Blog entry

Corporate loans – the rotten apple in EBRD’s Environmental and Social Policy?

The bank’s accountability mechanism has finalised a year long compliance review initiated by Bankwatch and member group CEKOR, which alleged that the EBRD’s restructuring loan to Serbia’s energy utility Elektroprivreda Srbije’s (EPS) has fallen short of the bank’s commitment to sustainability, rule of law and EU standards.

The Bank’s grievance body’s report has found evidence of harm associated with EPS operations, as well as evidence of inadequate due diligence and monitoring of the EPS Restructuring project. It shows that the EBRD has done an extremely poor job at assessing and mitigating risks and potential harm, “which do not adequately mirror the magnitude of some of the environmental and social challenges faced by EPS, especially as they continue to be reflected in the series of PCM complaints against EBRD operations supporting EPS”. This is especially of concern given the bank’s long experience with EPS.

Vreoci village disappearing – one of many illustrations of EPS’ impact

While the report demonstrates the failure of the EBRD to deliver on the intended improvements in environmental and social sustainability on corporate level, the compliance report concludes that the EBRD has not breached its own policy in the case of the EPS Restructuring loan. This conclusion is illogical and is only backed up by the argument that the EBRD made some, even if inadequate, effort to apply good international practice and EU standards with regards to environmental and social assessments and management, stakeholder engagement and resource efficiency.

As the case is virtually closed, the decision to clarify and strengthen the safeguards in the Policy for corporate loans is solely in the hands of the EBRD’s Board of Directors, who are expected to vote on it in the upcoming days. The compliance review did make specific recommendations in this regard: to clarify its policy provisions on corporate loans, especially for environmental and social risky projects, and to make sure that they are implemented.

How long is too long for non-compliance?

If EPS’ long-term plan to keep digging and burning coal for the next 60 years and impact on the community and environment wasn’t bad enough, the company’s most recent investments in coal infrastructure demonstrate a blatant disregard of national and EU legislation as well as international treaties.

❌ EPS began to construct the de-SOx chimney at Kostolac B1 and B2 in the summer of 2015 before the EIA procedure was concluded and a construction permit granted. Later on, the Construction Inspectorate issued a permit, without any public consultation, in an attempt to legalise the already half-constructed chimney.

Kostolac B power plant and the Drmno mine expanding, despite not having all necessary permits to do so

❌ The Drmno coal mine, which supplies the Kostolac power plant, is being expanded from 9 to 12 million tonnes a year without undertaking an environmental impact assessment procedure – a breach of the EIA Directive which is being investigated by the Energy Community’s dispute settlement mechanism.

❌ An analysis of emissions from 2016 of all power plants in the Western Balkan region places Kostolac B at the top of the polluters list in the region, with 128,000 tonnes of SO2 released into the atmosphere, nearly as much as Germany’s entire coal fleet. Even though in July 2017, work to fit units B1 and B2 with de-SOx equipment was allegedly completed, the pollution control equipment has hardly worked since, which essentially means the retrofit failed to bring any results.

The EPS restructuring loan and the EBRD’s cherry picking approach to Environmental and Social Policy compliance is a turning point.

If the Board decides to implement the compliance review recommendation in the revised Policy, it will show the world that the EBRD is committed to safeguarding impacted communities and the environment in the case of corporate level loans in the same way it has committed to do for loans directed at specific operations of its clients. If not, it will send a message that the bank is happy to leave itself plenty of loopholes with a vague policy that lets polluting giants like EPS get away with blatant legal violations and ignore the fate of people who suffer the consequences of their operations.

The final form of the Environmental and Social policy will be a test of the Board’s maturity and responsibility to close the loopholes that currently allow corporate loans to fall under the compliance radar and show whether they are willing to enforce tangible and measurable improvements for the life of people and the state of our environment, in line with the EBRD’s sustainability mandate.

Will the EBRD Make a Better Offer on Public Information Disclosure and Engagement?

Unfortunately, the EBRD’s proposed draft Access to Information Policy is the weakest link.

Having early access to information can mean the difference between a community learning about a project when the bulldozers arrive, and a community engaging with investors to co-design a project that avoids harm and creates real benefits. In practice, the right to access information goes far beyond simple information disclosure — it ensures that communities are equipped with the necessary information to substantively engage in the development processes that will ultimately shape their lives.

An analysis of the EBRD’s new Access to Information Policy, prepared by theInternational Accountability Project and CEE Bankwatch and co-signed by over 20 civil society organizations, indicates that the policy and practice of information disclosure at the EBRD falls considerably short of international best practice and does not align with international law. The draft policy is not people-centered and instead is excessively client-oriented. In addition, the policy carves out unreasonable amounts of discretionary power for the EBRD and its clients, lending itself to the circumvention of the policy’s own principles and commitments.

Communities have the right to know and understand the full scale of projects that may affect them, including both benefits and risks, so they can meaningfully contribute and ensure project plans align with their development priorities. To this end, the International Accountability Project and our partners are monitoring the online disclosure practices of several development institutions through the Early Warning System initiative. We track what project information is being disclosed, when it is being disclosed online, and ultimately, how accessible the information is for communities.

In Practice: How the EBRD Discloses Project Information

In the spirit of contributing to a more robust and people-centered Access to Information Policy, we have analyzed the EBRD’s disclosure practices for 195 projects proposed between November 1, 2017 and November 30, 2018. Our analysis does not evaluate compliance with Bank policies. Rather, our research seeks to assess current Bank disclosure practices against criteria which if met, would establish the foundation for the meaningful fulfillment of communities’ right to access information. These specific criteria are derived from our experiences working directly with communities affected by development bank projects, and our work to make information accessible through the Early Warning System.

The full analysis of disclosure practices can be accessed here. The dataset used for this analysis is also available for download. The analysis was shared in advance with the EBRD for comment and their response can be viewed here.

Criteria used to evaluate EBRD’s disclosure practices, based on maximizing community access to information

In the case of projects financed by the EBRD, many gaps remain that prevent communities from receiving the information they need. For example, only 6% of the 195 projects analyzed disclosed environmental and social action plans, a document rarely made publicly available that includes vital information like project mitigation measures and stakeholder engagement. Moreover, only 34% of the 195 projects analyzed provided a clear explanation of adverse environmental and social impacts, and only 48% shared measures to mitigate these risks.

Access to information is not only about the timely and early disclosure of documents. Often, the structure and language used can be overly complex, limiting community engagement. In our analysis, we found that only 20% of projects provided non-technical summaries of environmental and social impact assessments, and only 6% provided access to the full text – some with broken links.

The EBRD’s disclosure practice is particularly weak in providing access to information on how and when a community member can engage with a project. Only 14% of projects disclosed plans for stakeholder engagement and only 10% of projects included specific information on consultation dates and locations.

In addition to early access to information, communities require sufficient time to understand and evaluate project information, in order for their rights to be meaningfully fulfilled. As the interactive map above illustrates, the longest period of notice before an investment decision is made is 92 days for projects that are considered high risk, or Category A. However, this accounts for only 6% of projects. For projects that have the potential to pose significant risks to the environment and people, or Category B, information is disclosed an average of 17 days after the date the project is considered for approval, according to the EBRD’s own self-reported dates. Projects considered low risk, or Category C, are disclosed an average of 28 days before the Board date.

In response to the findings of the analysis, the EBRD noted that many projects were considered by the Board on an “authorized deferral basis”, where exceptions to the disclosure timeframe were granted, in line with the terms of the Bank’s current Public Information Policy. The specific reasons for granting deferrals were not disclosed in project documents. Based on the EBRD’s own data for 2017, the number of projects that meet this criteria is not insignificant.

In short, the EBRD reserves the right to carve out exceptions to its own access to information policy. Worryingly, the new draft policy continues in this vein, listing numerous overly broad, discretionary and vague exceptions. As a researcher from the Arab Watch Regional Coalition for Just Development observed during consultations on this policy in Cairo and Casablanca:

Despite the EBRD’s claim that its policy is based on default disclosure, the list of exceptions and language used in the draft policy suggests that in fact, disclosure is the exception.

It’s Time for A Better Offer

The EBRD operates in a region where space is often already restricted for communities to voice their concerns about projects, or even request access to information. This makes the Bank’s information disclosure practices even more critical. The EBRD must do more to meaningfully fulfill communities’ right to safe, timely and accessible information, early in the project cycle.

As Suma Chakrabarti, the current president of the EBRD noted in his vision for the Bank in 2016, “the Bank is instinctively too cautious still on public disclosure. It will need to make a better offer on public information disclosure and engagement to match the standards expected…”

We encourage the EBRD to use the opportunity afforded by this review process to strengthen its disclosure policies and practices, so that they better prioritize communities — the key stakeholders and purported beneficiaries of development.

Ishita Petkar is the Policy and Community Engagement Coordinator at the International Accountability Project (IAP) and is based in Washington D.C.

The Early Warning System ensures local communities and the civil society that support them, have verified information about projects likely to cause human and environmental rights abuses. Learn more: ews.rightsindevelopment.org

Note: The Early Warning System team strives to ensure the accuracy of the data. This analysis was shared with the EBRD before publication to allow opportunity for comment. While the Early Warning System team has made every attempt to research and present data accurately, it is often difficult to guarantee the complete accuracy of certain projects due to the lack of regularity and transparency in how various development institutions record and publish information. The Early Warning System team is committed to correcting any identified errors at the earliest opportunity.

When the EU’s bank can’t kick the fossil fuels habit

The numbers speak for themselves – EUR 13.5 billion spent on various fossil fuels projects since the latest revision of this policy in 2013 is an alarming sign even if renewables have been granted much more. This is the equivalent of EUR 6.2 million in EU public money – every day – over these six years going for the top culprit behind the climate crisis.

Every additional cent spent on another fossil fuel project, particularly in the relatively rich EU, makes it more difficult to realize the Paris Agreement and achieve the global Sustainable Development Goals which are intended to “leave no one behind,” irrespective of where people live or their material status.

Fossil fuels investments threaten people’s health and well-being, and undermine the fight against poverty, access to clean water as well as peace and justice – these are just few among the 17 global goals.

The EIB’s staff and leaders are certainly aware of the detrimental impacts of the bank’s continued fossil fuel financing. During the public consultation meeting in Brussels last month, Andrew McDowell, the bank’s Vice President responsible for energy projects, admitted the EIB has financed several uneconomic and heavily subsidized gas projects and regretted that projects defined by the European Commission as Projects of Common Interest (PCI) are not subject to a climate impact assessment.

This only confirms that the EIB’s due diligence has been inadequate, in turn enabling projects which should have never been financed. For example, the bank’s own carbon footprint assessment for the TAP and TANAP gas projects underestimated greenhouse gases emission by 3.5 and 2.5 times in comparison to environmental impact assessments for both pipelines, which eventually impacted the bank’s economic appraisal of these projects.

The public consultation document for the energy lending review suggests that, in light of the EU’s 2030 climate and energy targets, investment in gas network expansion may become stranded assets. And yet, the bank remains hesitant to finally commit to halting all fossil fuels investments.

It is surprising that the EIB, as an EU institution whose major role is to finance undertakings of common interest, has been granting loans to fossil fuels projects which are either meaningless or outright detrimental to achieving any stated EU policy objective in the energy sector.

At least 80% of gas related loans have been for projects outside the PCI pool, thus contributing to expanding and perpetuating the use of fossil gas. In reality, only 11 PCI gas projects out of dozens included on the list were supported by the EIB. Halting all these investments would not be difficult for the bank since its role was not significant anyway.

Where EIB money could make a positive contribution for EU policies is undoubtedly in mitigation of climate change through investments in energy efficiency and renewables. The situation is critical, as data from the European Environment Agency shows, since Member States’ most recent projections for emissions reductions fall short of the 40% domestic reduction target for 2030, with only six Member States expecting emission levels in Effort Sharing sectors below their respective targets. There are countries which are failing in achieving even their 2020 energy efficiency and renewables targets, not to mention new and more ambitious targets for 2030 agreed by the EU last year.

Prioritisation of these two sectors should be at the heart of the EIB’s energy lending review with the implementation strategy following soon after. The EIB‘s ‘fit for all’ business model may not be enough. The bank needs to develop national strategies, including relevant financial models and technical assistance.

New report highlights misuse of banking secrecy rules

Recent scandals show how susceptible the financial sector is to misuse and abuse. One of the main reasons for these violations is that the sector is cloaked in a shroud of confidentiality. Is there a better way for the financial sector to decrease the risk of mismanagement?

Civil society groups have repeatedly called on financial institutions to share more information about individual projects they finance, particularly when there are concerns about the social and environmental impacts of projects in the coal or hydropower sector.

A new report from BankTrack examines such calls for moving beyond confidentiality, examining 150 bank responses to different enquiries made by the organisation between 2012 and 2017. Nearly half of these responses said that the bank could not comment on whether it had a relationship with a customer or project. In 37 of 70 responses, client confidentiality concerns were cited as the primary reason for non-disclosure.

Yet client confidentiality is not an absolute rule – indeed many banks are able to comment on specific clients. The report suggests that banks readily share information when they see this as in their own interest or business practice such as in commercial databases (eg. Bloomberg) or registries of secured transactions. Moreover, ethical banks such as those in the Global Alliance for Banking on Values (GABV) share information about their investments routinely, showing that where there’s a will, there’s a way.

The report cautiously suggests a solution to the issue of banking secrecy: asking the client for consent to disclose information. In many major jurisdictions, including the UK, the Netherlands, Germany, Singapore, Switzerland, the US and Japan, there was no evidence that banks would be unable to disclose client information with their client’s consent.

European public banks such as the European Investment banks (EIB) should lead the way in disclosure of environmental and social information about the projects they fund. This is especially important as a significant portion of the EIB’s portfolio is channelled via commercial banks and other intermediaries: EUR 23 billion or 32 per cent of its entire lending in the EU and EUR 23 billion or 36 per cent of its entire lending in third countries.

Indeed, EIB policy requires the intermediary or fund manager to publish environmental and social information on specific loans, which would in turn also reveal the clients. In reality, the EIB does not include this requirement in financing contracts and it is not done in practice.

That’s why Bankwatch has submitted a complaint to the EIB’s Complaints Mechanism (CM), asking the bank to implement its own rules. The first response from the CM is expected in April. The European Ombudsman already requested more transparency from the EIB, including on intermediated loans, in a 2018 response to a complaint from Bankwatch, ClientEarth and Counter Balance.

One of the EIB’s financial intermediaries, the Croatian Bank for Reconstruction and Development (HBOR) has repeatedly refused to disclose information. HBOR even launched a court case against the Croatian Information Commissioner when it ordered the release of information to citizens that had asked about individual loans.

A recent ruling by the Supreme Court of Croatia rejected HBOR’s request that asked the court to review the legality of the High Administrative Court rulings pertaining to the citizens’ requests. The Supreme Court found that HBOR should disclose information about loans because of an overriding public interest.

This is the way forward. Public interest should prevail over commercial confidentiality rules, whether it is because public money is involved or whether there is a genuine interest from the public to learn about loans that bring risks of money laundering or human rights abuses.

Civil society groups will find a way to reveal what is hidden, and by then it may be that financial institutions’ reputations will be only more deeply compromised.

EIB and Volkswagen keen to return to business as usual

Nearly three and a half years after Bankwatch first raised concerns that millions of euros from the European Investment Bank (EIB) were involved in the Dieselgate scandal, a recently released summary report of an investigation by OLAF, the European Anti-Fraud Office, officially validated our suspicions. But it remains unclear whether the bank has learned any lessons.

Back in September 2015, shortly after the news broke that Volkswagen had fitted diesel cars with the so-called defeat device to rig emissions tests, a Bankwatch analysis featured in a Politico story was the first to reveal that the German carmaker had received no less than 17 EIB loans totaling more than EUR 4 billion over the preceding decade, five of them even classed as ‘climate action.’ We have since approached the bank multiple times requesting information related to its support for Volkswagen.

OLAF’s findings have confirmed our suspicions. The investigation revealed that part of the EIB’s EUR 400 million ‘Volkswagen Antrieb’ loan was deliberately used by Volkswagen for the development and installation of a defeat device on the EA 189 engine as part of the research and development programme financed under the loan.

This was one of the loans under the bank’s ‘climate action’ programme and it was originally intended to help develop cleaner and more fuel efficient drivetrain components with the explicit aim of lowering vehicle emissions. And surely enough, in February 2011 Volkwagen reported to the EIB about significant reductions of pollution emissions.

One would think that such findings would warrant some soul-searching at the EIB. Rather, it now appears that both the world’s largest public lender and the world’s largest automaker can’t wait to put this whole affair behind them as if nothing – or at least nothing that dramatic – had happened.

According to a statement published on the EIB’s website just before Christmas, the bank and Volkswagen had agreed the latter would donate EUR 10 million – effectively the equivalent of merely 2.5% of the defrauded loan – towards “environmental and/or sustainability projects in Europe,” and the bank’s internal investigation will be concluded.

The EIB has also claimed that it had stopped considering loans to the company in October 2015, and according to the statement, this moratorium will remain in place for 18 more months. Yet, even this lull considered, the EIB has been granting Volkswagen, on average, more than one loan every year since 2005 – so what’s a year and half more to wait?

A fraud of the scale of Dieselgate should have landed Volkswagen in EU blacklists. In August 2017 Transparency International EU has urged the European Commission’s EDES panel to consider the inclusion of Volkswagen in the Early Detection and Exclusion System (EDES) in light of the findings of the OLAF probe. Such inclusion would prevent the car manufacturer from accessing EIB funding. Now that (some of) the findings from this investigation are finally public, this proposal seems ever more relevant.

But even if one believes these penalties are adequate, the way the EIB has been handling this entire affair, as Bankwatch’s Anna Roggenbuck argued in September 2016, is a serious reason for concern about this EU public institution’s own accountability.

The bank has been particularly slow and hesitant to respond to our requests for information from the very beginning, breaching its own standards. It has also repeatedly turned down requests from Bankwatch, journalists and even the European Parliament to release OLAF’s report, despite the obvious public interest in disclosure in such case.

Only two weeks ago – 18 months after it had received OLAF’s report, a period longer than allowed under EU transparency standards on environmental information – did the EIB finally decide to make a 3-page version of this report public.

From an early stage, the bank responded to our inquiries, saying it is conducting its own internal investigation. Our requests for a report summarising this investigation have been rejected time and time again. On February 26, 2019 we received the following response:

“As indicated in our previous correspondence on the matter, the investigation was taken over by OLAF and the related EIB investigation was put on hold. Following the transmission of the OLAF report, EIB followed up on the case on the basis of OLAF’s findings resulting in the agreement reached between the EIB and Volkswagen (http://www.eib.org/en/infocentre/press/news/all/agreement-reached-between-the-european-investment-bank-and-volkswagen-ag-in-relation-to-eib-loan-antrieb-rdi.htm). EIB investigation was concluded on this basis and therefore, no internal investigation report has been produced by the Bank.”

The importance of an internal report is not only about establishing whether or not the EIB has been defrauded by a client, but primarily about how this happened and what needs to be done to prevent future misuse of public funds.

Instead, the EIB has consistently portrayed itself as the helpless victim of the fraud, implying there was nothing it could do to detect its loan could have- and had been misused. That’s not good enough. Specifically, the bank’s reliance on information provided by the client alone for both the due diligence prior to approval of loans as well as for monitoring the realization of EIB investments is particularly problematic.

The EIB is yet to explain what it has done, in light of the OLAF investigation findings, to ensure clients do not receive financial support under false pretenses, and what measures it has introduced to improve oversight of the implementation of its investments.

Other cases Bankwatch has explored give us reason to believe the EIB is failing in monitoring companies that enjoy its generous financial support. EIB loans to Israel Chemicals, a multinational with dubious environmental record whose subsidiary is behind one of the worst environmental disasters in Israel’s history; the bank’s support for Myronivsky Hliboproduct, a Ukrainian agribusiness giant whose massive poultry factories have taken a toll on local communities; and the EU Ombudsman’s recent critique of the EIB’s mishandling of complaints over its investment in the giant Ambatovy nickel-cobal mine in Madagascar – these are but a few examples that should ring the alarm.

We also understand the EU Ombudsman is currently looking into the way the EIB has been responding to requests for disclosure of information related to its role in the Dieselgate affair. Perhaps this probe would help in holding the bank to account.

Back in March 2009, less than a month after the EIB had granted the EUR 400 million loan that was used by Volkwsagen for the defeat device, Bankwatch and Greenpeace warned that EIB financing could end up as a “window dressing for the car industry” if no mechanisms are put in place to ensure the money is indeed used for cutting emissions. We couldn’t have imagined our warning would materialize so literally. But ten years later, there is no comfort in being vindicated. Rather, we are worried there is still nothing to guarantee this kind of scandal does not repeat.

A billions-worth problem

A new report Chronic Coal Pollution shows that Western Balkan coal power plants emit 20 times more than an average EU plant, causing thousands of lost lives and chronically ill people, in addition to millions of euros in health costs all across the continent.

Worse still, these findings might be understated due to a lack of monitoring data. Many of these power plants are not properly monitored by the national ambient air quality monitoring systems.

Several reports, including Air Quality in Europe 2018 and our own independent air quality monitoring, show that the air quality in the Western Balkan countries is gradually worsening. Outdated coal power plants and loosely regulated open-cast lignite mines might not be the only source of air pollution, but as the Chronic Coal Pollution report shows, their contribution is undeniable massive.

Failing the plants directive

Under the Energy Community Treaty, the Western Balkan countries were obliged to bring all thermal power plants in line with the Large Combustion Plants Directive (LCPD) requirements by January 2018.

More than a year after the original deadline however, the requirements remain unfulfilled. Meanwhile, the same power plants continue to log thousands of working hours with the same overused equipment.

Even the most basic requirement to continuously monitor emissions is not fulfilled at most of the plants. Available data is mainly composed of estimates based on periodic measurements; the monitoring of emissions does not provide real-time access to air quality data and the results are only available through yearly reports. Additionally, this data does not include dispersion patterns and effects on the surrounding population and ecosystems.

Failing the health and environment directive

Unlike the LCPD that targets pollution at the source, the Ambient Air Quality Directive (AQD) is established “to protect human health and the environment as a whole” and therefore provides principles for continuous real-time monitoring of air pollution and obligations related to emission reduction at the national, local, and community levels. In order to accomplish its goals, the AQD determines the siting criteria for sampling points for the assessment of ambient air quality:

Sampling points directed at the protection of human health shall be sited in such a way as to provide data on the areas within zones and agglomerations where the highest concentrations occur to which the population is likely to be directly or indirectly exposed for a period which is significant in relation to the averaging period of the limit value(s);
Where contributions from industrial sources are to be assessed, at least one sampling point shall be installed downwind of the source in the nearest residential area. Where the background concentration is not known, an additional sampling point shall be situated within the main wind direction.

The regions’ thermal power plants, being an immense source of air pollution, should have been first in line for monitoring.

All Western Balkan countries have transposed the AQD in their national legislation, but secondary legislation for its implementation varies significantly from one country to another (or even within the same country, as is the case for Bosnia and Herzegovina).

One of the key reasons why the EU is making progress in curbing its air pollution is that there is a level playing field for all countries, and they all aspire to the same standards. This is not at all the case in the Western Balkans.

As clearly visible on the map, most of the power plants are not sufficiently monitored: many of them fall outside the monitoring stations’ range and do not cover all relevant pollutants. Several of those, such as Stanari in Bosnia and Herzegovina, and Kolubara and Morava in Serbia, are completely excluded from the national monitoring systems. The closest monitoring station to TPP Stanari is 25 kilometers away, and to TPP Morava – almost 30 kilometers away.

If the governments are serious about their citizens’ health, proper implementation of the AQD is a must.

In the Western Balkans, we need to get back to the basics and have a reliable system of air pollution monitoring and assessment in place before we move on to air quality plans, national emission reduction plans, and step further.

In order to combat air pollution, we have to know where it comes from.

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