The World Bank has multiple lending instruments at its disposal. One is Development Policy Financing (DPF), a non-earmarked budget financing that the Bank uses to “rapidly-disburse financing” in the short-term. This is opposed to the five to ten-year lending period associated with Investment Project Financing (IPF). While there is flexibility in the manner of disbursement, one compulsory component is prior actions, which is the policy and institutional actions the Bank deems necessary for the project to meet its development objectives. Over the past several years, civil society has expressed concern about DPFs’ lack of strong environmental and social safeguards since the financing and associated prior actions have been linked to negative development impacts.
In February, BIC undertook an assessment of the “Climate and Environment Natural Resource (ENR)” prior actions in the World Bank’s DPF Prior Action Database. This resource includes all DPFs approved from fiscal year 2005 through September 2020. It is notable that while we assessed “Climate & ENR” prior actions, they do not necessarily account for all of the Development Policy Loans (DPLs) with prior actions that the Bank considers as producing climate co-benefits. That being said, we assessed 102 projects in the “Climate & ENR” section to determine whether the World Bank is properly classifying its climate and environment DPF prior actions as producing concrete climate and environment co-benefits.
The results from our analysis of DPF prior actions show 88 of the 102 projects (86.3 percent) include prior actions that are likely to have a direct or indirect positive impact on the environment and climate. Of the remaining 14 projects, we assessed nine as neutral, and five as likely to have an adverse impact on the environment and climate. Of the 88 projects with positive impacts, 58 promote both mitigation and adaptation, 19 promote adaptation, and 11 promote mitigation. This result is not surprising as DPF prior actions coded as addressing climate, environment, or natural resources should have positive impacts. However, we found many insufficient environmental assessments, particularly among DPLs with ambiguous or potentially negative prior actions.
One noteworthy example is the Paraguay First Economic Management Development Policy Loan. This DPL has a prior action making it easier to obtain loans that invest in commercial afforestation and enable the government to fund the expansion of exotic timber plantations, such as eucalyptus. The environmental assessment argues that this prior action is likely to have a positive impact on the environment and forests by virtue of there being more trees, which in theory will lower CO2 levels. An additional claimed benefit derived from this prior action is that wood will be harvested from exotic tree species rather than the native supply. The assessment fails to note the limited carbon sinks efficacy of monoculture tree farms versus native forests and fails to clarify whether the exotic timber plantations will be planted on previously cleared land. In the case of eucalyptus, one of the trees mentioned in the prior action, this distinction is important because eucalyptus can alter the soil and inhibit ecosystem growth. It also fails to recognize the adverse effects of eucalyptus, such as its nature as an invasive species, its potential to alter the pH level of soil, and the large quantities of water it uses on the larger ecosystem. This DPL exemplifies a project with an ambiguous prior action and an inadequate environmental assessment because it does not address how exotic timber plantations will affect other aspects of the ecosystem or clarify how the project will avoid having an adverse impact.
Looking at key sectors post-Paris Agreement, we found 76.5 percent (13 of 17) of post-2016 transport, energy, and Agriculture, Forestry and Land-use (AFOLU) projects have inadequate environmental assessments. This demonstrates that the Bank must do more to consider the potential adverse effects of its DPF prior actions on the environment, climate, and natural resources. In addition, unlike other multilateral development banks such as the Asian Development Bank, DPFs are not covered by the Bank’s social and environment safeguards policy. To reverse these shortcomings, we recommend the Bank:
