WRI Publications Feed: International Financial Flows and the Environment (IFFE)

Banking on Nature's Assets: How Multilateral Development Banks Can Strengthen Development by Using Ecosystem Services

Maggie Barron — Mon, 09 Nov 2009 16:57:27 -0500

Humanity depends on nature for physical and spiritual sustenance, livelihoods, and survival. Ecosystems provide numerous benefits or “ecosystem services” that underpin economic development and support human well-being. They include provisioning services such as food, freshwater, and fuel as well as an array of regulating services such as water purification, pollination, and climate regulation. Healthy ecosystems are a prerequisite to sustaining economic development and mitigating and adapting to climate change.

The UN-led Millennium Ecosystem Assessment audited the health of 24 ecosystem services globally and reported that two-thirds had been degraded over the past half century. This degradation is undermining development progress. However, by accounting for and managing ecosystem service trade-offs, multilateral development banks (MDBs) and partner countries can improve development outcomes, help address climate change, and reduce costs to people and economies. Toward this end, a growing number of tools are emerging to help factor ecosystem services into economic development decisions.

Traditionally, development planners have focused narrowly on provisioning services with a value in the market place while overlooking regulating services. Expansion of aquacultures has increased shrimp production, for example, but at the same time degraded the fish spawning ground and storm protection services provided by mangroves. Construction of dams has increased power and freshwater for irrigation while leading to downstream loss of wetlands and their purification and flood protection services.

MDBs have already begun to experiment with ecosystem service concepts in development planning and practice. This report makes the case for expanding beyond the current focus on single services and “add-on” projects. The authors recommend a more systematic approach, one that would take into account multiple ecosystem services in all development operations from the earliest stages of the planning process. Such an approach will enable MDBs to make the links among climate, environment, and development and identify risks and opportunities associated with development plans. Banking on Nature’s Assets identifies entry points for mainstreaming ecosystem services in MDBs’ core operations of strategic direction setting, advisory services, and investments and describes a portfolio of tools to help. It also presents a range of policy options that MDBs can help country partners implement to sustain critical ecosystem services.

The report concludes with five interrelated recommendations to scale up MDB and partner-country application of ecosystem services:

Incorporate into environment strategies;
Integrate into core operations;
Build capacity to implement an ecosystem services approach;
Empower local authorities, organizations, and communities; and
Strengthen policies and incentives.

Entry Points for Integrating Ecosystems Services into MDB Operations

The Legal Character of National Actions and Commitments in a Copenhagen Agreement: Options and Implications

Maggie Barron — Wed, 04 Nov 2009 15:54:28 -0500

Executive Summary

The world’s governments may be negotiating the most important treaty in modern history: a multilateral environmental agreement (MEA) that may determine whether humanity can successfully reduce anthropogenic sources of greenhouse gases and avoid the most dangerous consequences of climate change. With less than two full weeks before negotiations are scheduled to conclude in Copenhagen, delegations have yet to agree whether they are aiming at a legally binding treaty or at a political declaration. If it is a treaty, will the text contain legally binding, specific commitments, backed by robust review procedures, or will it be a legally binding agreement with a hollow core?

Introduction
The elements of legal character
A brief history of legal character under the climate change regime
The Bali Action Plan and legal character under a Copenhagen agreement
State of play: Snapshot of a moving process
Unilateral standard setting for legal character: A case study of draft U.S. climate legislation
Conclusions: the benefits and risks of legal character

Even as consensus builds around the need for urgent, collective action to combat climate change, countries remain deeply divided on how efforts to reach this global goal will be equitably shared among and between developed and developing countries. Part of the controversy centers around how developing country “nationally appropriate mitigation actions” (NAMAs) will be expressed in an international agreement, and how procedures for measuring, reporting, and verifying these actions might promote implementation. This Working Paper focuses on the choices facing developing country major economies participating in the Major Economies Forum (MEF) (China, India, Brazil, South Africa, and others) that are under pressure from industrialized negotiating partners to commit to actions that are comparable to those contemplated by richer nations.

This Working Paper clarifies a complex set of issues around the legal character of commitments that lie beyond the threshold question of whether Copenhagen should result in a legally binding treaty, and helps weigh the potential risks and benefits to developing country Parties of expressing their NAMAs in a legally binding form. The analysis reveals that commitments can differ in terms of their form (binding v. non-binding), their content (specific v. vague), and in terms of the procedures and institutions by which their implementation is reviewed.

To provide context, the authors note recent discussions within the Major Economies Forum (MEF) which suggest that MEF countries seem to be moving towards a “bottom up” approach to a climate agreement that places less emphasis on the international legal character of countries’ commitments. The authors then review the legal character and legal implications of previous undertakings in the UN Framework Convention on Climate Change (UNFCCC) and the Kyoto Protocol. The paper then reviews the major proposals submitted by countries to the Copenhagen process, as well as recent versions of the negotiating text (described in the Appendix). The paper also provides a case study of draft U.S. climate legislation, and analyzes the special challenges facing developing country major economies under pressure to take actions comparable to richer countries.

A key conclusion from our analysis is that a post-2012 climate agreement, whether agreed in Copenhagen or thereafter, should take a legally binding form, but one that contains undertakings by countries with a wide range of legal form and content, and that are subject to differentiated review procedures. It notes that some developing country major economies are likely to be held to a higher standard of legal content and review, than other, poorer or smaller developing countries.

Lessons from other treaties tell us that international agreements with binding, specific content backed by robust review procedures are generally more effective than those with vague content or limited review procedures. The table below indicates some of the benefits and risks associated with strengthening and weakening an international agreement’s legal character, content, and review procedures designed to promote implementation of the agreement.

General Benefits and Risks of Legal Character

Each country has the opportunity to influence the design the agreement’s content and, ultimately, will have to decide whether to become a Party. Signing up to legally binding, clear, specific, measurable, and ambitious commitments demonstrates strong political will to contribute and comply, encourages other countries to do the same, and thus should lead to stronger environmental outcomes. In most cases the international penalties associated with failing to comply with an international treaty are unspecified, and thus the risks of being found in non-compliance seem low. However, a post-2012 climate change regime, built from the “bottom-up” will likely combine multilaterally agreed rules and bilateral arrangements. There are indications that this regime will support performance-based financial mechanisms and carbon markets that could reward countries willing to make more specific undertakings. For example, our case study of draft U.S. climate change legislation suggests that countries undertaking commitments of a stronger legal character may have preferential access to large scale carbon markets, and may be able to avoid the unilateral trade sanctions contemplated by the U.S. and other countries. While each country must weigh these risks and benefits for itself, this Working Paper seeks to assist in this process.

Power, Responsibility, and Accountability: Re-Thinking the Legitimacy of Institutions for Climate Finance

Maggie Barron — Mon, 02 Nov 2009 10:27:36 -0500

As the December deadline looms to conclude a new agreement under the UN Framework Convention on Climate Change (UNFCCC), negotiators have yet to agree on how to finance cuts in greenhouse gas (GHG) emissions while meeting the energy needs of developing countries. If a global deal is to be struck, many estimate that developed countries will need to commit tens of billions of dollars of public money to support developing country efforts. With little money on the table, disagreement remains on whether these billions should be entrusted to new or existing institutions. There is also heated debate over whether a single centralized institution or a decentralized approach that coordinates international, regional and national institutions would be more effective.

A new global deal on climate finance is likely to significantly redistribute power, responsibility and accountability between traditional contributor and traditional recipient countries.

Broadly speaking, industrialized nations want to continue to rely on existing institutions they have funded and led for the past 60 years. Developing countries prefer new institutions, arguing that existing ones favor donor interests, and have failed to deliver on promises to support poverty alleviation and development. Delegations‟ proposals to the UNFCCC reflect this gulf. If the institutional arrangements entrusted with managing new flows of climate finance are to succeed in raising these resources and in investing them well, they will need to be perceived as legitimate by both contributors and recipients.

Institutional Arrangements for Climate Finance: Power, Responsibility, and Accountability

This Working Paper seeks to ground the debate on climate finance in an objective analysis of ongoing efforts to finance mitigation and adaptation in developing countries. The authors step back from the question of “which institution?” should be entrusted with these funds to examine instead how governments can design a climate financial mechanism in a way that is widely perceived as legitimate. We identify three crucial dimensions of institutional legitimacy: power, responsibility and accountability. (See Box A)

We review the governance structures, operational procedures, and records to date of 10 international and national finance institutions, with reference to these core dimensions of legitimacy, to draw lessons for future institutional arrangements. We place special emphasis on the experiences thus far with the Global Environment Facility (GEF) which, since 1994 has served as the operating entity of the financial mechanism of the UNFCCC.

We conclude that a new global deal on climate finance is likely to significantly redistribute power, responsibility and accountability between traditional contributor and recipient countries. In light of the dramatic changes in global politics and the global economy in the past decades, this redistribution seems both long overdue and necessary to provide the basis for a successful global partnership on climate finance.

Building Legitimate Institutions for Climate Finance: Conclusions and Recommendations

Balancing Power:

Formal distribution of power within the governing body of any financial mechanism will color perceptions of its legitimacy. Funds recently established under the Kyoto Protocol and under the World Bank, establish separate governing committees which reflect a more balanced governance structure with equal votes and representation of contributor and recipient countries. However, these funds continue to rely on the existing institutions – so called “Implementing Agencies” such as the World Bank, UN Development Programme and the UN Environment Programme - for financial and project management. As long as the underlying power structures of these institutions remain unchanged, they will continue to reinforce existing relationships between contributors, financial institutions and recipients.

Developing countries can, through their majority representation in the COP to a climate agreement, seek to exercise power over climate financial mechanisms. But the experience of the GEF has shown that the legal and institutional means of exercising this power are limited, and developing countries and other observers continue to view the GEF as unaccountable to the COP.

Formal grants of power have generally been neutralized by other ways in which contributors exercise influence. Contributor countries continue to dominate the processes of replenishment, resource allocation and project cycle management by imposing conditionalities and standards. As long as climate financial mechanisms are dependent on voluntary contributions raised by the parliaments and finance ministries of one set of countries, and channeled to finance activities in another set of countries, donor influence is likely to check the formal power of recipients.

The economic and policy conditionalities that donors have attached to their financing in the past have been neither popular with recipient countries, nor entirely effective in achieving their objectives. But priorities and standards attached to donor resource mobilization have provided a means of prioritizing scarce development financing, and of promoting environmental and social safeguards. It is unclear how developing countries, when they are given greater power, will exercise this power responsibly without deploying similar tools.

Recommendations: If existing institutions are to meet evolving standards of legitimacy, then their fundamental governance structures, as well as their operational procedures, will need to be reformed to give greater voice to developing country recipients. If formal grants of power are to lead to the effective exercise of that power, the international community must also make greater efforts to de-link the source of finance from the exercise of informal power by donors, by adopting new levies – such as the levy on Clean Development Mechanism (CDM) projects.

Taking Responsibility:

There is a growing consensus that, to be successful, efforts to address climate change must effectively reflect national priorities and circumstances. As developing countries gain more power in the governance of financial institutions, they should be natural champions of “nationally owned” and “country driven” programming. These countries are increasingly keen to have “direct access” to climate finance through their own national institutions, by-passing traditional Implementing Agencies. Arrangements for “direct access” to finance should be supported by nationally derived and owned low GHG emissions development strategies and national adaptation programs. If these strategies and programs contain measurable, reportable and verifiable (MRV) actions, they should provide a more legitimate basis for allocating resources between countries as well as for designing programs within countries.

The Montreal Protocol Fund, Clean Technology Fund, and Forest Carbon Partnership Facility experiences suggest that countries are ready to embed proposed projects and programs in broader national planning processes, if it leads to more sustained support. But a national plan is a far easier thing to develop than “national ownership”. Too many past efforts at national planning have been rushed, and completed with limited stakeholder engagement. Going forward, the processes by which these plans are developed, and the institutions involved, will influence whether they adequately reflect and respond to national circumstances.

Recommendations: A next generation of climate finance needs to promote the responsibility of recipient countries, by strengthening the national institutions that will implement mitigation and adaptation activities, and by ensuring their transparency and accountability to citizens within countries, as well as to the international community. While it is important that Implementing Agencies provide technical support to national institutions, they should rely less on external consultants and work in closer partnership with national stakeholders. Collaborations with local independent research institutions and civil society can be particularly important to make sure climate finance proposals appropriately reflect national circumstances and priorities.

Ensuring Accountability:

If done properly, shifts of power and responsibility to developing countries, through greater voice in decision-making and “direct access” to funds, will entail greater accountability for the consequences of investment.

Many developing countries are already building the capacity of their national financial institutions to support climate friendly development. Countries including Mexico, India and Brazil have set up units within national development finance institutions that are already supporting investments in renewable energy, energy efficiency, and sustainable forest management. The trend toward greater reliance on national Implementing Agencies raises both opportunities and challenges. Recent experiments to set up national funds in developing countries to finance climate change programs have taken some significant steps to ensure good financial management of funds. Little emphasis has been placed to date on their overarching institutional accountability, or the systems in place to maximize environmental and social benefits and minimize unintended harm.

Direct access to funding for developing countries whose national institutions can demonstrate they meet fiduciary standards, and national systems for measuring, reporting and verifying funded actions are two new dimensions of a more reciprocal relationship and deeper partnership between contributors and recipients. Together, these reflect an agreement on the conditions necessary to empower developing countries to shape their own climate policies.

Recommendations: National implementing institutions that take on a greater role in climate finance need to demonstrate the capacity to be held accountable, both nationally and internationally for the results of their investments. We suggest the following standards of good governance for national implementing institutions, building on the standards to which conventional Implementing Agencies are being held accountable. First, their governance structures should be inclusive and transparent. Second, their responsibilities should be clearly articulated, and they must have the technical capacity to develop ambitious and effective programs in partnership with local stakeholders, particularly citizens and other potential program beneficiaries. It will also be essential to have strong provisions for accountability in place, including to ensure compliance with international good practice for fiduciary management, robust anti-corruption measures, and to manage potential environmental and social impacts. If these standards can be met, then national institutions may hold significant promise for climate finance.

Catalyzing Low Carbon Development? The Clean Technology Fund

admin — Fri, 01 May 2009 00:00:00 -0400

Breaking Ground: Engaging Communities in Extractive and Infrastructure Projects

Payson Schwin — Wed, 04 Feb 2009 10:18:01 -0500

Growing demand for energy and natural resources has led many low-income, resource-rich countries to open remote areas to industrial development. Even as a financial crisis engulfed the global economy in 2008 and 2009, projects such as oil pipelines, roads, and mines continued to remain key development priorities.

Engage Communities, Avoid Conflict

Kirk Herbertson explains the story of the Mae Moh coal plant in Thailand and how it demonstrates why early community engagement is critical.

In many of these countries, however, strong institutions and governance systems are not yet in place to ensure that extractive and infrastructure projects do not adversely affect local communities. As a result, these sectors have generated a history of harmful environmental and social impacts on local communities. These impacts create risks for companies, governments, and financiers.

For several years, companies, governments, and financial institutions have responded to these challenges by signing up to various initiatives that provide standards and guidance to foster better industry practices. Financial institutions, in particular, often require clients in these sectors to meet environmental and social standards, in order to avoid or mitigate risk.

Many project proponents, host governments, and financial institutions recognize that a strong relationship with those affected by a project can improve the identification and management of risks, as well as long-term project viability. But community engagement efforts often fall short because of a failure to understand local political and community dynamics, or a failure to fully engage all local stakeholders affected by a project.

Establishing Effective Community Engagement Principles

WRI analyzed existing community engagement standards and guidance, as well as experiences in several high profile projects. Our analysis revealed that key gaps remain in the knowledge base and on-the-ground application of community engagement standards. Despite the abundance of existing reports and manuals that provide guidance on community engagement, much of the publicly available information on how project proponents engage communities reveals great difficulty in applying existing guidance effectively.

Based on this analysis, we developed seven Principles for Effective Community Engagement for extractive and infrastructure projects. These principles are intended to serve two key purposes:

For companies and governments developing projects: to provide a framework for identifying solutions to core community engagement challenges.
For citizen organizations supporting communities: to serve as a resource, in order to empower local communities to provide more meaningful input into project design and implementation.

Principles For Effective Community Engagement

Prepare communities before engaging.
Determine what level of engagement is needed.
Integrate community engagement into each phase of the project cycle.
Include traditionally excluded stakeholders.
Gain free, prior and informed consent.
Resolve community grievances through dialogue.
Promote participatory monitoring by local communities.

Next Steps for Key Players

Extractive and infrastructure projects do not exist in a vacuum—they will both affect and be affected by the surrounding communities and environment. Effective community engagement strategies must create win-win situations for the proponent and communities over the life of a project. To address the gaps remaining in the knowledge base and application of community engagement standards, we recommend the following next steps:

For project proponents: identify and promote best practices. Proponents of extractive and infrastructure projects should prioritize the collection and public dissemination of community engagement best practices, including examples of how community engagement creates value for companies. The seven principles proposed in this report can serve as a framework around which best practices can be collected.
For financial institutions: increase disclosure, promote improved community engagement. Financial institutions can play a critical role in guiding their clients to link community engagement with project risk management, and should send strong signals to their clients that community engagement is a priority. By improving their own public reporting on community engagement, financial institutions can promote more open sharing and improvement of engagement strategies. For example, the International Finance Corporation (IFC)—the private sector financing arm of the World Bank Group—should begin to routinely disclose how it determines that each of its projects has “broad community support.” Similarly, the Equator Principles financial institutions should disclose the projects where they are applying the IFC Performance Standards.
For citizen organizations: advocate for inclusive, accountable, and transparent processes. The ultimate goals of community engagement are tangible outcomes, such as providing benefits and mitigating risks to improve the lives of communities and strengthen a project’s viability. However, these outcomes often depend on the integrity of the process for achieving them. Community engagement that is inclusive, accountable, and transparent is more likely to result in optimal outcomes for both communities and project proponents. Informed by this report, citizen organizations supporting affected communities can more clearly articulate the type of processes in which they would like to engage.

When communities have the opportunity to collaborate with project proponents during the design and implementation of a project, proponents can more effectively identify and mitigate potential impacts, prevent harm, and shape the project to fit local conditions. Communities, in turn, can have a voice in determining how they will benefit from a project and whether a project fits their development priorities. This creates local ownership and support for the project, which is also good for the bottom line.

This report is the first of two reports to be produced by WRI’s Institutions and Governance Program, the second of which will identify examples of best practices for each of the principles identified.

Correcting the World's Greatest Market Failure: Climate Change and the Multilateral Development Banks

Smita Nakhooda — Tue, 10 Jun 2008 11:47:00 -0400

Correcting the World’s Greatest Market Failure: Climate Change at the Multilateral Development Banks is a new analysis by the World Resources Institute that examines the challenges of mainstreaming climate change at the Multilateral Development Banks (MDBs).

In the lead up to the 2005 G8 Gleneagles Summit, WRI analysis found that climate change had been considered in less than 20 percent of the World Bank’s lending for the energy sector. Three years later, Correcting the World’s Greatest Market Failure: Climate Change at the Multilateral Development Banks, reviews the Country Strategies and project documentation for the energy sector portfolios of the World Bank Group, the Asia Development Bank, and the Inter-American Development Bank.

Operationally, opportunities to mitigate emissions and reduce climate risk are still not systematically incorporated into MDB strategies and project development. More than 60 percent of financing in the energy sector across these institutions does not consider climate change at all. The MDBs need to support transformative changes in key sectors to steer investment towards low carbon, environmentally sustainable development choices; this will be difficult to achieve when they remain invested in many “business as usual” projects and policies. To help correct the “world’s greatest market failure,” MDBs must do more to internalize the environmental and social costs of climate change into their decision-making including:

Measure and manage the GHG emissions associated with investments in all relevant sectors.
Work with developing country clients to identify low carbon approaches to development.
Revise guidelines for country and sector strategies to explicitly integrate climate change considerations, particularly vulnerability to climate variability and change.
Maintain high environmental and social standards to manage climate risk.
Invest in the capacity of governments to practice good governance in order to respond to the realities of climate change.
Significantly increase support for low carbon technologies, particularly in rapidly growing emerging economies.
Build capacity and create new incentives for MDB staff to consider climate change in their interventions.

Development Without Conflict: The Business Case for Community Consent

admin — Tue, 01 May 2007 00:00:00 -0400

While much has been written on the legal, normative, and development arguments for ensuring that host communities have the opportunity to consent to a project, there has been relatively little attention paid to how obtaining the free, prior informed consent (FPIC) of host communities is in the pecuniary interest of project sponsors and their financial backers. This report seeks to build the “business case” for sponsors of large-scale, high-impact projects to treat the consent of the host community as a requirement of project development.

The argument is set out in four sections. Section I provides context by briefly reviewing the origins and evolution of the FPIC requirement in international law and development discourse. It argues that while community FPIC first emerged as an international norm applicable to indigenous peoples, it has come to be widely seen as critical to the fair treatment of all communities. Section II then directly addresses the business case for FPIC. It identifies and describes the various types of risks associated with developing projects that lack the support of their host community. Section III focuses on case studies. Through a series of real-world examples, it illustrates some of the ways in which the risks of community opposition can manifest themselves. It also provides a positive case study that demonstrates how early attention to FPIC issues can avoid significant costs during implementation. To the extent possible based on publicly available information, each case study quantifies the financial impacts that community opposition (or its avoidance) has had on the project and its sponsor.

We appreciate the input provided by Clive Armstrong, Jennifer Coulson, Anne Perrault, Anita Roper, Bruce Schlein, Jake Siewart, Julie Tanner, and Elizabeth Wild, in the development of this report.

Consideration of Climate Change in World Bank Energy Sector Lending, 2000-2006

admin — Sun, 01 Oct 2006 00:00:00 -0400

Project appraisals and other documents indicate the extent to which climate change considerations are actually included in the Bank’s loans. A review of publicly available documents for 2000 to 2006 assessed whether project documents accounted for GHG emissions, identified alternative approaches that might reduce emissions, considered incremental cost and financing issues for addressing climate change impacts of projects, or included specific indicators tied to climate change considerations. This review reveals that there is very little systematic incorporation of climate change issues in World Bank lending in the energy sector.

Sustaining the Environment at the World Bank

admin — Sat, 02 Sep 2006 00:00:00 -0400

At the end of June 2006, World Bank President Paul Wolfowitz announced an internal restructuring of two vice presidencies: the Bank’s “networks” for Environmentally and Socially Sustainable Development (ESSD) and Infrastructure were integrated into a new Vice Presidency for Sustainable Development, headed by the sitting Vice President for Infrastructure (the position of Vice President for ESSD had been vacant for several months).

While the Bank’s outreach efforts described the restructuring as an elevation of the sustainable development agenda, the merger of the environment and infrastructure units raised questions about whether and how the Bank will promote environmental sustainability in its operations.

As a rule, poor people are made not just worse off, but disproportionately worse off when ecosystems are degraded. It follows that the World Bank must integrate ecosystem protection into its policy advice and investment operations designed to reduce poverty.

It is clear that if the Bank’s core mission is to reduce poverty, it cannot ignore the environment.

Environmental Mainstreaming: Applications in State Modernization, Social Development, Competitiveness, and Regional Integration

admin — Tue, 01 Nov 2005 00:00:00 -0500

As part of a collaborative effort between the Inter-American Development Bank’s Environment Division and the World Resources Institute, this document discusses environmental mainstreaming considerations in the context of the four pillars of the Bank’s Institutional Strategy:

Modernization of the State
Social Development
Competitiveness, and
Regional Integration

The purpose of the document is to set forth ideas and recommendations that will help identify mainstreaming opportunities to strengthen environmental sustainability across sectors, which in turn should enhance development outcomes.

You can download a copy of this report at http://www.iadb.org/sds/doc/env-environmentalmainstreamingap....