Green safeguards yield higher economic returns

The launch of the Sustainable Development Goals (SDGs) and agreements in Paris finally signalled the realisation that we can no longer achieve our economic ambitions by endangering the environment and society. But even as countries agreed on the need to nurture sustainability, it has come under fire from the mistaken notion that doing so will slow the pace of growth.

A case in point is the severe pressure on environmental and social safeguards which international banks apply to deflect damages that projects can cause. A spike in infrastructure investment is expected in Asia not only from the World Bank and the Asian Development Bank (ADB) but also from the two new entrants: the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB). More funding for transport, energy and cities can be good for growth, but without adequate mitigation, roads harm habitats, dams displace communities, slum rebuilding hurts livelihoods and climate change blocks growth.

Worrisome proposal

Thus, it is worrisome that a current proposal at the World Bank, an outline at AIIB, and emerging thinking at the NDB are poised to soften these defences on the premise that it will speed growth. Brazil, India, Indonesia, Russia and others have also taken steps to weaken protection related to land acquisition, resettlement, and deforestation. The reality, reflected in countries’ support for the SDGs and the Paris accord, however, is that for growth to go forward, it must be environmentally and socially concordant.

After all, the logic of having safeguards is grounded in economic theory. Whether it is displacing people from their homesteads, polluting the air we breathe, or jumping a red light and endangering others, regulatory protection is required to prevent spillover damages (or externalities). Welfare economics calls for enforcing regulations or setting equivalent taxes rather than just announcing flexible standards.

Experiences over the past decades establish the necessity for safeguards. In their absence, new road projects in forest areas of Brazil and Indonesia have aided the encroachment of agriculture and livestock and massive deforestation. The needed scale of the response can be vast: the Sardar Sarovar Dam on the Narmada river eventually displaced over 2,00,000 people, while China’s Three Gorges Dam displaced six times as many. And ineffective measures can be very costly. The 1978 Amoco-Cadiz tanker spill on the Brittany coastline of France led to claims of $250 million, while the costs in the 2010 BP-Amoco Gulf of Mexico oil spill in the U.S. were 100 times as much.

The central point is that compared to these benefits (or avoided damages), the cost of having safeguards is typically small — often 3 per cent or less of the project cost. That means safeguards promise high economic returns. But to get these potential gains, experience tells us that four lessons must be heeded.

Lessons to be heeded

First, safeguards must be legally binding, and compliance should be enforceable. Standards that are to be met flexibly during a project’s life will not suffice in ensuring protection against spillover damages. Sure, flexibility can speed up project approval, but for risky projects, the resulting damages could just delay project completions.

Second, international policy should govern safeguards, rather than national systems that by law or in practice are not yet equivalent. Recent years have seen several disasters under national systems; for example, the collapse of a garment factory near Dhaka, Bangladesh; a mining disaster involving a dam burst in Minas Gerais, Brazil; and explosions at a container storage station in Tianjin, China.

Third, it is not enough to have systems in place, but implementation and oversight need strengthening. In particular, downstream supervision of how safeguards are being followed on the ground needs to be bolstered, but without weakening upstream regulation. Monitoring of impacts is essential, not by the investor alone but also by an independent party.

Fourth, the efficiency with which processes and procedures are followed can usually be improved a great deal. Greater differentiation in the treatment of high- and low-risk projects can help. Project processing can be speeded through such efficiency improvements, and not through a weakening of the regulation.

Effective safeguards are needed more than ever both at the established lenders and the newcomers. How the international banks apply these defences will be an indication of their true commitment to the SDGs and the climate accord.

(Vinod Thomas is Director General of Independent Evaluation at the Manila-based Asian Development Bank, and former Senior Vice President and Director General of Independent Evaluation at the World Bank.)

For growth to go forward, it must be environmentally and socially concordant