ESTABLISHED COMMON ELEMENTS OF INTERNATIONAL GOOD PRACTICE
Background Memorandum for a Presentation before the OECD Trade Directorate Working Party on Export Credits and Credit Guarantees
By Bruce Rich
I. Introduction 2
There is now over a quarter century of established experience in OECD countries concerning the basic, internationally accepted and practiced principles of environmental assessment (EA). In the words of a recent Finnish Ministry of Foreign Affairs study examining environmental assessment and export finance (with specific reference to the situation of OECD ECAs), "the assessment of environmental impacts in various planning and decision making situations is an internationally accepted principle from large management schemes to quality management of small businesses." The use of environmental assessment for private sector finance, and for public support of private sector activities, is also long established in OECD countries. Within the last half decade multilateral financial institutions such as the World Bank's IFC and the EBRD that provide sector financial support have also promulgated new, explicit assessment guidelines and environmental standards. Entities such as the United Nations Environment Programme (UNEP) and the International Association for Impact Analysis (IAIA) have promulgated documents embodying international principles of good practice for environmental assessment. In fact, the Finnish Ministry of Foreign Affairs study cited above examines in some detail the EA policies of the IFC, EBRD, United States Export-Import Bank and Overseas Private Investment Corporation, and the Inter-American Development Bank, and also summarizes basic principles of international good practice required for "effective and credible application of EA."
Thus, though there is an enormous literature on EA, the international consensus on basic elements of good practice for private sector, public sector, and mixed private-public undertakings is clear and based on decades of experience. This paper summarizes the principles of this good practice, as set out in particular in the policies and documents cited above which are both representative, and of special, direct relevance for Export Credit Agencies. Any reasonable compliance with the mandate of the OECD Ministers and the 1999 G8 Summit Declaration to develop common environmental approaches and guidelines would, to be credible, embody as a minimum, common commitments and common, specific approaches and guidelines that include the internationally recognized elements of good practice in environmental assessment. These principles are procedural, but specific, and binding, involving such elements (described in more detail below) as screening, scoping, consultation with, and disclosure of information to affected and interested stakeholders, consideration of alternatives, etc.
II. Environmental Standards
Specific environmental standards?such as pollution and emissions levels for particular industries etc.?are invoked by the environmental assessment process depending on the specific investment or project concerned. It can be argued that while the EA procedure must be clearly defined and mandatory to have any credibility, the application of environmental standards in specific cases can allow for some flexibility, with reference to normally applicable quantitative standards. This is the approach of the World Bank Group, which has very specific EA procedures, and a voluminous reference work on environmental standards (the Pollution Prevention and Abatement Handbook). The Handbook standards have the status of recommended good practice. However, it should be pointed out that there is a burden of proof on World Bank/IFC management to demonstrate in specific cases the need for variance from the criteria of the Pollution Prevention and Abatement Handbook. This establishes a reasonable balance between the need for flexibility concerning application of environmental standards (a major concern of ECAs, but also for the IFC) and the need for a clear baseline of acceptable environmental performance for specific sectors.
The key point is that environmental assessment guidelines will not have much credibility if they do not invoke specific, common internationally recognized quantitative standards as a baseline for environmental performance?at the very least as normally expected good practice. This can mean higher standards than host country standards, when the international standards are more rigorous. The World Bank/IFC Pollution Prevention and Abatement Handbook is increasingly cited as a source of good practice for environmental standards by a number of bilateral ECAs and investment insurance agencies, as well as by private companies operating in the international sphere. (It should be emphasized that World Bank standards fall short of national standards in some cases, and are constantly being updated). The US Overseas Private Investment Corporation (OPIC) expects projects to meet both host country (national) standards and World Bank standards, and, where there are gaps in World Bank standards, relevant U.S. federal standards and standards of other international organizations (e.g. the World Health Organization).
The European Bank for Reconstruction and Development (EBRD) expects that its investments meet both national and EU environmental standards, and where EU standards do not exist, national and World Bank standards. Here too some flexibility is built into the application of these standards: If they "cannot be met at the time of Board approval, operations will include a programme for achieving compliance with national and EU or national and World Bank standards. In addition, the Bank will make recommendations and encourage project sponsors to bring their existing operations at the project site into compliance with good international practice and standards within a reasonable timeframe." The EBRD procedures also note that "where alternative approaches to those described above are required by an operation ? for example, as may be expected at the present time for most financial intermediaries ? such approaches will in all cases be subject to Board consideration on a project-by-project basis. In all cases the standards applying to the operation will be an integral part of the Board documentation."
III.Basic Elements of Good Practice in Environmental Assessment
The basic elements include the following:
Responsibility for the EA
The project sponsor is generally required to prepare the EA, but it is the responsibility of the financing institution to make clear what its environmental guidelines and standards are, and to ensure that at each step the project sponsor or recipient of its financial assistance is following and complying with its guidelines and standards.
Screening ? conducted by the financing agency, determines whether or not a proposal should be subject to EA and, if so, at what level of detail. For example, the IFC evaluates a project as "Category A," requiring a full EA, if "it is likely to have adverse environmental impacts that are sensitive, diverse, or unprecedented." The IFC, as well as other agencies, provides illustrative lists of the kinds of projects that will normally trigger a category A screening: large dams, large-scale forestry operations, large industrial plants and agro-industry development, projects involving large resettlement of local populations etc. A project classified as Category B by the IFC "if its potential adverse environmental impacts on human populations or environmentally important areas…are less adverse than Category A projects. These impacts are site-specific; few if any of them are irreversible; and I most case mitigatory measures can be designed more readily than for Category A projects." Accordingly, Category B projects require a significantly less comprehensive EA document. IFC "Category C" projects have minimal or no adverse environmental impacts, and do not require an EA.
For financial support of privatizations and/or modernization of existing and old facilities is involved (a major issue in economies in transition), the IFC requires that news facilities financed by IFC, or the facilities to be privatized, "must conform to applicable IFC policies and meet applicable guidelines." This usually means that the project sponsor "retain an independent consultant to complete an environmental audit of the existing plant" or facilities. The audit identifies measures to mitigate environmental, health and safety conditions that do not meet IFC standards, and these measures are incorporated into a Corrective Action Plan to be implemented by the sponsor.
Finally, the IFC, OPIC and other agencies have lists of categorical prohibitions of activities and projects that they will not finance under any conditions because of their totally unacceptable?and in some case illegal under international law?environmental and social impacts. In the case of the IFC examples include trade in wildlife or wildlife products regulated by the CITES Convention (The Convention on International Trade in Endangered Species of Wild Fauna and Flora), production or trade in products containing PCBs (Polycholorinated biphenyls?"a group of highly toxic chemicals…likely to be found in oil-filled electric transformers, capacitors and switchgear dating from 1950-1985") etc.
Scoping ? conducted by the project sponsor, it is the first activity in the process for a full EA; it identifies the issues and environmental and social impacts that are likely to be important and establishes terms of reference for the EA. Public consultation and disclosure of information, particularly with local, project-affected populations, is critical to scoping, otherwise potential impacts and relevant issues may not be fully identified. Scoping is one of two points in the EA process where the IFC requires public consultation and disclosure of information to affected and concerned stakeholders.
Preparation of the environmental assessment
The EA document, for a full environmental assessment, is generally expected to include the following elements, as a minimum (the following list is from the UNEP 1987 statement, but reflects, with very minor variations, generally accepted practice):
(a) a description of the proposed activity; (b) a description of the potentially affected environment, including specific information necessary for identifying and assessing the environmental effects of the proposed activity; (c) a description of practical alternatives, as appropriate; (d) an assessment of the likely or potential environmental impacts of the proposed activity and alternatives, including the direct, indirect, cumulative, short-term and long-term effects; (e) an identification and description of measures available to mitigate adverse environmental impacts of the proposed activity and alternatives, and an assessment of those measures; (f) an indication of gaps in knowledge and uncertainties which may beencountered in compiling the required information.
For (b) ("a description of the potentially affected environment, including specific information necessary for identifying and assessing the environmental effects of the proposed activity"), more specific information is often required, such as biological and socioeconomic baseline data and an analysis of the policy, legal and administrative framework in which the proposed investment is taking place. In the case of (e)?description of measures to mitigate adverse impacts?the IFC generally requires that the project sponsor prepare an enivronmental action plan specifying in detail the "mitigation, management, monitoring, and institutional measures to be taken during implementation and operation to eliminate adverse environmental and social impacts, offset them, or reduce them to acceptable levels."
Assessment and mitigation of related social impacts
International good practice in environmental assessment necessarily includes assessment of the social impacts of environmental disruption associated with investment decisions, for example, involuntary resettlement, destruction of cultural and archaelogical heritage, and impacts on indigenous peoples and socially vulnerable ethnic minorities. The World Bank Group/IFC has separate guidelines and policies for each of these issues, which are triggered generally by the initial environmental assessment process.
Consultation with interested stakeholders and public disclosure of environmental information
A critical principle embodied in all good practice documentation of EA preparation calls for consultation with affected and interested stakeholders, and release of environmental information, including the draft EA, before any decision is made to go ahead with the project or investment. The IFC requires consultation and information disclosure at least twice for a Category A EA: first, during the scoping process (see above), and second, after the draft EA is prepared and before project approval. The recent Finnish Ministry of Foreign Affairs study on environmental assessment as it relates to export finance reiterates this principle, the sina qua non of credible and effective environmental assessment: "effective and credible application of EA requires consideration" of whether the "EA includes effective information disclosure and stakeholder participation."
Specifically, the Finnish study summarizes the following elements as inherent in "effective information disclosure and stakeholder participation":
"[the] EA must be an open and informative interactive process which aims at transmitting and considering the stakeholders views. Does the institution inform about the projects under consideration? Is the information produced in the EA process publicly available? Is stakeholder participation included in the process? How and at what stage of the process is participation organized? Are the financing decisions and the environmental conditions included in the contracts made public?"[emphasis in original]
The issues of stakeholder consultation (and who the stakeholders are), transparency and disclosure of information are of outstanding and indispensable importance for the success of environmental assessment, and indeed lie at the heart of the whole process, the purpose of which is to generate needed information from diverse sources to improve the design and outcome of investment decisions. Since this has also been a particularly sensitive issue for ECAs, its importance from the private sector perspective is further discussed in section III below.
Clear, publicly available, criteria for environmental review and decision
There must be clear, unambiguous criteria for evaluating environmental assessments, and for incorporating their findings into decision making concerning ultimate approval of the investment or project proposal. An ad hoc, project by project approach, or an approach vague in terms of its decision criteria, or one that leaves undefined, basically limitless discretion with the financing agency is not credible international good practice. It may create costly confusion in ECA clients as to what environmental due diligence is required. If environmental guidelines and environmental assessment are not to be rendered ultimately meaningless, there must publicly clear criteria and standards for approving projects, requiring modifications of projects, or rejecting them based on environmental guidelines. The Finnish Ministry of Foreign Affairs study asks the following questions in this regard:
"Does the institution check the adequacy of the information produced? Is the information produced or is main contents used as a part of the decision-making material? Do the propositions for a decision take a stand on the environmental sustainability of the project? What kind of environmental standards are required for the project? Can environmental terms be included in the financing contract, if necessary?" [emphasis in original]
Examples of such clear decision criteria are the categorical exclusions of the IFC, OPIC and other agencies, and the procedural requirements of the EA process. Others include the requirements of meeting specific standards and of carrying out environmental corrective measures, and action plans. But existing good practice, such as that of the IFC, clearly allows for some flexibility on a project by project basis in determining how these standards might be modified against an existing baseline, such as that of the Pollution Prevention and Abatement Handbook.
The IFC requires a monitoring plan and reporting as part of the Environmental Action Plan required for a full EA. The Finnish Ministry of Foreign Affairs study summarizes the following criteria: "Is the developer given sufficient monitoring and reporting obligations? Does the financing institution actively and systematically monitor the projects? Does the financing institution interfere with the neglect of environmental obligations, if necessary? Does the institution take into account learning from experience with the view to making improvements in the application of the EA process?"
The Need for ECAs to adopt international good practice in environmental assessment
It should be remembered that all of the above elements simply summarize existing international good practice concerning public financial support for private sector investment, project finance, and exports already in existence for some time. For the large part of OECD ECA activities, these elements would apply in part or not at all. Most if not all short term trade finance would be totally exempt from environmental assessment. Even for major investment undertakings and projects, only a minority would fall into what the IFC would categorize as "Category A," requiring the elements of full environmental assessment outlined above. For example, in the IFC's fiscal year 1996 some 264 projects were financed, of which only 15 were Category A, 135 Category B, and 72 were Category C (another 42 were investments supported through Financial Intermediaries, for which the IFC has a different procedure).
IV. The Keystone of Good Practice in Environmental Assessment: Transparency, Stakeholder Consultation, Disclosure of Information
Perhaps the most difficult issue for many ECAs in considering common environmental guidelines, of which environmental assessment is the most basic and important, lies in the closely associated issue of greater transparency, public disclosure of information, and consultation with affected and interested stakeholders. Yet greater transparency and public disclosure of information are not peripheral issues in environmental assessment, they lie at its heart. Environmental assessment without public disclosure of environmental information and consultation with affected stakeholders is a non-sequitur, a contradiction in terms, since generating and disclosing information with other concerned parties besides the project sponsor and financer is at the core of the process. In the case of private sector finance, this concern naturally has to be weighed with the concern for keeping certain information confidential within a certain time frame to protect client commercial competitiveness.
There are already examples of good practice, however, where these concerns have been balanced, the IFC perhaps being the most recent major example, its new environmental assessment and information disclosure procedures having been finalized in late 1998. The IFC's "Good Practice Manual" on "Doing Better Business Through Effective Public Consultation and Disclosure" provides very specific, step by step guidance for private sector clients on how to carry out public consultation and information disclosure activities in connection with IFC guidelines on environmental assessment and information disclosure. The IFC's former Executive Vice President, Jannik Linkbaek, notes that although the good practice experience and guidelines in the Manual were "initially designed to be an integral part of IFC's procedural framework, I feel that the subject is of relevance to private sector investors at large." He cites three major reasons why project sponsors should develop "management structures and skills to ensure long-term dialogue with affected communities." First, "consultation and disclosure with affected people and groups brings local knowledge to a project's design, construction, and operation, thereby increasing efficiency and avoiding future costs." Second, "candid, two-way communication can help to identify and solve problems and conflicts while they still can be resolved in an atmosphere of trust between the sponsor and other interested parties, such as community groups, NGOs, and government agencies. Third, "the long-term sustainability of investments is critically dependent on good relations with all stakeholders."
The Manual summarizes three increasingly recognized commercial and business advantages for project sponsors?and OECD ECA clients?provided by greater public information disclosure and consultation. The first is reduced financial risk by gaining and maintaining local public and government support for an investment, which experience shows can be delayed by political opposition, legal action or local social unrest. Second, direct cost savings can be achieved through cost-effective mitigation measures identified through early information exchanges with affected populations and interested researchers and NGOs. The third is increased market share for future investments through the positive impact on the project sponsor's local, national and international reputation. Similarly, lack of transparency and consultation can lead to delays in closing transactions that otherwise be avoidable (though the intention is often to avoid the shorter delay that disclosure and consultation may entail), a weakened negotiating position and tarnished reputation for both the sponsor and the financing institutions?so-called "reputational risk."
The recent mandate of the OECD Ministers and the G8 to develop common environmental approaches and guidelines should be viewed as an opportunity for OECD ECAs to help their clients respond to these increasingly widely recognized elements of good international business practice.
Who are the stakeholders?
The IFC good practice manual identifies four groups of primary stakeholders that may be affected by, or concerned with a specific investment proposal or transaction: the private sector (the project sponsor, associated contractors, industry associations); project affected people in the project area; public sector players?national and local government agencies, and bilateral and multilateral financial institutions; and national and international research and advocacy NGOs, religious organizations, university and research centers.
V. The Need for Public Disclosure and Stakeholder Consultation in the OECD Working Party Process
The same principles of stakeholder consultation and public disclosure of information that are an integral
part of the environmental assessment process are of equal importance for the OECD Working Party on
Export Credits and Credit Guarantees in elaborating common environmental approaches and guidelines to
respond to the mandate of the OECD ministers and G8. If the development of common approaches and
guidelines takes place without public consultation and disclosure, there is a very considerable risk that
whatever is enunciated will lack legitimacy and ownership among critical stakeholder constituencies, as well
as not take advantage of potentially useful technical contributions. This point was raised last August at the
Third OECD Round Table on Sustainable Development, held in Oslo, Norway August 30 and 31. The
President of the World Resources Institute, an internationally respected environmental research and policy
think tank, shared with OECD representatives at the Round Table an illustrative "Stakeholder Map for ECA
Environmental Guidelines Consultation," accompanied by an outline of "Critical Elements of a Public
Consultation Process." These documents in turn have been shared with the Working Party Secretariat.
They set out basic principals and prerequisites for such a consultative process, with reference to several
international processes that may serve as analogies or precedents.