Bank Information Center Europe and Center for Financial Accountability India have recently co-published the report ‘Risky Business: Will the Asian Infrastructure Investment Bank choose to avoid funding coal in India?’

This report comes just before the Board of the Asian Infrastructure Investment Bank will approve the bank’s new Energy Sector Strategy in June 2017. In the strategy, the AIIB explicitly commits to the Paris Climate Agreement and the United Nations’ Sustainable Development Goals. This is good news for both climate and energy access for poor communities.

However, many in civil society are worried that the strategy does not specifically stop the AIIB from financing coal. The AIIB will face a litmus test on this issue very soon. In its pipeline of proposed projects, the AIIB lists the India Infrastructure Fund as a potential recipient of a $150 million equity investment. Infrastructure investments, by their very nature, can have significant impacts on people and the environment; while the proposed investment model – of AIIB lending through a financial intermediary – carries with it high risks of diluting social and environmental protections.

The report highlights some of these risks and assesses whether the AIIB’s standards are robust enough to address them. The report draws out wider lessons to guide the AIIB in achieving its aim of “ensuring the environmental and social soundness and sustainability of Projects.”

The report urges the AIIB and its shareholders to take into account two significant risks in deciding whether or not to proceed. First, the current portfolio of the IIF/IDFC in 2017 includes massive coal investments, contrary to AIIB’s stated intention to uphold the Paris Agreement. Second, the IIF/IDFC was the subject of the first ever formal complaint to the IFC’s watchdog, the Compliance Advisor Ombudsman (CAO). The CAO found the IFC to be in breach of core environmental and social safeguards in backing IIF/IDFC; worryingly, AIIB standards on financial intermediary lending are likely inadequate to prevent similar violations.

The report also goes ahead to make recommendations regarding ensuring greater transparency and disclosure, especially in FI cases. The report also recommends that AIIB should commit to carrying out due diligence, monitoring and supervision itself in high-risk sub-projects, and in infrastructure projects; and put in place measures to assess the accuracy of FI clients’ risk categorization. The report further emphasizes that the Energy Sector Strategy of AIIB should apply across both direct and indirect lending and the Bank should not end up funding coal through the FI back door.

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