Impact of Ecological Information on Investment Decision-Making in International Financial Organizations
by Predrag Bjelić, M.B.A. [1]
paper presented at the XI International Conference "Danube - River of Cooperation", November, 17-19 2000
Economy and the Environment
Economics, being the science which studies economic phenomenon in limited-resources environment, is turning its attention to natural resources in the last decades of the 20th Century. The natural resources, as the one of the factors of production, are becoming scarce. The natural environment is polluted as a result of the developed industry. The world market does not stimulate producers to include nature-preservation costs in its price calculations. But natural environment is a main condition for survival of the mankind and production organized by men. The scientists have realized that something must be done in order to stop pollution of the environment and to start its revitalization. The cost of "cleaning" the planet must be paid by those that have contributed most to its pollution. Environmental degradation consists of air pollution, de-forestation, overfishing, global warming or depletion of ozone layer.
One of the first things to do is to stop further pollution. But we cannot expect that developing countries should renounce its economic growth because of that. That is why the international financial institutions had come up with the idea of sustainable development. This concept proposes that future growth plans take into consideration only the growth alternatives that do not further pollute the environment. First to define this concepts was World Commission on Environment and Development (1987), also known as the Brundtland Commission, as "development that meets the needs of the present without compromising the ability of future generations to meet their own needs". The World Bank view is that "successful economic development depends on the rational use of natural resources and on reducing as far as possible the adverse environmental impacts of development projects". The natural resources are very important production factors. Even if capital and technology are gaining in importance as a factors of production against natural resources and labor declining importance, we must keep in mind that clean environment is a precondition not only for production but for human existence.
Nowadays globalization is the main topic of discussion among scientists. Many of them point out the main positive effect of this process, like global economic integration, technological development, integration of business practices, market integration and liberalization etc. Some of them think that process of globalization is to blame for increasing global pollution. The developed countries are transferring their "dirty" industries to developing countries that have much more liberal ecological laws. This process is known as deindustrialization. At first glance everybody seems happy. The developed countries are becoming less polluted and the developing countries are becoming developed with the growth of new industries. But global pollution remains wherever those industries relocate. Some views suggest that free trade and liberalization of international exchange of goods and services led to further pollution of the environment. This is not a proven fact. We can only state that raise in technology transfer between countries, especially between divisions of the same company, can only lead to new environmental friendly technology.
Everyone knows that global pollution is a global issue. That means that it can be dealt with only on global level because pollution does not recognize national boundaries. Many actions have been undertaken on a global level like adoption of International Conventions that dealt with environmental problems. The most important of them are Montreal Protocol (1987) and United Nations Framework Convention on Climate Change (1992) with Kyoto Protocol (1997).
Within the Economics the new discipline that deals with environmental factors has emerged - Environmental Economics. The main aim of this discipline is discovering methods of economic development that does not endanger the environment. Practically, Environmental Economics analyze optimal use of production factors that will result in maximal output and minimal pollution of the environment.
In order to analyze the effects of production on global environment some criteria must be establish. The indicators that measure the present and future state of environment must be adopted in order to monitor those effects. Main environmental indicators had been developed by the United Nations Statistics Division (UNSD) in cooperation with Inter-governmental Working Group on the Advancement of Environment Statistics and presented for the first time in 1995. The classification of those indicators is presented in table 1.
Table 1: Main Environmental Indicators
| Air / Climate | Land / Soil | Water | |
| Activities and events | emission of CO2 - emission of SO2 - emission of NOx - consumption of ozone depleting substances | land use change - livestock per km2 - use of fertilizers | discharges into freshwater -annual withdrawals of water - consumption of water per capita |
| Impacts and effects | concentration of CO2 - concentration of SO2 - concentration of NOx - concentration of O3 - concentration of TSP - Air quality index | area affected by soil erosion - land affected by desertification - area affected by salinization | concentration of lead, cadmium and mercury and pesticides in water - concentration of fecal coliform |
| Responses to impacts | - expenditure on air pollution abatement - reduction in emissions and consumption | protected areas as a % of total area | waste water treatment - access to safe drinking water |
| Inventories, stocks and background conditions | weather and climate conditions | - arable land per capita | - groundwater reserves |
World Bank Environmental Policy
With a rise in global environmental concern and more frequent appearance of environmental problems the World Bank had to take action in this area. "As a development institution, the Bank's overarching concern is not only lending money, but helping countries make the policy and institutional choices that benefit poor people most and facilitate equitable and sustainable growth". The Environmental Economics and Indicators Unit (EEI) of the World Bank was formed at the end of 1995.
The World Bank Group is now working ona a environment strategy that will enhance the Bank`s effectiveness in addressing environmental challenges in its member countries. The Bank's new strategy aims to strengthen the Bank's environmental agenda and better integrate environmental concerns into development, which is the main aim of all World Bank operation.
The Bank began in 1999 the process of formulating a new corporate environment strategy that it will present to the Board of Directors in early 2001 after thorough consultations with civil society, governments, and other stakeholders. The main goal of the strategy is to better align the Bank's environmental work with its central mission of poverty reduction, either through environmental interventions that directly benefit the poor or through changes in governance and public policies that foster sustainable economic growth.
The World Bank is making sure that all new project have no negative effect on the environment. The main instrument for that purpose is Environmental Assessment (EA). This method is used to "examine the environmental risks and benefits associated with Bank lending operations". The main environmetal risks, that are studied, include: human health effects, habitat loss, pollution levels and lend use change. Environmental Assessment is there to ensure that project options under consideration are sound and sustainable.
The environmental assessment procedures are laid down in World Bank document OP/BP/GP 4.01 (Operational Policy, Bank Procedures, Good Practices). This document states that "environmental costs and benefits should be quantified to the extent possible, and economic values should be attached where feasible". Moreover, the Operational Policy on Economic Evaluation of Investment Operations (OP 10.04), another World Bank document, states that environmental assessment findings and recommendations should be taken into account in project appraisal and supporting benefit-cost analysis. This process include following considerations: "linkages with social assessments, analysis of alternatives, public participation and consultation with affected people and NGOs and disclosure of information". It is broad in scope because it takes into account not only the natural environment but the human health and socio-cultural aspects as well. The process of environmental assessment of a project runs parallel with other types of project assessment, ensuring that environmental considerations are given appropriate weight in project selection.
The public participation and availability of ecological information on certain projects are important characteristics of an environmental assessment process.
The Environmental Assessment process is organized in several stages. In the preparation stage of project assessment main environmental assessment activities are: Environmental screening, Environmental Assessment team selection, Environmental Assessment preparation and Review of Environmental Assessment. In the appraisal stage the Environmental Assessment is incorporated in project design and documentation. In the negotiations between Bank and the Borrower the agreements must be reached on environmental issues, according to findings of Environmental Assessment. And finally, in project implementation stage the Environmental supervision is organized in order to monitor the real effect of a project to a environment.
Table 2: Environmental Assessment Activities in diferent Project Assessment Stages
| Project stage | EA activity | Associated economic analysis activity |
| Preparation | Environmental screening | Potential environmental costs and benefits are considered on a preliminary basis |
| Preparation of EA TORs | Requirement to quantify environmental impacts and assign monetary values spelled out | |
| EA team selection | EA team includes resource or health economist, as appropriate | |
| EA preparation | EA team analyses the impact of project alternatives and compares them, using monetary values on their costs and benefits, where feasible | |
| Review of EA | The Bank reviews the EA report, including the economic analysis | |
| Appraisal | Incorporation of EA into project design and documentation | EA findings, including the environmental costs and benefits, are incorporated into the project economic analysis and the estimation of the economic rate of return |
| Negotiations | Agreements reached on actions to be taken, based on the findings of the EA | |
| Implementation | Environmental supervision | Supervision includes monitoring the project's actual environmental costs and benefits |
The aim of World Bank Environmental Strategy is that economic growth does not come to the expence of present and future ecological systems.
European Environmental Stadards and EBRD activities
The European Bank for Reconstruction and Development (EBRD) is comitted to "promote in the full range of its activities environmentally sound and sustainable development". It has a mandate to promote environmentally sustainable development in all of its activities. The EBRD recognizes that sustainable development is a fundamental aspect of sound business management and that the pursuit of economic growth and a healthy environment are inextricably linked. The EBRD is one or few international financial institution with such a proactive approach to the environment because it combines support for economic development with sound environmental practices. This is particularly important because the environment is in bad condition in countries of Central and Eastern Europe and countries of Former Soviet Union due to inappropriate previous policies and ecological mismanagement.
The various ways in which the EBRD promotes environmentally sound and sustainable development are described in the Bank's Environmental Policy. One specific step taken by the Bank to address its mandate and the General Principles and Objectives set out in the Policy is to ensure that all of its investment and technical cooperation activities undergo environmental appraisal as part of the overall financial, economic, legal and technical due diligence which is carried out. The Environmental policy was revised in 1996.
The general principles and objectives of the EBRD`s environmental policy are as follows:
- ensuring, through environmental appraisal process, that EBRD projects are environmentally sound and that their environmental performance is also monitored;
- particular importance is given to operations which promote energy and resource efficiency, waste reduction, resource recovery and recycling, the use of cleaner technologies and the promotion of renewable resources, and to other operations with primarily environmental objectives;
- providing training programs and other mechanisms for building and enhancing the necessary capacity for environmental management in its countries of operations;
- contributing to the implementation of multilateral environmental agreements, such as the Framework Convention on Climate Change, the Montreal Protocol and the Convention on Biological Diversity;
- cooperation with international financial institutions, the European Union, bilateral donors and UN organizations in promoting a coordinated approach to effective environmental interventions in the region;
- fostering the principles of public consultation within its region of operations, in order to ensure that information is provided to interested parties concerning the Bank's environmental activities and that views expressed are taken into account in the preparation of projects;
- pursuing the best practices in environmental management, including energy efficiency, waste reduction and recycling, in Bank's internal operations.
The EBRD implements its environmental mandate by financing projects with specific environmental objectives and by applying environmental requirements to all of its operations. These include investments to reduce atmospheric emissions and industrial waste-water discharges as well as projects to promote energy and resource efficiency, waste recovery and recycling, and cleaner technologies. About 20 per cent of the Bank's financing contributes to environmental improvements.
The Environmental policy principles and objectives are implemented through EBRD Environmental procedures. These procedures are the basic instrument for environmental appraisal process of every project. The Procedures have two basic aims:
- to ensure that the environmental implications of the Bank's activities are taken into account early on in the planning and decision-making process and are properly reflected in the preparation, approval and implementation of loans, equity and other types of financing;
- to identify ways in which the Bank's investments can be enhanced through the provision of environmental benefits or improvements.
EBRD operations undergo environmental appraisal in order to help the EBRD to decide if an activity should be financed and, if so, the way in which environmental issues should be incorporated in operation financing, planning and implementation. An overall objective of environmental appraisal is to improve decision-making. Environmental investigations are normally undertaken early in the EBRD's project approval cycle to allow time to identify environmental concerns and opportunities, to plan mitigation and enhancement measures, and to obtain agreement on action to be taken before the project is reviewed by the Bank's Board of Directors.
A starting point of a environmental appraisal is indentification of laws and regulations that are applicable to a specific project appraisal. National nad local environmental laws and environmental procedures must be fully respected and EBRD environmental procedures are subordinated to these procedures. Some internatinal legal instruments must also be taken into account, like "Convention on Environmental Impact Assessment in a Transboundary Context" (the Espoo Convention).
One more reason why environmental assessment must start in early stages of overall project assessment is because costs of ongoing compliance with applicable environmental legislation and standards must be calculated in the start. These costs are a part of total operating cost and a major element in cost-benefit analysis of a project.
Environmental appraisal is a part of an overall project appraisal also consisting of economic, financial and technical appraisal.
Environmental appraisal is, essentially, the responsibility of the Project Sponsor. He gathers information on environmental effects of the project even before the project is proposed to EBRD. On the basis of material submitted by the Project Sponsor the environmental assessment is carried out. Environmental investigations are undertaken or commissioned by Project Sponsors to provide environmental information satisfactory to the Bank. Sometimes preliminary information provided by the Project Sponsor is insufficient; in which case an Initial Environmental Examination (IEE) will be required. The role of EBRD is to determine the type of appraisal needed, to provide guidance on how it should be conducted, to review the results, and to ensure that findings are properly reflected in operation financing and implementation.
Environmental investigations measure the impacts of a specific project on the physical environment, health and safety and socio-economic impacts.
The main types of environmental investigations carried out on Bank operations, in the case of direct investments, are:
- environmental impact assessments
- environmental analyses
- environmental audits
Environmental impact assessments and environmental analyses are carried out to identify, predict and assess the future environmental impacts associated with a particular operation where the impacts are potentially significant and cannot be readily identified, assessed or mitigated. The scope of Environmental Analysis is usually more limited than the scope of Environmental impact assessments. An Environmental Audit identifies past or present concerns and potential environmental and health and safety risks and liabilities associated with the operation.
The results of environmental investigations are the base of Environmental Action Plan (EAP) creation. This Plan is developed by the Project Sponsor and its aim is an agreement concerning key environmental, health and safety performance criteria, corrective actions and improvement programs, and to define monitoring and reporting requirements. Environmental requirements are subsequently incorporated into loan agreements and other legal documents.
Many environmental project assessments will require a combination of these three assessment procedures.
Where the EBRD`s operation involves intermediated financing there are special information requirements. The EBRD needs to ensure the proper implementation of its environmental mandate as in the case of direct investments. But EBRD must also respecting the principle of delegated responsibility. Therefore, it lays down the following basic requirements that are incorporated into the agreements concluded with financial intermediaries:
- The financial intermediaries will have to develop and implement environmental procedures satisfactory to the Bank and integrate them as fully as possible into its credit/investment appraisal and monitoring procedures
- The financial intermediaries will have to comply with the Bank's Environmental Exclusion List which includes activities prohibited by international environmental agreements
- The financial intermediaries will have to submit to the Bank periodic reports on the implementation of its environmental procedures and the environmental performance of its investment/lending portfolio
The EBRD pays a great attention to public participation in environmental decision-making proces. The EBRD regulations require that Project Sponsor fulfill all national public participation request and those descibed in the Bank's Disclosure of Information Policy and Annex 1 of environmental procedures.
Conclusions
The environmental metters are becoming more and more important. This is the reflection of the realization that clean and unpolluted environment is a precondition for economic activity and growth. That is the reason why large number of international financial institutions are making environmental appraisal a part of overall project appraisal procedures. The ecological informations provided for every specific project are important factor in investment decision-making in these institutions.
[1] Institute of International Politics and Economics, Belgrade, SCG
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