, or that taking coal out of the energy mix may mean an increase in nuclear capacity. While these are appropriate – although surmountable – concerns for national governments deciding on their energy mix, the EBRD has to coordinate its investments with its sustainable development mission, as well as with global climate objectives. Development banks should use limited public money for sustainable projects rather than simply finance any energy projects. Ultimately, support for sustainable energy can in fact show the transition countries that, in spite of long-held views, there are solid alternatives to fossil fuels and nuclear power.

While the energy sector is an obvious focus for environmental issues, the bank also needs to take a look at other sectors to improve its environmental impact and in turn its reputation. Many of the EBRD’s projects aim at environmental rehabilitation as part of their impact, and these should in principle be one of the bank’s most important contributions in a region with serious environmental legacy problems, dramatically illustrated last year by Hungary’s infamous red sludge disaster. However, the cases monitored thus far by Bankwatch and its partners, such as Dundee Precious Metals’s mining operations in Armenia7 and ArcelorMittal’s steel-making operations across the region8, have raised questions about the use of public financing for companies that are not able to prove concrete positive environmental results.

One of the main problems has been actually getting hold of the information about exactly what improvements are to be made as part of the project and when; whether they have been done; and their exact impact (emissions reductions, etc). Seeking to improve corporate responsibility, the EBRD relies on clients to release this information, but what little information the clients release is often incomprehensible, unable to show developments over time, or is missing important pollutants. As it reviews its Public Information Policy this year, the bank has a chance to address this problem. However a draft circulated in April does not look promising.

The problem goes well beyond transparency, however. The EBRD evaluation department – which is surely able to access much more information than the general public – has pointed out that, for environmental change resulting from the projects from 1996–2009, “cumulatively 24% of the evaluated projects were rated Substantial or Outstanding, while 53% achieved some environmental change. However, in 2009 no projects attained an Outstanding rating, which is cause for some concern.” The evaluation report also points out that the proportion of projects achieving some change has been growing at the expense of other ratings, especially higher ones, in recent years.9 The bank needs to pay attention to how it can improve the environmental change aspect of its projects, as this in principle represents clear added value by a public bank in the region, but when done badly it erodes public trust in the institution.

Overall, the EBRD needs to develop a vision and strategy of how to fulfil the environmental sustainability aspect of its mandate. It may even need to adjust its mandate to ensure that environmental and social goals are not hidden by the ‘main’ goal of transition to market economies. It needs to have a clearer idea of how a truly sustainable region would look and what is needed to get there. Its recent The Low Carbon Transition report10 looks into the topic, but unfortunately does not lead us to a truly sustainable future. The bank also needs to continue the work already started to integrate environmental indicators into its country-level transition indicators, in order to recognise that transition is not worthwhile if it does not lead to environmental sustainability.

Some aspects of sustainability are, however, already clear. The bank’s work on energy efficiency and environmental rehabilitation is appreciated but its project appraisal and transparency about the project activities and their concrete results does need to be improved if the bank is to gain the trust of the public in this area.

In a world of finite resources and climate change, the bank needs to limit or exclude itself from financing in more sectors than just those which are already more or less illegal – and the fossil fuels sector must be first in line.

A public bank must lead, not follow, markets, and public financing should not be for just anyone but only for projects with proven social and environmental benefits. The bank should not finance any fossil fuel projects apart from a small number of energy efficiency or health and safety projects that do not extend either the lifetime or capacity of plants. In turn, it also needs to step up financing for renewable energy. Even in those countries where legislative conditions for renewables are not optimal, the bank has a role to play in financing pilot projects to push forward the development of the regulatory framework.EF