Environmental Safeguards: Is AIIB Going to Follow the Rules?

by Tao Hu, Yanyang Wu, Li Zhu

Representatives of the 57 Prospective Founding Members (PFMs) of the Asian Infrastructure Investment Bank (AIIB) signed the Articles of Agreement of AIIB in Beijing on June 29th, 2015. Now AIIB has entered a more substantive preparatory stage that will lead to its operation at the end of 2015.

Is AIIB going to adopt the environmental safeguards comparable to those of the existing multilateral development banks? Will AIIB follow the World Bank and Asian Development Bank to implement the safeguards rigorously in its planned operation?

Environmental Safeguard Policies of Multilateral Development Banks

The World Bank, Africa Development Bank (AfDB), Asian Development Bank (ADB), and other multilateral development banks have over the years developed a series of standards and policy requirements for environmental protection, known as the “best practices”.

The World Bank requires its clients to implement the Environmental and Social Assessment and Management System (ESMS), in order to identify and manage potential environmental and social risks. AfDB requires its clients to conduct environmental assessment in accordance with its Environmental and Social Assessment Procedures (ESAPs). While both the World Bank and AfDB require all their investment projects to follow similar environmental assessment procedures, ADB classifies its projects into 4 categories based on their potential environmental impacts and applies different levels of environmental assessment requirements, including Environmental Impact Assessment (EIA), Initial Environmental Examination (IEE), and Environmental and Social Assessment and Management System (ESMS). There are also some projects with moderate or negligible environmental impacts, for which environmental assessment is not required according to the classification of ADB. China is a member state of these three banks, so making a comparison between their environmental standards is beneficial and informative for this new China-led development bank (Table 1).

Table 1

 

Since this is the first time China has led a multilateral financial mechanism, whether the Chinese government will follow the international standards and principles has been the center of attention for the international media. The United States has seen the AIIB as a potential competitor and challenger to the West-dominated international financial institutions established after the World War II, such as the World Bank and IMF where the US has the veto power, and the US/Japan-led Asian Development Bank (ADB). In one statement in response to UK’s move to join AIIB, the White House National Security Council said: “Based on many discussions, we have concerns about whether the AIIB will meet these high standards, particularly related to governance, and environmental and social safeguards … The international community has a stake in seeing the AIIB complement the existing architecture, and to work effectively alongside the World Bank and Asian Development Bank.”[i] In a similar fashion, the United States Treasury Department has also raised its concern that AIIB might not meet the environmental standards, procurement requirements and other safeguards embraced by the World Bank and the ADB.[ii] Many other interested parties in the West continue to watch the progress of AIIB closely to see how it will be structured and governed so that it doesn’t undercut the existing environmental standards. Because they believe failure to do so will likely prompt multilateral development banks to race to the bottom in weakening environmental safeguards in order to attract clients.

AIIB’s Pledges and Actions

Mr. Jin Liqun, the secretary-general of the AIIB’s interim secretariat and possibly first president, clearly stated that the Asian Infrastructure Investment Bank would ensure that projects it funds are sustainable and environmentally friendly. At a think tank summit in Beijing last week, he said that “the regulations on AIIB lay out a set of environmental criteria for projects it will fund. It will explore a new development model that will try to address the conflict between improving people’s livelihood and environmental protection.” He also said that the “green” principle is to design a set of “high-standard” rules: “The bank has already drafted an environment-related document to be approved by member countries. It will also promote adoption of energy saving and environmentally-friendly technologies in its projects”. Mr. Jin also mentioned that the AIIB’s headquarters in Beijing will be an eco-friendly building.

AIIB is also actively cooperating with its international peers. Since last year, AIIB has been exchanging experience and lessons learned actively with the World Bank, IMF and ADB. In 2014, AIIB also invited former World Bank senior official and well-respected impact assessment expert, Stephen F. Lintner, to assist in crafting its environmental and social sustainability criteria. This gesture is very much an indication of AIIB’s intention to adopt high standards for environmental assessment, procurement process, and social impact of investment projects from the beginning.[iii]

Is AIIB Going to Fulfill its Pledges?

One major aspect of China’s mission to establish AIIB is to create a new governing model for multilateral financial institutions in contrast to the existing models of the World Bank and Asian Development Bank. Given the extraordinarily high stakes China has in this ambitious undertaking, China has every intention to ensure the success of this endeavor. And China has a very good track record in delivering such success stories, where it clearly has the political will and determination to deploy all resources at its disposal. The 2008 Beijing Olympic Games and Shanghai WorldExpo 2010 are perfect examples. Therefore, when the international community raises concerns over AIIB’s environmental and social safeguards, China listens and responds. For the Chinese policy makers, AIIB is as much a political and symbolic proposition as an economic and substantive one. Given this broad political context, it is therefore fair to say that to think that AIIB tends to automatically downgrade the environmental and social safeguards is purely speculative and misguided.

Also China’s credibility and reputation is staked on stewarding AIIB into an inclusive, transparent, and efficient multilateral organization that is built on a solid suite of policies, procedures, and best practices that have proven to stand the test of time. Without such building blocks in place, it would be very hard for AIIB to attract AAA rated countries, or to borrow competitively in the credit market. Given this, the belief that AIIB would be the convenient cash machine to finance China’s newly unveiled “One Belt One Road” Strategy is also unsubstantiated. For project financing that involves higher environmental and social risks under the “One Belt One Road”, it’s reasonable to believe that AIIB would tread very cautiously and exercise abundant restraint. From China’s perspective, it has ample choices in terms of financing vehicles in their toolbox, ranging from the China Development Bank, China ExIm Bank, to the Silkroad Fund, for such more contentious projects.

Besides, eight of the nine countries rated AAA by all main rating agencies (Standard & Poor’s, Moody’s, and Fitch) are AIIB members. These include Australia, Denmark, Germany, Luxembourg, Norway, Singapore, and Sweden. Given their shared values on and approach to environmental and social safeguards, they will likely act in unison when reviewing and deciding on such issues. Together their combined voting shares would enable them to effectively veto any lending proposals under AIIB they deem inappropriate or unacceptable. Therefore the alleged scenario where China would abuse its vetoing power to push through environmentally damaging projects is more a myth than reality.

Others in the US argue that AIIB would export the adverse side-effects of China’s industrialization to other parts of the region. Again this is highly speculative and unfounded. If we take a look at China’s commitment and performance under many international environmental treaties, China is doing quite commendably. China is one of the countries in the world that have signed most of the multilateral environmental agreements (MEAs), which is quite remarkable even compared to many Western countries.

Based on the analysis above, it is our belief that the environmental performance of AIIB in the future should be much more encouraging and positive than many people currently believe. Of course, for anything that’s just emerging, there is still a steep learning curve ahead.

[i] http://www.theguardian.com/us-news/2015/mar/13/white-house-pointedly-asks-uk-to-use-its-voice-as-part-of-chinese-led-bank

[ii] http://www.nytimes.com/2014/10/10/world/asia/chinas-plan-for-regional-development-bank-runs-into-us-opposition.html?_r=0

[iii] http://finance.sina.com.cn/world/20150407/130721898352.shtml

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