Social Risks of MDB-backed Projects Going Unnoticed
Lack of community consultation and accountability frameworks are undermining efforts to fund a just transition, campaigners argue.
Multilateral development banks (MDBs) need to do more to identify and mitigate potential societal harms when financing companies and projects contributing to the net zero transition, according to the NGO Accountability Counsel.
“When considering how to achieve a just transition, the main thing missing is ensuring efforts are more community-centred to achieve the best impacts on the ground,” Caitlin Daniel, Communities Co-director at the Accountability Counsel, told ESG Investor.
“The way MDBs are thinking about impact has been oversimplified to [focus on] getting money out the door to big businesses and financial institutions – assuming that the positive impacts they are supposed to be ensuring are going to flow from that,” she said. “What we’re seeing in practice is that societal impacts are not being tracked, and there isn’t enough transparency or accountability in the incentive structures and systems of these MDBs to ensure that benefits are being delivered.”
The World Bank recently issued a US$225 million bond to address deforestation across the Amazon rainforest via reforestation projects that will produce carbon removal units. The bank claims the bond will provide social co-benefits, such as providing equitable and quality livelihoods for local communities in Brazil.
The transaction was hailed as a positive innovation – partly due to a partnership with a local firm that would build partnerships on the ground. But the past record of MDBs in the region and more broadly invites caution.
Societal factors still “don’t feature enough in these high-level discussions”, said Daniel.
Local communities
MDBs provide catalytic capital across a variety of projects globally to incentivise investment from the private sector. Increasingly, these projects are targeting sustainable development and climate-related solutions – particularly in emerging markets and developing economies (EMDEs).
“One of the most problematic issues with this [blended finance model] is that the local communities are not part of this process,” said Alexandre Andrade Sampaio, Communities Associate at the Accountability Counsel. “The same could be said with closing the large finance gap to achieve the UN Sustainable Development Goals (SDGs). The SDGs are incredibly important for achieving human rights, but local communities have been very poorly consulted in terms of what the capital gap to achieve the SDGs really entails.”
An example of an MDB-backed company that is failing to account for societal impacts is MHP – the largest poultry producer and exporter in Ukraine. It has received financing from the European Bank for Reconstruction and Development (EBRD) and other MDBs.
As their investments in MHP have not been labelled as ‘high-risk’, MDBs have not required the company to carry out or disclose the potential environmental and societal harms of its work, which involves rearing and processing millions of animals, heavy usage of land and water, and high annual greenhouse gas emissions – all of which have negative impacts on surrounding communities, such as dangerously high levels of nitrates in local wells.
“We are in touch with local community members who have been complaining to these MDBs about MHP for years, citing social and environmental impacts – for example, pointing out how MHP is pushed small- and medium-sized firms out of the Ukrainian agribusiness sector,” said Daniel. “Yet, we’re seeing these MDBs repeatedly reinvest in MHP as if this is the best way they can find to promote food security in Ukraine and globally,” she said.
Increasing investment from MDBs and development finance institutions has resulted in a five-year high of US$15 billion in new sustainability-focused blended finance transactions last year, according to blended finance network Convergence. Deals have covered projects centred around sustainable agriculture, renewable energy and health and education across EMDEs.
Social reform
There have been ongoing discussions around the need to reform the role MDBs play within the global finance architecture, to ensure they bolster the world’s climate transition.
At COP27, MDBs committed to tackling sustainable development, climate change and nature loss “in an integrated manner”. They promised to collectively expand their support for countries’ low-carbon, climate-resilient transitions by formulating policies to spur systemic change, defining specific investment plans, mobilising financial resources – including public, private and blended finance. The group also committed to undertaking analyses to identify priority mitigation and adaptation actions for individual countries.
Last year at COP28, MDBs published a joint statement outlining their progress collaborating with each other. Incoming World Bank CEO Ajay Banga also committed to devoting 45% of the institution’s annual finance to climate by 2025.
Earlier this year, the World Bank revealed its corporate scorecard, which outlined how its financed projects will be evaluated across 22 key performance indicators. These indicators span both climate and social factors, such as CO2 emissions and social inequality.
In addition, local communities must be given a seat at the table with MDBs when considering the potential impacts of climate-focused projects, Andrade Sampaio insisted. He added that private investors involved in MDB-backed projects can also look to “champion the values” of the binding treaty on business and human rights when engaging with these investment opportunities.
“Transparency is a pivotal first step [when considering MDB-backed project financing],” said Daniel. “For transparency to be meaningful, we need to see it getting more specific over time.”
The introduction of a well-functioning accountability framework makes money more trackable, enabling MDBs to exercise necessary levels of control and influence, Daniel added.
“MDBs need to be considering the net impacts of these projects,” she said. “If they limit the conversation to climate and aren’t looking at the negative social impacts, too, then they are only having half a conversation.”
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