How can the World Bank reform development policy financing to more effectively protect the climate, environment, and natural resources?

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:

1. Revise Operational Policy (OP) 8.60 to guarantee environmental aspects are taken into greater consideration, and a more rigorous environmental assessment is provided for all projects. The assessment should be consistent with the requirements for investment projects established in Environmental and Social Standard One (ESS1). Alternatively, the Bank should consider revising OP 4.01 to make environmental assessments applicable to DPF regardless of whether there are prior actions with potential negative or neutral impacts.
2. Clearly identify in the project documents how the mitigation hierarchy is being implemented and define the criteria being used to assess whether a prior action will have a positive or negative impact. For prior actions expected to have significant environmental impacts and demonstrate application of the mitigation hierarchy, the Bank should include in its policy a requirement for an alternatives analysis that will avoid negative impacts, and achieve positive results while reducing cost and risk. 
3. Define or clarify what is meant by “likely significant effects” as this term dictates the need for a more thorough environmental assessment. “Significant effects” should include the impacts on, and perspective of, marginalized communities.
4. Provide more guidance on the role of the Bank and task teams in completing environmental assessments if a country is identified as not having the capacity to complete a Strategic Environmental Assessment.  
5. In order to avoid policies (DPF prior actions) likely to have negative environmental or social impacts, consider expanding the excluded expenditures list, footnote 6 in the 2017 DPF policy, to cover prior actions that are inconsistent with the World Bank’s commitments to address climate change and to promote environmental and social sustainability. This would apply, for example, to policies benefiting coal and upstream oil & gas, or contributing to deforestation or coastal erosion.
6. Increase the transparency of analysis on DPFs by establishing stakeholder engagement, similar to that set forth in Environmental and Social Standard 10 (ESS10), as a mandatory procedure in the project development process.