House of Commons - Trade and Industry

Select Committee on Trade and Industry Written Evidence

APPENDIX 20

WWF-UK's submission to the ECGD Public Consultation on Case Impact Analysis

EXECUTIVE SUMMARY

Export Credit Agencies provide the largest source of taxpayers money for foreign corporate investment in industrial projects in the developing world. Voters and taxpayers, therefore, have a right to information on how these taxes are being used.

A major proportion of ECA support goes to large industrial and infrastructure projects, including power plants, large dams, mining projects, road development and oil pipelines, all of which can have significant environmental and social impacts. The ECGD's decisions and subsequent actions must be in line with the UK Governments' national and international commitments to sustainable development.

The ECGD has been undertaking a consultation on their case impact analysis process. To input into this consultation WWF undertook research examining Export Credit Agencies and the environment. This study identified current environmental best practice amongst financial institutions—export credit agencies, multilateral development banks and the private sector—and compared it with ECGD's environmental policies. It found that the actions and activities of the ECGD were lagging far behind best practice

Whilst welcoming the opportunity to comment on the detailed case impact process, WWF feel that there are some serious flaws in the ECGD's operations and strongly advocates the following recommendations:

(A) ECGD must actively promote sustainable development

1. Align with Government commitments on sustainable development

Current ECGD activities risk undermining Government commitments on sustainability. The ECGD must adopt clear and specific objectives with regard to sustainability, directly linked to ECGD Business principles, UK Government sustainable development goals and international commitments (for example, the Kyoto protocol and the Convention on Biodiversity).

2. Monitor and report on performance of the ECGD

It is not yet clear how ECGD monitors and measures the success of the overall organisation with regards to meeting its Business Principles, and UK Government commitments to sustainable development. Targets must be set to reduce the overall environmental impact of ECGD supported activities to ensure it adheres to these commitments. These should include targets to reduce annual carbon emissions in supported projects and the percentage of projects impacting on high conservation value forests.

3. Demonstrate and exert leadership

Through setting an example by strengthening its environmental policies and capacity, as well as through exerting leadership in international fora like the Working Party on Export Credits and Credit Guarantees (ECG) of the OECD, ECGD can work towards the creation of a level playing field promoting environmental excellence and sustainable development. The ECGD should push the Common Approaches to reach international best practice. In the process it can strengthen its own performance by reducing financial and reputational risk, and capitalising on opportunities to offer new products and services to clients.

4. Foster and enhance the competitiveness of UK environmental exports

There is an opportunity for ECGD to provide real leadership in supporting UK environmental exporters, and improving environmental quality in host countries. ECGD needs to put in place incentives to encourage sustainable exports. These could include: offering extended terms of finance, offering training and grants.

(B) ECGD must amend its impact screening and analysis procedures

5. Clarify and strengthen the screening and review process

There is significant scope in the current process for impacts to go unreported by the company. There is not a strong legal requirement for the provision of complete, verifiable and honest information, nor sanctions when information is dubious. ECGD must require EIAs to be mandatory for all category A projects. For category B projects WB standards should be adhered to.[111] The EIAs must also require back-up documentation, and conduct spot checks by independent reviewers for all three categories (A, B and C).

6. Develop clear and consistent environmental sectoral standards

The benchmarking approach means a lack of predictable and consistent standards. The development of a set of clear ex-ante standards could bring significant benefit to ECGD and the companies it supports by allowing projects to be designed from the beginning with these standards in mind. Following examples from the World Bank/IFC, Ex-Im and ABN Amro in the private sector, clear screening policies should be established for sensitive sectors or impact areas, including forestry, mining, oil and gas, and water (dams). These should be developed in consultation with stakeholders or existing initiatives—such as the World Commission on Dams. Those projects that do not meet these standards should be excluded from support.

7. Improve the monitoring of projects

Procedures for follow-up, monitoring and enforcement are very weak. Without adequate monitoring, there is a tendency for environmental impact assessments to be used merely as a rubber stamp to allow a project to go ahead, rather than to create a work-plan to maximise positive environmental impacts and mitigate damage. Monitoring should be necessary for all category A and B projects, based on guidelines and in consultation with stakeholders.

8. Support a presumption of transparency

Transparency and disclosure is one of the key issues being discussed as part of ECGD's consultation process, and so may change in the near future. However, currently it is one of the areas where ECGD falls furthest behind. Ex-ante information disclosure should take place 120 days before a decision on the project is made. Disclosure requirements should be part of the contract between ECGD and project sponsor. Information disclosure should be extended to all projects and should include all information that is not demonstrated to be of a commercially sensitive nature.

9. Develop an appeal process

Although ECGD decisions can be challenged through the Parliamentary Ombudsman and judicial review, there is currently no easily accessible appeal procedure. The ECGD should develop an approach similar to the IFC and EDC, with a compliance officer or ombudsman to which stakeholders can bring their complaints if they feel a decision has not been in compliance with ECGDs own business principles or international law.

10. Expand environmental capacity

It is unclear whether sufficient capacity (ie staff with sufficient knowledge and time) currently exists within ECGD to implement the engagement process and other environmental policies. In order to adequately incorporate environmental dimensions into ECGD activities greater capacity may be necessary.

1. INTRODUCTION

The rationale: export credit agencies and sustainable development

— WWF is making these policy suggestions to the ECGD as part of the review process for their Case Impact Analysis.

— Export Credit Agencies (ECAs) are the world's largest class of public international finance institutions, collectively exceeding the size of the World Bank Group, and represent the single largest source of taxpayer support for foreign corporate investment in industrial projects in the developing world.

— ECAs are public bodies funded through taxes. Voters and taxpayers have a right to information on how their taxes are being used—as well as to expect that ECA actions are in line with the commitments and priorities of their own governments.

— A major portion of ECA support goes to large industrial and infrastructure projects, including power plants, large scale dams, mining projects, road development in tropical forests and oil pipelines, which often have significant environmental and social impacts. With the trend towards private sector financing and ownership of infrastructure projects during the 1990s, ECA support of such projects has been growing. Because most of these projects are high risk, many would not take place without ECA support.

— Although many ECAs have made significant advances in the last few years, particularly in terms of developing a willingness to understand and tackle key issues, social and environmental standards are as yet limited. The Working Party on Export Credits and Credit Guarantees (ECG) of the OECD has developed the Common Approaches on Environment and Officially Supported Export Credit to try to harmonise environmental standards and avoid an environmental "race to the bottom" between different ECAs. However, the agreement has not yet been ratified by the US or Turkey. As OECD agreements have to be ratified by all parties the agreement has not come into full force. The adoption of a draft agreement has been agreed by all states except the US and Turkey. This said the Approaches are heavily criticised by the NGO movement as being too weak in key areas of transparency and standards.

— WWF is concerned that the ECGD does not have in place systems and policies that facilitate the minimisation of environmental impacts nor the maximisation of environmental benefits. It is for this reason that we are making the recommendations outlined in the Executive Summary and detailed further on in this report.

2. RECOMMENDATIONS FOR ECGD

The following recommendations show how ECGD could both strengthen compliance with the spirit of its Business Principles and the UK Government's sustainable development commitments, and move towards a leadership position in the international finance sector. It also addresses the key questions from the ECGD case impact analysis consultation—see Annex I for detailed comments on the questionnaire.

These recommendations are based on recent research on best practice to be found in Annex II and III which looks at International Best Practice and How Does ECGD Compare.

Below we firstly examine what the ECGD needs to do to actively promote sustainable development. Secondly we examine what amendments the ECGD needs to make to its impact screening and analysis procedures.

(A) ECGD must actively promote sustainable development

1. Align with Government commitments

The ECGD Mission Statement calls for it to ensure activities accord with other Government objectives, including those on sustainable development, human rights, good governance and trade. The Business Principles commit it to constructively engage with project sponsors to achieve necessary improvements. However, there are also a number of sectors ECGD is involved in which contradict Government objectives and are inherently environmentally unsustainable, particularly related to fossil fuels. Recent research has shown that ECGD supported power plants contribute an annual 13.3 million tonnes of carbon emissions, despite Government commitments to reduce the UK's emissions by 26.5 million tonnes.[112] Other recent research shows similar unsustainable activities supported by the ECGD with regard to dams and forestry.[113]

ECGD must move away from supporting projects in unsustainable sectors and moving towards those with greater economic benefits, now and into the future. This is also in line with ECGD's commitment to measure applications against whether the projects "assist social and economic development, or are of maximum benefit to areas most affected by poverty; or tackle problem areas where private investment is not available . . .",[114] as well as Government commitments to cut carbon emissions.

2. Monitor and report on performance of the ECGD

It is not yet clear how ECGD monitors and measures the success of the overall organisation with regards to its Business Principles, including support of UK Government sustainable development priorities and commitments.

— If indicators exist, ECGD should make them public and report on performance in the next Annual Report. If not, ECGD should develop indicators to measure and monitor performance with respect to its Business Principles and UK Government priorities, setting targets for improvement and disclosing results in the Annual Report. One of those indicators should be greenhouse gas emissions from projects in the ECGD portfolio. Other indicators could follow the EPI Finance 2000 indicators (see Annex VI), while even more complete reporting could follow a framework like IFC's to show the value added by projects, based on ECGD's Business Principles.

— To facilitate the transition, targets should be set to increase the percentage of environmental exports within the ECGD portfolio, as well as targets to reduce overall annual carbon emissions from projects in the ECGD portfolio and the percentage of projects impacting on high conservation value forests. See also Recommendation 4 regarding fostering environmental exports.

— Greenhouse gas emissions from ECGD supported projects should also be included in UK national carbon accounting.

If necessary the ECGD should formalise its underwriting processes, assessments and review procedures through an amendment to the Export and Investment Guarantees Act 1991. Such amendments have been put in, place by other ECAs such as in Canada.

3. Demonstrate and exert leadership

ECGD has influence within a number of international bodies, particularly the OECD Export Credits and Credit Guarantees Working Party (ECG) and should use it to level and raise the playing field for environmental standards.

— By adopting WWFs recommendations ECGD could demonstrate environmental leadership through its example.

— ECGD should take a leadership role in the ECG, pushing for the Common Approaches to be strengthened. The US's non-ratification was based on their view of the Approaches being too weak and this position should be adopted by ECGD. At the same time ECGD should work at encouraging Turkey to endorse a strengthened agreement in future. The upcoming review of the Common Approaches (before the end of 2003) provides an ideal opportunity.

— ECGD should also encourage the OECD to allow more concessional terms or other inducements for environmental exports, such as extended repayment terms (as are currently offered for power plants and nuclear plants). See also note in Recommendation 8 regarding tied aid.

— ECGD should work with other ECAs to develop a common methodology to report on local and global environmental impacts.

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— ECGD should work with and (lobby) influence the EC DG Trade's ECA work to ensure uptake of best practice across the EU's ECAs and policy coherence across the EU's areas of responsibility such as trade, competition, social affairs and the environment.

4. Foster and enhance the competitiveness of UK environmental exports

ECGD should ensure that as well as avoiding unsustainable projects, they are encouraging more sustainable ones.

ECAs face a number of barriers when it comes to supporting more environmental exports, including high up-front costs and longer payback periods; the relative inexperience of project sponsors; and less established markets. Additionally, projects with environmental technologies have access to grant funding, for example from the Department for International Development (DFID). Another barrier ECGD faces is that it does not deal with short-term loans, which are often favoured by SMEs. However, there is still an opportunity for ECGD to provide real leadership in supporting UK environmental exporters, and improving environmental quality in host countries.

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— It should also develop the capacity to deal with environmental exports, so that ECGD is prepared to support them in appropriate ways when grant finance diminishes. This could include conducting a survey of the UK environment industry to understand industry needs, and setting up a unit specialising in energy efficiency.

— ECGD should encourage environmental exporters through offering extended terms of finance within OECD restrictions, as EFIC, JBIC and Ex-Im do (see also Recommendation 3 regarding changing OECD restrictions). Furthermore, it should strive to expand its provision of political and currency risk insurance to environmental exporters, thereby improving project finance calculations for these products. ECGD could also offer other incentives such as fast track processing.

— ECGD should also help build awareness and capacity amongst environmental exporters regarding its products, including outreach and guidance on preparing projects. The current ECGD effort to raise awareness amongst SMEs could also be targeted specifically at environmental exporters. This would be in line with the Business Principle committing to make ECGD's facilities available to the widest possible range of markets and customers, including smaller firms.

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— ECGD could also investigate the numerous private sector examples of innovative environmental care products, to see which products might be adapted to fit ECGD's remit.

— ECGD should allocate at least 20% of their energy portfolios to sustainable energy.

(B) ECGD MUST AMEND ITS IMPACT SCREENING AND ANALYSIS PROCEDURES

5. Clarify and strengthen screening and review procedures

Greater clarity and transparency regarding both standards and assessment procedures would be in line with the recommendation in the ECGD Mission and Status Review that ECGD produce information for customers and interested parties on how it will handle sensitive cases caught in its initial screening process.

— The case impact analysis questionnaire falls behind best practice in a number of ways. Reference should be made to our comments on the questionnaire in Annex I on issues such as the need for spot-checks in self-assessment reliant procedures.

— More information should be made available regarding the review procedures for projects identified as Category A or B through the case impact analysis questionnaire. For example, ECGD could develop and make publicly available a series of sector-specific checklists as JBIC does.

— ECGD should make clear what guidelines exist for underwriters in considering the trade-offs between likely environmental impacts of projects, as identified by the Business Principles Units, and its potential benefits. It should also report on the training the underwriters have in order to undertake environmental and reputational risk assessments.

— An EIA should be required for all category A projects. For category B projects WB standards should be adhered to (see footnote 111 on page Ev 175).

— Questions should be added regarding positive environmental or social impacts, including information on capacity-building, training, technology transfer, reduction of local or national emissions. This would help to better evaluate the overall project impacts.

6. Develop clear and consistent environmental standards

The ECGD puts both the interests of UK industry, the UK taxpayer and project affected peoples at risk by supporting unsustainable projects. Clearly their policy of `engagement' has failed on numerous counts to ensure sustainability in inherently unsustainable projects and for this reason certain project types must be avoided. The ECGD has the powers to adopt such a stance under the Export and Investment Guarantees Act 1991.

— Companies applying to the ECGD should have enforceable policies on such issues as human rights, labour standards and environmental issues. Standards should be clear and specific, directly linked to ECGD Business Principles, UK Government sustainable development goals and international commitments (including for example the Kyoto protocol, UN Convention on Biological Diversity, OECD guidelines on MNEs' the ILO and the Basel Convention).

— Following examples from the World Bank/IFC, Ex-Im and ABN Amro in the private sector, clear screening policies should be established for sensitive sectors or impact areas, including forestry, mining, oil & gas, and water (dams). These should be developed in consultation with stakeholders or existing initiatives—such as the World Commission on Dams.

— Those projects which do not meet these standards should be excluded from support. ECGD has been notified of NGO views on these issues a number of times—for example by FoE International and WWF International in May 2002 where we called for funding for fossil fuels, large dams not meeting the requirements of the WCD and nuclear power to be phased out as well as any projects that do not receive prior informed consent from local communities in the developing world. (see for example Annex VII for the WWF guidelines on Forest Impacting Projects.)

— The benchmarking approach means a lack of predictable and consistent standards. Although ECAs generally come to projects at a late stage, exporters often know in advance that they will need ECA support. The development of a set of clear ex-ante standards could bring significant benefit to ECGD and the companies it supports by allowing projects to be designed from the beginning with these standards in mind. Designing a project to limit environmental impacts is much less costly overall than adding mitigation measures later. (see also recommendation 8 on Transparency).

— These standards should be developed in consultation with external stakeholders.

7. Improve monitoring of projects

Without adequate monitoring, there is a tendency for environmental impact assessments to be used merely as a rubber stamp to allow a project to go ahead, rather than to create a work-plan to maximise positive environmental impacts and mitigate damage. For example, a World Bank review of the environmental assessment process found that while the EIA procedure itself was sound, the key problems were in implementation, including inadequate supervision. The ECGD proposal is for independent monitoring only of category A projects, relying on host country authorities to enforce compliance for others. Yet it is a common problem in developing countries that governments lack the resources and capacity to adequately monitor and enforce environmental regulations, while corruption can be another problem.[118]

— Monitoring should take place for all category A and B projects based on guidelines developed in consultation with stakeholders and made publicly available. (See for example JBIC's monitoring guidelines for sensitive sectors; footnote 114 on page Ev 176).

— Consideration should be given to building capacity in countries where credit is expended to ensure they have capability to assess and monitor potential impacts.

8. Support a presumption of transparency

As the Mission and Status Review notes, transparency is important for maintaining public confidence in and understanding of ECGD[119], and for demonstrating accountability. It is also important for the reputation of the UK Government.

— As in the Jakarta Declaration (http://www.fern.org/pubs/ngostats/jakarta.htm) transparency refers to public access to information and consultation with civil society and affected people in both OECD and recipient countries at three levels: in the assessment of ongoing and future investments; in the preparation of new procedures and standards; and in the negotiation with OECD and other fora of common approaches and guidelines. (see www.fern.org/pages/eca/intcamp.html)

— All key project information (not only environmental) should be publicly available. Environmental, social and economic aspects are interdependent and information on all three is necessary for stakeholders to be truly informed. These requirements are in accordance with the Aarhus convention.

— Although commercially sensitive information should remain confidential, the presumption should always be for disclosure, except where the project sponsor can demonstrate a commercial need for confidentiality, as is the policy of the World Bank/IFC and EBRD. ECGD should clearly define what constitutes `commercially sensitive' information in advance, as the EDC does. Disclosure should be a requirement of the guarantee agreement, and not be conditional on the permission of the sponsor.

— Ex ante information disclosure should take place 120 days before a decision on the project is made. Disclosure requirements should be part of the contract between ECGD and project sponsor.

— Information should be clearly available both on the website and at the project site in a culturally appropriate way for those affected by the project.

— Information on individual transactions should also be available ex post, on the website and in the Annual Report. In addition to the information currently printed in the Annual Report, there should be a description of the company, site and purpose of the project, a description of key issues and mitigation measures, and monitoring and compliance plans—along with environmental documentation.

— ECGD should develop its Annual Report into a Sustainability Report. This would include ex post information on projects, as well as sustainability information related to ECGD itself.

9. Develop an appeal process

Although ECGD decisions can be challenged through the Parliamentary Ombudsman and judicial review, there is currently no easily accessible appeal procedure for project affected peoples. Time should be given for such appeal between project approval and contract commencement.

— ECGD should consider developing an approach similar to the IFC and EDC, with a compliance officer or ombudsman for cases in which stakeholders feel a decision has been out of compliance with ECGD's own Business Principles. The compliance officer should be independent of management and focused on problem solving—providing redress and satisfaction to affected peoples while helping to find compromise solutions.

— Clarity should be given as to how affected communities can appeal against projects both during assessment procedures as well as after credit has been offered. This must be in accordance with the EU directive on Environmental liability

10. Expand environmental capacity

ECGD advocates an approach of constructive engagement. While such an approach can be an effective in effecting environmental improvements, such effectiveness relies on a high quality team such as those employed in best practice Socially Responsible Investment fund engagement. It is unclear whether sufficient capacity (ie staff with sufficient knowledge and time) currently exists within ECGD to implement this and other environmental policies. Implementation requires adequate expertise; senior level responsibility for compliance; appropriate training and incentives for underwriters and other non-environmental staff; as well as the alignment of staff appraisals with performance on the Business Principles.

— The setting up of the Business Principles Unit to manage environmental and social issues has been an important step in the right direction, but capacity and training should be expanded.

— The ECGD Business Principles commit it to providing customer-orientated, efficient and professional service. This could be enhanced by developing the capacity to run an environmental advisory service to help customers understand environmental risks and opportunities, as many of the private sector banks such as UBS and Credit Suisse have started to do. A survey of IFC clients revealed that the IFC's assistance on environmental matters was amongst the top three most valued services. This service would also be valuable internally—providing underwriters with a help-desk related to environmental risk assessment.

— See also Recommendation 4 regarding capacity to deal with environmental exporters.

3. CONCLUSION

Since the end of 2000, ECGD has taken some steps towards aligning its activities with the commitments of the UK Government. These steps include the development of the Business Principles and the expanded role of the Export Guarantees Advisory Council. The Principles require ECGD to take into account the Government's international policies on sustainable development, environment, human rights, good governance and trade. Another major step was the development of the impact analysis questionnaire, along with the current consultation process. In addition, publishing a list of ECGD guarantees in the Annual Report is a move towards greater transparency.

When compared with the international best practice identified in Annex III, ECGD still lags far behind. In particular, its lack of clear environmental standards and of measures to enhance the environmental sustainability of its project portfolio, as well as very limited transparency and monitoring mean that it currently falls behind many of the examples cited. In addition, weak environmental standards put ECGD at increased financial risk—and threaten the reputation of both ECGD and the UK Government more generally.

As the ECGD Mission and Status Review notes, "Ill-conceived and poorly executed projects can have negative impacts on the environment and local people and make for poorer quality risk. It is in ECGD's self-interest to take full account of these factors in its assessments and to promote good projects. ECAs have an important role to play in improving project impacts, by working in partnership with stakeholders to influence negotiations to achieve an acceptable outcome."[120]

Through setting an example by strengthening its environmental policies and capacity, as well as through exerting leadership in international fora like the ECG, ECGD can work towards the creation of a level playing field promoting environmental excellence and sustainable development. In the process it can strengthen its own performance by reducing financial and reputational risk, and capitalising on opportunities to offer new products and services to clients.

111 The World Bank states "The scope of EA for a Category B project may vary from project to project, but it is narrower than that of Category A EA. Like Category A EA, it examines the project's potential negative and positive environmental impacts and recommends any measures needed to prevent, minimise, mitigate, or compensate for adverse impacts and improve environmental performance." Back

112 "New research shows Blair `exporting global warming'", Greenpeace press release, 12 July 2002. Back

113 "Illegal logging and ECAs', FERN, April 2002. UK Export Credit Policy-lessons from Ilisu", FERN, January 2002. www.fern.org/pages/eca/pubs.html Back

114 ECGD, "Public Policy Issues: Sustainable Development", 28 July 2002 www.ecgd.gov.uk/graphic/debtdev/susdev.asp?sid=6 Back

115 So far only one ECA-Canada's EDC-has joined the UNEP initiative. For more information see http://unepfi.net/fii/index.htm Back

116 According to the ECGD, the Overseas Investment Insurance scheme is suitable for smaller investors (ECGD Annual Report & Resource Accounts 2000-01, p. 15), yet current research suggests that the provision of such insurance for renewable projects by ECAs is not well established. See Glenn Stuart Hodes, "Sustainable Finance for Sustainable Energy" in Jan Jaap Bouma, Marcel Jeucken and Leon Klinkers (eds), Sustainable Banking: The Greening of Finance, Greenleaf Publishing, UK, 2001 Back

117 Crescencia Maurer, The Transition from Fossil to Renewable Energy Systems: What Role for Export Credit Agencies, German Advisory Council on Global Change, Berlin, forthcoming (draft dated July 2002). Back

118 See for example, World Bank, World Development Report 2002, Washington, DC, for a discussion of institutional failures in developing countries. Back

119 Export Credits Guarantee Department, Mission and Status Review 1999-2000, London, 2000. Back

120 Export Credits Guarantee Department, Mission and Status Review 1999-2000, London, 2000. Back