Dec. 5, 2023
Climate Finance: Is it doing more harm than good?
With COP28 underway this week, our attention turns to financial institutions and their role in the climate crisis, prompting questions about the effectiveness of climate finance and emphasizing the pressing need for strengthened accountability and meaningful remedy.
Navigating the landscape of climate finance
Financial institutions play a dual role in the climate crisis. On the one hand, many of their investments, particularly in fossil fuel projects, have contributed to climate change, causing issues like community displacement, environmental degradation, economic disruption, and conflict. On the other hand, these institutions have committed themselves to combating climate change and promoting sustainable development. They do so by allocating substantial financial resources, known as ‘climate finance’, to projects aimed at reducing greenhouse gas emissions and mitigating global warming effects. This includes climate adaptation and resilience projects, designed to help communities in coping with and withstanding the effects of climate change.
In recent years, there has been an increase in the allocation of climate finance across multilateral development banks (MDBs). In 2022, a joint report by MDBs disclosed that low- and middle-income countries received approximately $60.9 billion in climate financing. The World Bank alone contributed over 40% of this amount, providing $26.2 billion in climate funds. Looking ahead, the Independent High-Level Expert Group on Climate Finance anticipates that by 2030, the developing world will need to spend around $2.4 trillion annually to address climate change and meet the goals of the Paris Agreement.
How effective is climate finance?
It's important not to assess the effectiveness of climate finance based solely on the amount of funding involved. The key focus should instead be on whether this large-scale financing is accomplishing its intended goals while safeguarding the well-being of communities and their environment.
Currently, climate finance is perceived as lower risk, and therefore rarely has heightened human rights or social requirements or disclosure standards. Contrary to that lower risk rating, climate finance often includes high risk factors, affecting land, natural resources, and Indigenous territories.
Of the 1,804 complaints filed with independent accountability mechanisms (IAMs), 558 complaints (31%) raise concerns of environmental harm. Within this subset of complaints focusing on environmental harm, over one-third cite harm caused specifically by ‘green’ projects.* Of the 558 complaints citing environmental harm, 194 compliance reviews have been initiated. Of the 159 compliance reviews that have already been completed, IAMs found that 114 projects (72%) were noncompliant. These numbers indicate that climate finance is already missing its mark.
The role of accountability in climate finance
IAMs play a significant role in ensuring climate finance is both effective and rights-respecting. By holding parties accountable for the outcomes of funded projects, it becomes possible to assess whether the funds are being used effectively to address climate goals and safeguard against harm. Without proper oversight, there’s a risk that projects funded by climate finance may violate the rights of vulnerable communities that climate adaptation and resilience goals are meant to protect in the first place. IAMs can help identify and remedy these violations.
Moreover, accountability is instrumental in fostering community participation in project design. IAMs serve as a safeguard against top-down decision making by holding parties accountable for their actions. This encourages collaborative approaches that prioritize the agency of local communities and emphasize the importance of considering local contexts.
Additionally, accountability serves as a preventative measure, ensuring that climate finance projects learn from past mistakes and avoid repeating them. The existence of IAMs provides regular evaluation and community feedback loops, enabling MDBs to learn from past experiences and continuously improve their processes. As such, complaints filed with IAMs provide valuable insights for financial institutions.
A closer look at due diligence and remedy:
OPIC’s Buchanan Renewables' Biomass Project in Liberia
Like any project lacking sufficient safeguards, renewable energy projects can cause significant environmental and social harm. The Biomass project in Liberia is an example. Between 2008 and 2011, the US Overseas Private Investment Corporation (OPIC), now the US International Development Finance Corporation (DFC), approved three ‘climate-friendly’ loans totaling US$216.7 million for the Buchanan Renewables’ (BR) Biomass project in Liberia. The stated aim of this project was to ‘rejuvenate family farms’ and ‘create sustainable energy’ by converting old rubber trees into biofuel for a BR power plant. However, the project resulted in serious harm to both its intended beneficiaries and the environment. This included impeding farmers and charcoal producers' ability to sustain their livelihoods, forest degradation, water contamination and a number of labor rights violations.
Although affected groups made repeated efforts to engage OPIC and the company in dialogue, all these efforts failed. In 2013, the company abruptly abandoned the project, further devastating local communities. In 2014, hundreds of Liberian farmers, charcoal producers and workers filed a complaint to OPIC’s President stating that they were worse off than they were before OPIC’s investment. The complainants demanded accountability for the harm caused by the project. This prompted an investigation by the Office of Accountability (OA), which resulted in a 2014 OA investigation report confirming harm from the project, and revealing various OPIC failures, including in collecting baseline project data, conducting human rights due diligence, mitigating project and community-level risks and monitoring its investments.
Getting due diligence right
Worryingly, in the realm of climate finance, there is a prevailing trend across major financial institutions including the World Bank, towards streamlining due diligence requirements to expedite processes. However, the potential inadequacy of streamlined social and environmental due diligence presents clear risks. Failure to properly assess the potential human rights, environmental, and social impacts of investments can undermine climate goals, leading to inadvertent harm to local communities and the environment.
This concern is exemplified in the Liberia Biomass complaint, where the investigation report by the OA confirmed OPIC’s failure to conduct adequate due diligence given the heightened human rights risks. The OA found that the project faced heightened risks due to factors such as the business plan not accounting for Liberia's post-conflict environment (after 14 years of civil war), the documented history of human rights risks in the rubber industry, and the lack of prior experience in the rubber sector or in operating commercial enterprises in Liberia by the project's senior management.
This project illustrates the consequences of top-down development projects that insufficiently consider community needs, concerns and local contexts. In attempting to address Liberia’s energy challenges through sustainable energy, the project unintentionally worsened the crisis for many Liberians and pushed local communities towards environmentally harmful practices, leading to the degradation of local forests. Company practices contaminated clean drinking water, which remains inaccessible for these communities. Moreover, inadequate due diligence led to labor rights violations, unsafe working conditions, debilitating injuries, and sexual abuse, without medical care or compensation. This project adversely impacted communities’ livelihoods, environments, and drinking water.
The prevalence of inadequate due diligence across complaints raises concerns as MDBs continue to streamline requirements, risking unintended harm to local communities and the environment. The Liberia Biomass case underscores the repercussions of insufficient due diligence, emphasizing the need for thorough assessments to avoid exacerbating crises and to safeguard the wellbeing of communities.
As part of recent research on outcomes of IAM complaints, we have been outlining the landscape of remedy across complaints by tracking every ‘commitment’ or promise by a financial institution or client borrower recorded in complaint documents (including published dispute resolution agreements and management action plans).
One category of commitments we have been tracking across complaint documents is ‘environmental remedial commitments,’ which we have defined as “actions designed to return environmental spaces to their pre-project status (addressing pollution that has already occurred).” This data reveals numerous cases where MDBs have been found to contribute to environmental harm without adequately remediating it.
Interestingly, despite MDBs stated commitment to mitigating environmental harm, only 3 out of 221 eligible complaints filed by communities to IAMs, raising environmental issues, have resulted in ‘accomplished’ environmental remedial commitments.** This represents a mere 0.01% of eligible complaints. We have categorized commitments as ‘accomplished’ or ‘not accomplished’ based on information in publicly available complaint documents (e.g. monitoring reports). Complainants we’ve spoken to often disagree on whether the commitments made in their complaints have in fact been accomplished, in contrast with information provided in complaint documents.
In the case of the BR biomass project, the company abandoned the project in early 2013 without providing adequate redress to communities or addressing the environmental harm caused. The OA investigation report showed that OPIC’s failures in addressing risks contributed to the harm caused. However, the commitments made were mostly for policy and process changes within OPIC, leaving the community and environment without actual remedy for harm. Nearly a decade after the investigation report validated the community’s concerns and experiences, a community member describes the ongoing suffering:
“We won a case. We won something! [...] And what did we get from it? Nothing. Our living conditions continue to go down. [...] All the effort, and up to now, no result. From 2013 to the present, we have heard nothing. So our effort, their effort, was wasted for nothing.” (2023)
A just transition, vital for climate initiatives, demands remedy for communities harmed by climate financed projects, as well as remedy for their environment. The increase in climate finance investments amplifies the urgency of remedying harm for both communities and the environment.
A closer look at ‘greenwashing’ and remedy:
ADB, EBRD and IFC’s Shuakhevi Hydropower Project in Georgia
The Shuakhevi hydropower project in Georgia, co-financed by the Asian Development Bank (ADB), the European Bank for Reconstruction and Development (EBRD), and the World Bank’s International Finance Corporation (IFC), serves as a case study of ‘greenwashing’. As Georgia’s biggest hydropower plant, Shuakhevi HPP, a 187 MW plant, aimed to bring ‘clean energy’ to the region.
Despite early promises by Adjaristsqali Georgia LLC (AGL), a joint venture of India’s Tata Power, Norway’s Clean Energy Invest, and the IFC to minimize and address harm, AGL refused to acknowledge any responsibility for the adverse impacts of the project on the community and the environment once the harm was caused.
The project, employing drilling and explosion methods, resulted in rockfalls, landslides, damaged water sources, and changes in the village’s microclimate. Groundwater levels decreased, and local fish species disappeared from the river. Two months after becoming operational in 2017, Shuakhevi HPP’s tunnels collapsed at eight different spots, heightening concerns about geological risk in Makhalakidzeebi.
In 2018, the affected community turned to the IAMs of the ADB, EBRD and IFC. The IFC’s Compliance Advisor Ombudsman (CAO) and EBRD’s Project Complaint Mechanism (PCM) facilitated a dispute resolution process. The ADB’s Office of the Special Project Facilitator acted as an observer. In October 2020, after two protracted years of dispute resolution, the PCM concluded the dispute resolution without agreement or remedy.
In early 2019, the PCM registered a compliance review, concluding in May 2022. Noncompliance was found in setting the project’s area of influence too narrowly excluding affected villages, insufficient geological studies, failure to minimize adverse impacts on water resources, and failure to achieve ‘no net loss’ of biodiversity.
In November 2020, the case was transferred to the CAO’s compliance team for investigation. This investigation is ongoing, but the community has not received updates from the CAO for over a year.
The pervasive issue of ‘greenwashing’ within climate finance demands urgent attention. Within this context, greenwashing refers to organizations making misleading sustainability claims, masking their unsustainable activities with eco-friendly gestures to mislead stakeholders and obscure their true impact on sustainable development. This troubling trend is on the rise across financial institutions.
To take one example: hydropower projects, often falsely marketed as ‘green’ energy sources, are projects that raise a multitude of environmental impacts and human rights violations. A hydropower tracker, for instance, recorded 265 human rights and environmental issues linked to 32 small and large hydropower projects across four countries. Far from being a carbon-neutral energy source, hydropower dams can emit significant greenhouse gasses, including harmful methane. Studies reveal that dam reservoirs can cause more warming than coal-fired power plants. The negative impact on freshwater habitats and the declining biodiversity further raises questions about the sustainability of hydropower. Simply put, hydropower not only fails to contribute to climate mitigation and adaptation goals but may actively undermine them, leaving countries more vulnerable to climate change.
Out of all complaints raising issues of environmental harm from ‘green’ projects, almost a quarter relate to hydropower initiatives. The Shuakhevi hydropower plant in Georgia serves as a stark illustration of the tangible harm caused by projects that falsely market themselves as ‘green’. The community lamented how a 37-kilometer tunnel could be drilled without a geological assessment, resulting in numerous impacts on the environment including contaminating river water and impacting biodiversity. This underscores the true environmental cost of ‘greenwashing’ projects, as well as streamlining due diligence requirements.
Despite the evident environmental consequences that hydropower projects can have on the environment, some financial institutions such as the ADB continue to demonstrate a willingness to finance these projects. This calls for greater scrutiny, accountability and a re-evaluation of financing decisions to ensure alignment with climate goals.
Although the PCM’s compliance report found the EBRD to be noncompliant on a number of issues, the adverse impacts on the community and environment from this noncompliance remains unaddressed. For intance, the report highlights a failure to achieve a ‘no net loss’ of biodiversity, a standard that demands mitigating negative impacts on biodiversity through avoidance, minimization, restoration and offsetting. Despite this failure, the ‘commitments’ outlined in the complaint documents only impacted EBRD’s policies and procedures, offering no concrete environmental remedy for the biodiversity loss caused by the Shaukhevi project.
Since December 2021, the complaint at the CAO remains at the compliance investigation stage. It is still to be seen how seriously the CAO will take its mandate to facilitate access to remedy for project-affected people.
Further challenges that undermine climate goals of MDBs
Lack of transparency in climate finance
It is crucial to also acknowledge the difficulty of effectively tracking climate finance. The lack of transparency in climate finance poses significant accountability challenges, casting doubts on the climate finance numbers provided and the proper use of those climate-related funds.
For example, the World Bank, despite being the largest multilateral financier of climate action, reportedly cannot account for up to 40% of its climate-related spending. This lack of clarity prompts questions about the efficacy of these funds, making it challenging to say whether that money was properly spent on climate mitigation and adaptation. Enhanced disclosure practices are necessary to assess the impact and ensure that climate finance is meeting its intended objectives.
Financial intermediary lending undermining climate goals
Transparency must also be improved across investment chains in order to improve accountability, and prevent indirect support for environmentally harmful projects. Challenges arise in tracking the flow of funding from MDBs through financial intermediaries to sub-projects, leading to undisclosed support for projects with negative environmental implications.
For instance, despite the IFC’s commitment to stop funding new coal projects and align with the Paris Agreement, reports shows that the IFC was indirectly backing dozens of new coal projects throughout Asia through the use of financial intermediaries. This can be seen in the IFC’s investment in Rizal Commercial Banking Corporation in the Philippines, which in turn invested in 10 coal-fired power plants. Financial intermediary lending, then, can undermine the climate goals of MDBs.
As the world confronts pressing challenges, MDBs must prioritize quality and impact of projects to ensure a just and sustainable transition. As such, various issues must be addressed within climate finance, including ‘greenwashing’, the streamlining of due diligence, enhancing transparency, and providing remedy to communities for harm caused by climate financed projects.
* For this article, we categorize green projects as conservation and environmental protection, forestry, or energy projects. Environmental harm constitutes issues pertaining to biodiversity, the environment, water, and pollution.