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Change for good: why we need fair, just supply chains

In an opinion piece for the Financial Times, the EBRD’s Chief Economist Beata Javorcik outlined the extraordinary shock to the global supply chains caused by the current pandemic, one that is ‘likely to spark nothing less than a rethink of how the world does business’. Indeed, Javorcik is right to call for a closer look at the sustainability of global supply chains, but it should be done from both ends of the chain. 

Uncertainty and crisis have always been the natural state of the global supply chain, especially in the industries most removed from consumers – raw materials and manufacturing.

To make a profit, these industries rely on competitive advantages and cost efficiency derived from tightly controlled human labor, working on deadlines set to the second (the just-in-time system of manufacturing and logistics). They frequently operate without backup stocks of raw materials and finished products. 

Under this paradigm,  global supply chains have been known to cause a whole variety of impacts such as environmental destruction, violations of workers’ or communities’ rights, harmful labour patterns or deepening poverty in the peripheral regions at the beginning of the global supply chain. 

These shocks primarily affect some of the most isolated but necessary links in today’s global supply chains. Small and medium mines – the first block in the global information and communication technology (ICT) supply chain – are usually situated on the peripheries of the globe, beyond scrutiny. In connection with its aggressive exploitation of natural resources, mineral mining can severely affect the environment and the rights of people living in the vicinity of the mines.

As a Swedwatch report shows the unsustainable extraction of copper, a mineral frequently used in ICT products, has caused environmental degradation and adverse impacts on local communities in Zambia, the second largest copper producer in Africa. The pollution of water in mining areas has impacted their health, destroyed farmlands and reduced crop yields. 

In Armenia, where the Amulsar gold mine is being developed with the support of the EBRD, locals who make their livelihoods tending apricot orchards, collecting wild plants, breeding animals and farming fish have been protesting for almost two years against the lack of meaningful public engagement in decisions about the mine. Their safety and security in exercising their rights to information and freedom of opinions has been repeatedly threatened. 

After sites of extraction come smelters,  the next block in the chain, which are often situated in places with low legal standards and a lack of scrutiny of working conditions. This is the case of the copper smelter in Namibia, where highly toxic substances, like arsenic trioxide, are being kept in unsafe conditions at a smelter in Tsumeb and affecting the health of workers and local communities. 

Another vulnerable part of the supply chain is manufacturing. Some societies that make their livelihoods from the production of a whole range of goods have become subject to abusive labour conditions, such as the workers in the Turkish metal sector.   

Unfortunately, corporate businesses, governments and development finance, which are now so shocked by the fragility of supply chains, have not been doing enough over the years to see the reality of what has been happening at the foundations of global supply chains. 

The lack of transparency in supply chains enabled the dismantling and violation of workers’ rights. Dodgy deals between big business and governments exclude tax payers and societies from decision-making processes. As pressure to extract diminishing natural resources grows, so too do instances of attacks and threats against human and environmental rights defenders. 

The most developed countries in the world are surprised that well-engineered, global supply chains have led to critical shortages of basic products, such as medicine and protective masks or gowns, desperately needed in the current situation. But how can the current setup be considered well-functioning if it fails during abnormal spikes in demand? 

The role of public finance in such a scenario should be to work in the public interest and not focus primarily on furthering private interest. The assumption that promoting the private sector is in all of the public’s interest is in part responsible for what led to the current crisis of the global supply chains.

Today’s shock is affecting ‘the rich end’ of the supply chain, and while it has already started to shake, the question is what will be the result of it. Diversification of the full range of suppliers is surely not enough. The crisis should be an opportunity to fix not just the proximity of supply chains but also to end their obscurity and bring resilience into labour relations and stakeholder engagement. 

Public finance institutions, such as the EBRD, should explore more space to examine and address these structural issues. For example, why not give some new meaning to the EBRD’s transition indicators like Resilience, Competitiveness, Green Economy or Inclusion? 

The 2008 economic crisis caused the overhaul of the previous transition methodology at the EBRD. So why not strengthen it again? Instead of plugging the gaps, alternatives can be introduced: starting from ending extractivism and unsustainable logistic chains, through just transition and strengthening local economies, to public finance institutions using a human rights-based approach to development.

The Commission must stay strong on EU sustainable investment criteria as they become law

The European Commission is currently consulting the public on its plans to set up legally binding criteria for the so-called “EU sustainable investment taxonomy” on climate mitigation and adaptation. The taxonomy is a welcome move by the EU to prevent greenwashing in investments by setting a widely-agreed standard for defining which investments can be regarded as sustainable.

This could be a very welcome instrument for increasing coherence between investments by the European Investment Bank and European Bank for Reconstruction and Development, among others. For years the EBRD and EIB have been increasing support for climate action but their selection criteria have not always been strict enough to ensure that the projects supported are really sustainable. Notable examples include hydropower projects like those financed by the EIB on the river Tamega in Portugal and the Nenskra hydropower plant in Georgia, approved by both the EIB and EBRD but not yet signed. Even burning fossil fuels and waste have been considered to be climate action, with the EIB-financed gas-and-waste incinerator in Sofia, Bulgaria, and the EBRD-financed gas heat and power plant in Zagreb, Croatia, and Belgrade waste incinerator in Serbia, all cases in point.

So far discussions on rules for EU funds under the next EU budget have taken place separately from the taxonomy debate, but it makes sense to apply these rules to EU funding as well, to make sure all forms of EU financing are applying consistent standards. 

The criteria to be used by the Commission have been set by a Technical Expert Group, whose work has been subject to two rounds of public consultations. In March the Group published its final report, in which it has been quite successful in ensuring that that the criteria embody sufficient environmental integrity to be widely accepted.

Activities excluded from the taxonomy for now, due to their impacts, include nuclear power, waste incineration and unabated gas power and heat generation, while other controversial areas like hydropower are subject to tight criteria, which if properly applied will ensure that only a select few projects will qualify.

The challenge now is to maintain the delicate consensus as the legislative process proceeds. Further lobbying will no doubt take place to amend the criteria, during the development of the European Commission’s Delegated Act and later on. However, we strongly caution against reconsidering activities that the Technical Expert Group has excluded.

The Group rightly excluded waste incineration with energy recovery from the climate mitigation/adaptation taxonomy, but recommended “bringing this … for further … consideration to the Platform on Sustainable Finance…” Its report cited a potential argument in favour of including incineration: “WtE has a role to play even in an increasingly circular economy as not all residual waste can be reused or recycled”. However, an incinerator built now will run for at least 25 years, and needs a steady quantity and types of waste in order to operate. This locks in incineration for decades to come, and undermines the development of waste prevention, composting and recycling. 

We cannot accept that there will always be residual waste needing to be disposed of, as EU policy needs to make sure that such materials are replaced with those which can be re-used and recycled.

Incineration’s climate impact must also be critically examined. Its CO2 intensity depends on waste composition and whether it generates only electricity or also heat, but much of the combustible waste consists of fossil-derived plastics and other non-renewable material, which produce climate-relevant emissions. Numerous studies have shown that waste incineration with energy recovery results in poorer climate outcomes than prevention and recycling, and for some materials it offers little advantage relative even to landfilling.

Similarly, on nuclear power, “the TEG recommends that more extensive technical work is undertaken on the DNSH aspects of nuclear energy in future…” As the long-term management of high-level nuclear waste is unresolved, among other concerns, reconsidering nuclear’s inclusion in the taxonomy would not be purposeful, as nuclear energy clearly does not fulfil the “do no significant harm” criterion used by the Technical Expert Group to ensure that in resolving climate issues, its sustainable investments do not cause other major environmental and social problems. 

The Technical Expert Group has also been ambiguous about gas with carbon capture and storage. It proposes a declining threshold starting at 100 gCO2eq/kWh for electricity and heating/cooling generation. Unabated gas-fired power generation is rightly excluded from the list of eligible activities, but while stating clearly the need to avoid investment in fossil-fuelled power generation in order to reach the Paris Agreement objectives, the annex to the Group’s final report also states that “gas fired power with carbon capture and sequestration may qualify” as a clean investment. 

However, gas installations not only emit greenhouse gases during combustion but also via upstream activities: gas transportation and processing emits methane, whose global warming potential is far higher than that of CO2. The EC itself acknowledges in its long-term strategy that “due to the higher global warming potential of methane, as little as 3% leakage along the natural gas supply chain can cancel out the greenhouse gas emission benefits of natural gas vs. coal in power generation”. The IPCC in 2014 identified the minimum carbon intensity of gas power generation with CCS as 94 gCO2eq/kWh, so it is very unlikely to fall within the declining threshold.

As the EC moves forward, it must avoid being tempted to tweak the criteria, no matter how strongly pushed. Including activities like those above would erode the relative consensus achieved so far around the criteria, and if stakeholders lose trust in the taxonomy’s sustainability, the whole aim of the process – to form a united definition of sustainable investments that will be widely recognised – will be lost.

Wither the money: Czechia must make better use of EU funding to meet EU climate goals

A new report finds that only 9.7 per cent of the current EU Regional Development and Cohesion Funds has been used for investments in clean energy, including energy efficiency or renewable energy projects. Ironically, the report also shows that the states that often are the loudest when asking for more money to support their decarbonisation efforts – such as Poland – are the ones spending the least on advancing cleaner energy.

The most prevalent problems were the low absorption capacity of the Member States i.e. the lack of capacity of economic actors to design and deliver “green” projects, as well as the high administrative burdens posed by national managing authorities, which discouraged and disqualified many from applying for funding.

Of the overall allocations for climate and energy-related areas, the largest share was dedicated to energy efficiency (64 per cent), followed by renewable energy (18 per cent), electricity infrastructure (7 per cent), research and innovation (7 per cent) and gas infrastructure (4 per cent). While energy efficiency has rightly received the largest share of funding, the majority of investments under this strand have gone into public infrastructure, leaving little for the residential building sector. Investing more into insulation of residential buildings would not only help reduce emissions, but also help cut energy poverty.

Furthermore, of the money allocated for renewable energy, the majority of funded projects were in support of biomass development at the expense of solar, wind and other renewables. This is a worrying trend, as the availability of sustainable biomass is limited across the EU and its increased usage could be damaging to the environment and the climate. 

These issues appear mostly in central and eastern Europe, which lags behind in the transition to a clean economy and where EU funds account for the major share of public investments. A case in point is Czechia, where past experiences with corruption have led to stringent administrative conditions being placed on who receives EU money, resulting in many small and medium enterprises and smaller municipalities being left out and larger entities benefitting. Combined with low capacities to absorb the funds, much of the transformational potential of EU funding has been squandered. 

Learning from past mistakes and enabling more EU money to be spent on low-carbon projects would bring double benefits, both for economies and climate efforts. Without aligning the financial flows in individual states with the EU decarbonisation policies, the EU as a whole will not have a chance of reaching its climate neutrality goal by 2050.

Fears revive in the villages of Shuakhevi as one of Georgia’s biggest hydropower plants starts operation

Locals have started raising concerns that the malfunction of the plant’s derivation tunnels, which pass through their villages, has already caused massive water leakages and is ‘dangerous for life’ – particularly for those living in landslide risk areas.

In March 2020, India’s power company Tata Power (one of the shareholders in  Shuakhevi) announced ‘the start of commercial operation of the 178 MW Shuakhevi Hydro Power Project (Shuakhevi HPP) located in southwest Georgia’. It is one of the largest of the 140 hydropower plant projects currently under development in Georgia.

It is also among the most controversial power plants, mainly because of the geological threats it poses to local communities. CEE Bankwatch Network raised a red flag about this in 2019.

Since its construction commenced in 2013, the Shuakhevi project has been  met with a number of demonstrations, lawsuits and complaints to the international financial institutions (IFIs) funding the HPP as the affected communities tried to find solutions for their cracked houses, decreased crops, disappeared drinking water and water leakages. They complain that these are the direct consequences of the construction.

The people of Shuakhevi have been living with the constant fear of deadly landslides, which are a likely risk in the area because of its geological structure and the type of heavy construction being undertaken there. These protests, however, did not stop Shuakhevi’s promoters from launching the project in 2017. But after just two months, Shuakhevi failed: the tunnels of the USD 420 million hydro power plant collapsed at eight different spots.

Shuakhevi

Three international financial institutions, the Asian Development Bank, European Bank for Reconstruction and Development and International Financial Institution, are among the funders of Shuakhevi HPP. The IFC is also a shareholder in Adjaristsqali Georgia LLC (AGL), the special purpose vehicle established for developing hydropower in this region, along with Tata Power and Clean Energy Invest (Norway).

‘It is a well-known fact that we live in a landslide risk area. These springs of water which started leaking about a month ago here are dangerous, as it could move the land and one day all of us might be taken down to the river and we might not survive, like other villages once could not’, said Madona Tavdgiridze, a local of the village Golkhanauri. She is referring to the two villages in the municipality that were taken down by a landslide decades ago.

The official website of the Georgian Electricity Market Operator states that Shuakhevi HPP has already been operating since the beginning of March of 2020. This time coincides with when the communities of Golkhanauri and Makhalakidzeebi recall the reappearance of massive amounts of water less than a kilometer from their houses.

Golkhanauri is situated in the municipality of Shuakhevi, right below the plant’s 17.8 km long tunnel, one of the three of its water diverting structures. Years ago, after the drilling for tunnel construction kicked off, several water springs disappeared, including drinking water springs in both villages.

‘Later, when the plant became operational and derived water through the tunnel, some areas of the village were full of leaking water. Then the water outflows disappeared soon after the plant was shut down 3 years ago’, said Tavdgiridze. This is why she and her villagers believe Shuakhevi HPP is the reason for the water-saturated lands which they have to live on and which they fear are a threat to their lives.

Another water leakage showed up in the village of Makhalakidzeebi as well. Locals said the water is leaking exactly along the area where the tunnel passes, from 100 to 150 metres from the settlement. In addition to the cracks in the walls of village houses and falling stones, which have continued since the explosions for tunnel construction near the village, locals fear the water leakage could cause erosion, or even a landslide ‘that will result in something bad’.

Photo picturing the water leakage in the village of Makhalakidzeebi

Makhalakidzeebi has been part of a mediation process with the Shuakhevi HPP company since 2018. The process is facilitated by the accountability mechanisms of the EBRD and IFC, in order to solve problems between the community and the company. Its results  have yet to be disclosed. 

The company itself has not engaged most of the project-affected villages in a dialogue about the fate of the project, its impacts and measures it has taken to address people’s fears. Instead, information has mostly been available from locals working on the reconstruction of the tunnels, but not from official and reliable sources.

The company carried out a number of Corporate Social Responsibility projects before the tunnel collapse in 2017 and has continued with support for some educational activities in villages. However, these are a poor substitute for transparency and public consultations on issues, such as damage to subsistence agriculture and geological risks, that keep people awake at night.

The villages are not the only places where Shuakhevi’s renewed operations have raised questions. Georgian media outlet Batumelebi recently spread a video taken on 10 April at the Didachara dam and reservoir of the Shuakhevi HPP, which shows a flaw that is allowing a significant amount of water to leak out of this 52 metre high concrete dam. Adjaristsqali Georgia replied that ‘such leakages are common’ due to temperature changes and the company is ‘working to fix it’.

‘The local communities have been complaining about project impacts for years, as the construction process of Shuakhevi hydro showed it creates a clear threat for their safety and livelihood. Since its failure, the company has spent enormous money to fix the project; however, till now no responses have been given to communities who have experienced damages’, Manana Kochladze, representative of CEE Bankwatch Network said. ‘Now the project is supposed to become fully operational, and fears among communities are back. At the end of the day, nobody takes responsibility for the failure of the project in 2017, no remedies have been put in place to address the concerns of the communities’.

Although the collapse of the power plant tunnels in 2017 was later officially attributed by Adjaristsqali Georgia to ‘unpredictable geological processes’, the company’s official website does not disclose any updated environmental or geological studies conducted after its failure.

Locals of Golkhanauri said representatives of the company have been to the spot and seen the soaked lands at the tunnel areas but have not yet officially confirmed its cause. In 2019, CEO of Adjaristsqali Georgia Prashant Joshi told Georgian independent outlet Batumelebi that the company does not take responsibility for the problems in Golkhanauri.

The company stated in its press release published on 30 March: ‘AGL will be soon commissioning the 9 MW Skhalta Hydro Power project which is also a component of the overall Shuakhevi Project scheme’.

In full swing ahead but with a daunting past, Shuakhevi still has to prove that it will not fail again. After a decade of controversial history, with three influential financial institutions involved, Shuakhevi remains a project that has put communities living in landslide areas at risk, with a lack of water and ability to participate in the agricultural activities that give them their livelihood, and without a clear answer about who is, or will be, responsible for their damage. 

Moving beyond oil shale in Estonia

While most of Europe has shut down to stop the spread of COVID 19, governments continue to prepare territorial plans in order to be eligible for the new Just Transition Funds. 

In Estonia, one of the leading nations in digital governance, high-level virtual meetings have been held in recent weeks between environmental organisations, public sector officials in charge of planning the territorial plans and stakeholders affected by the transition. 

The groups discussed a new study commissioned by a coalition of NGOs including Bankwatch member Estonia Green Movement that analyzed the different European and Estonian funds in place or under development that could be useful for the transition, the existing plans Estonia has in place and policy recommendations from international best practises. 

The report finds that Estonia is facing a challenging task in planning a proper just transition for its oil shale region and pointed out the importance of consulting a wide range of stakeholders. It also offers a possible step-by-step planning process and a number of policy recommendations, stressing the importance of starting with a clear vision and goals for the region. 

 

Another policy recommendation is to conduct an analysis on the effects of an oil shale phase out on the local workforce, as without this data it is difficult to construct concrete plans regarding a just transition. 

Given the current raport, ministries can continue building their capacity with further concrete studies on which decisions can be made to contribute to the EU-wide commitment to a climate-neutral future. 

As was clear from the online discussions, Estonia must decide the fate of its fossil shale oil sector. Will the phase out be swift, just and controlled, or uncertain, drawn-out and costly? Bankwatch and other environmental NGOs will continue arguing for the former. The study is supported by EUKI.

How to start a just transition in Gorj, Romania

Hundreds of people are losing their jobs every year and the company that produces coal energy has debts of hundreds of millions of euro. Just transition must be hastened in order to mitigate any further negative impacts on workers in the region.

According to the report, the number of employees in Gorj County in the energy field decreased sharply between 2007 and 2016, with 4 639 people laid off in multiple waves at the Oltenia Energy Complex (OEC). Another 4 000 layoffs are foreseen due to the planned closure of some lignite mines and power plants. OEC is the largest employer in the region, so its downfall will affect the entire community.

Another concern is the financial condition of the company. It still has to pay off hundreds of millions of euro in loans, and for 2019 has to acquire 11 million EU Emissions Trading System (ETS) allowances at an average price of EUR 25 per unit. The Romanian government granted a six-month aid loan of EUR 251 million to cover these allowances. If the company is not able to pay the debt, it is required to start a restructuring process.

Together with the fact that Best Available Techniques (BAT) derogations will expire soon and OEC will have to upgrade its power plants, some of which are more than 42 years old, to reach new pollution limits, it is obvious that the company and the region cannot afford to count on coal in the medium and long term.

Financial resources

To avoid the negative impact the possible collapse of the company may have, it is urgent to plan for a just transition of Gorj. The report shows which financial resources will be available to achieve just transition in the region and analyses the previous implemented European Programmes for regional development and human resources.

Through the Just Transition Mechanism, the EU has made EUR 757 million available to Romania, part of which can be used for the development of Gorj County. The prerequisite for accessing the funding is drafting a territorial just transition plan (valid until 2030) in line with the transition towards a climate neutral economy. Romania can also mobilize funding for Gorj from the InvestEU scheme, Cohesion Policy funds or European Investment Bank (EIB).

Learning from the past

Before planning, authorities need to consider the impact of previous implemented European programmes. In analysing the period from 2007 to 2013, Bankwatch Romania found no clear correlation between the programmes that were implemented and an increase in jobs or drop in the unemployment rate, which remained constant after the 2010 recession. Furthermore, the number of permanent migrants, those who left the region seeking a more stable economic life, increased significantly after 2010. 

 

Most business development projects supported by these programmes were focused in Târgu-Jiu, the region’s main city. However, these projects had no clear outcomes in terms of the number of businesses they supported or the viability of those businesses. In smaller towns, projects focused on sustainable development by regenerating certain urban areas, developing infrastructure and public utilities or financing investments in the public transport.

With these findings in mind, Bankwatch Romania urges authorities to ensure that the implementation of the future Just Transition Fund is more successful. In the next financial framework, proper consultation with the local community should be undertaken to identify priority projects and sectors to achieve a fair economic development. Any current or future strategy must be devised with the energy transition in mind, and Oltenia Energy Complex should be included as an integral part of this strategy.

See the full study here: https://bankwatch.org/publication/financing-a-just-transition-in-gorj-romania