CSO Critique on AIIB’s Energy Sector Strategy Update

Energy  is  the  dominant contributor  to  climate  change,  accounting  for  around  60  percent  of  total  global greenhouse gas emissions. AIIB’s support to its members to reduce the carbon intensity of energy supply helps them achieve their long-term climate goals developed in the wake of the Paris Agreement. Energy sector operations, therefore, play a crucial, albeit not  exclusive,  role  in  AIIB’s  commitment  to  align  its  operations  with  the  Paris Agreement by July 1, 2023, and its efforts to achieve its climate finance target by 2025.

AIIB  recognizes  that  the  process  of  transitioning  to  a  less  carbon-intensive  energy system is already underway and that the deployment strategies for low-carbon technical solutions    reflect    members’    individual    primary    energy    resource    endowment, affordability, financing capacity, knowledge, and regulation, among other factors. AIIB will support and accelerate  its  members’  respective  transitions  toward  low-carbon energy mixes through investments in (i) renewable energy; (ii) enabling infrastructure and system flexibility for low carbon electricity and fuels; (iii) fuel shifts from carbon intensive  fossil  fuels  such  as  coal  and  oil  to  lower  carbon  alternatives;  and  (iv) associated efforts to mitigate adverse social impacts of energy transition and facilitate a just transition.

Last year, the AIIB declared that its operations will fully align with the Paris Agreement by July 1, 2023. While the bank reiterates its commitment to the Paris Agreement, an international treaty requiring economic and social transformation to address the climate emergency, the Strategy still lacks concrete and actionable steps to achieve these goals: 

• aligned with the 1.5 degrees Celsius goal, or even more ambitious climate goals;
• compatible with reaching a global CO2 emissions decline of at least 45% from 2010 levels by 2030, and real zero CO2 emissions before mid-century; and,
• not reliant on false or unproven solutions such as carbon pricing, carbon capture storage and energy efficient fossil fuel technologies.

While the AIIB maintains that fossil fuels are important in the transition phase, genuine alignment is only possible by ending all direct or indirect support to all kinds of fossil fuels. Findings show that for every dollar the bank allocates for renewable energy, more than twice that amount is used for fossil fuels. While the bank states that it would not finance oil except for certain country contexts, it is necessary to divest from so-called natural gas and oil, due to their harmful carbon dioxide emissions. Fossil fuel extraction entails the construction and financing of high voltage transmission and distribution lines, and road projects, which also negatively impacts the communities and the environment.

Civil society welcomes the bank’s contribution to decarbonization, or the process of reducing carbon emissions, through its commitment of halting direct financing for new coal-fired power and heating plants. Known for its hands-off lending, the AIIB must also suspend indirect financing for coal through financial intermediaries, such as commercial and specialized banks, as well as leasing and insurance companies. 

The AIIB must also remain accountable for the fossil fuel plants it has financed, coming up with a detailed action plan on how the bank plans to mitigate health and environmental impacts caused. 

In the path to decarbonization, the Strategy recognizes the different stages and contexts of its member countries, pursuing equity and the principle of common but differentiated responsibilities (CBDR) in allocating its financing. In line with this, the bank must declare its commitment to provide sufficient financial and technical assistance to help member countries to decarbonize and advance renewable energy. 

Addressing the needs of affected sectors. Aside from unequal footing of member countries in their transition to renewable energy, various sectors from this transition are also disproportionately affected. The bank must address the affected livelihoods from the decommissioning of power plants, in the form of building capacities and increasing opportunities to minimize impacts. In pursuing less carbon-intensive alternatives in various industries, workers employed must be attended to and given the necessary assistance. 

Access to affordable and reliable modern energy services is instrumental in underpinning development and expanding economic opportunities for people to improve their lives. It is also a key aspiration of SDG 7. In Asia, lack of such access continues to deprive the most vulnerable people of the basic human needs. Reliance on traditional fuels also extends gender inequality and prolongs exposure to health risks.  Furthermore, AIIB considers that the access agenda is not limited to last-mile electrification and realizes that the provision of entry- level  solutions  alone  does  not  accomplish  the  mission  of  SDG  7. 

AIIB therefore supports its members in moving to higher service levels of access, ensuring the  clean  energy  services  are  affordable,  of  adequate  capacity  and  good  quality, available when needed, reliable, convenient, and safe. AIIB also recognizes that efforts to advance energy transition are to be considered in conjunction with the needs for energy access and security under specific member context for co-benefits to be reaped and  for  the  most  urgent  needs  to  be  addressed.  In  doing  so,  AIIB  attaches  great importance to new technologies and business models in extending modern energy and fostering access and prosperity through the transition process.

AIIB will place emphasis on: (i) promoting, directly or indirectly, access to modern energy by those who currently have little or no access; (ii) improving the affordability, reliability, and quality of electricity supply to serve productive uses and modern society needs; and (iii) reducing the negative health impacts caused by indoor combustion of solid fuels.

Guided by Agenda 2030 and Sustainable Development Goal 7 (SDG 7), the Strategy recognizes that access to clean, affordable, quality, reliable, convenient, and safe energy is crucial for development. The right to sufficient energy is a human right and must be upheld by development actors, such as governments and financial institutions like the AIIB. 

Energy security for all.  Energy security, or the stable and affordable access to energy sources for consumption, should be ensured. To ensure access to the marginalized and vulnerable, such as rural women and children, workers, farmers, fisherfolk, urban poor and Indigenous Peoples, initiatives to provide electricity to remote and far-flung areas described as last-mile electrification programs, must be pursued. Going beyond last-mile electrification, energy infrastructure and supply must be able to address both basic and aspirational needs of communities. 

These can only be possible with the development and establishment of renewable energy systems that are democratically owned by the people who use it. Sustainable energy is assured when it is linked with peoples’ capacity to design, manage, operate, and maintain such energy facilities. The AIIB should further promote the distributed generation of renewable energy, through the establishment of community mini and micro-grids. Along with micro-grids, decentralized solar initiatives are affordable and accessible technologies that can encourage democratic ownership of the communities over their energy source and infrastructures. 

Development and establishment of renewable energy systems must be consistent with the goals of promoting, protecting, and realizing human rights, and ensuring a climate-safe and equitable future for all. Energy access is inextricably linked to control over energy choices for people, especially the most vulnerable and marginalized. 

The energy sector should be based on public ownership, exercising democratic ownership of energy resources and systems. Patents on renewable energy technologies that only profit the private sector must be abandoned, while technology transfer to developing member countries must be advanced. 

International experience and primary energy forecasts by international institutions indicate that energy efficiency is one of the major means to achieve global environmental objectives. Prosperity and well-being can no longer be gauged only by the consumption of energy. The focus should instead be placed on the efficient provision of the services derived from energy. Given the high energy  intensity  in  most  non-OECD  countries  in  Asia,  AIIB  will  cooperate  with partners operating in Asia to tap the existing large, but dispersed, potential for energy efficiency in industry, buildings, and transport. Initially, AIIB will focus on projects that make the most of existing energy infrastructure stocks through (i) rehabilitation and upgrading of existing energy facilities; and (ii) aggressive loss reduction and utility- driven  energy  efficiency  programs  in  power  and  gas  T&D  networks,  including reduction of methane leakage. Over time, AIIB will also develop more tailored financial instruments and engage with potential financial intermediaries in these areas.

AIIB  will  support  its  clients  in reducing,  limiting,  and  mitigating  the  deleterious  impact  of  pollution.  Fossil  fuel production,  transport,  and  consumption  have  severe  negative  impacts  on  the  local environment, especially in Asia’s densely populated cities. Historically, issues related to local and regional pollution have been addressed mainly by limiting emissions of fossil fuel-based power generation, especially coal-fired plants. While pollution from large energy infrastructure can be controlled through statutory measures, the dispersed energy end uses, such as traffic or household energy, are more challenging to address and often require a shift of energy sources embedded in a systemic transformation. AIIB will (i) support cross-sectoral projects aimed at pollution reduction at the city, national, and regional levels; (ii) support fuel shifts and cleaner energy infrastructure solutions resulting  in  lower  air  pollution;  and  (iii)  integrate  air  pollution  control  and  carbon intensity reduction, where relevant.

Following this principle, potential risks and adverse impacts resulting from projects must be prevented, reduced and controlled. Projects financed by the bank that neither contribute towards mitigating environmental and climate challenges nor aid in facilitating the needed shift towards low-carbon and sustainable development paths, must not be pursued.  

Techno-fixes. While the Strategy does not outright endorse techno-fixes, it provides a leeway for the bank to still consider financing these. Techno-fixes are profit-oriented technologies proposed as solutions to climate change, usually in the form of carbon capture, utilization, and storage technologies. Such techno-fixes have long been criticized for not solving the root cause of the climate crisis, as these do not effectively lessen emissions. Besides the need for more evidence regarding techno-fixes’ long-term usage and benefits, their malfunction and destruction can also pose additional risks and danger to the environment. As such, these should not be imposed as a step towards decarbonization. 

Avoiding adverse impacts.  Energy security must be promoted without threatening the development of other sectors.  Implementation of cross-border and sub-regional electricity interconnection infrastructure must not impede on the people’s development, peace, and security.  Other sources of energy that prove to be costly for the local population, such as bioenergy and hydropower, should not be pursued. The AIIB should not finance large hydropower and solar infrastructure, which have served to impede on Indigenous Peoples’ lands and rights, causing conflict, instability, and exploitation. Protection of human rights, in both the physical and digital landscape, are to be assured by the bank. 

AIIB’s Environmental and Social Framework. Despite updating its Environmental and Social (ESF) last year, it remains faulty and inadequate to avoid and address negative impacts of its projects. The framework is lacking in upholding the rights of the affected communities, and diluted to pursue private sector interests. The ESF has ultimately failed in upholding the rights of the people and protecting the environment. There is also a lack of transparency with the AIIB’s processes under the ESF, which makes it challenging for civil society to make the bank accountable. Furthermore, redress to the victims of the bank’s flawed framework and mechanisms must be sufficiently distributed. 

Project-affected People’s Mechanism. The bank has an existing Project-affected People’s Mechanism (PPM) that provides an avenue for victims of violated ESF policies to raise their concerns. However, the PPM does not cover projects co-financed with other institutions, leaving affected peoples no recourse. When available, it remains inaccessible to communities due to complicated requirements and processes. Furthermore, the mechanism fails to be transparent with the complaints it receives. To genuinely address the needs and mitigate the impacts of its projects, the PPM and its processes must be further improved to make it feasible for the marginalized and vulnerable to raise their concerns. 

This  principle  reaffirms  AIIB’s  Corporate Strategy thematic priority on Private Capital Mobilization, which aims to help close the  enormous infrastructure  investment  gaps in  developing  Asia  through  mobilizing private  financing  both  at  the  project  and  sector  level.  For  varying  reasons,  to  date, private  capital  investments in  energy  and  infrastructure  have  been  marginal  in  non- OECD countries, although partial credits, investment, and country guarantees by MDBs have been instrumental in promoting successful projects. Innovative approaches have also  been  initiated  using  grants  and  concessional  financing  to  reduce  the  cost  of electricity generated under public-private partnerships (PPP) or to improve risk sharing in PPP ventures. AIIB will: (i) explore innovative models, at both project and sector level,  to  mobilize  private  investments  in  energy  infrastructure;  (ii)  build  upon  the successful experience of and lessons learned by MDBs operating in Asia, especially in PPPs, ensuring that the costs and risks are appropriately  shared and distributed; (iii) explore  new  cooperation  modalities with  clients and  private  sector  partners to  meet members’ needs; and (iv) in doing so, avoid crowding out the private sector. When pursuing  such  opportunities,  AIIB will  evaluate  risk  carefully  and  will  put  in  place appropriate measures to mitigate and manage such risks.

Reasoning an investment gap, the Strategy allows for the further entry of the private sector in the energy sector. Assigning a dominant role to the private sector must be reconsidered, as corporations have historically been major actors in worsening environmental degradation and the climate crisis. 

Despite growing evidence against public-private partnerships (PPPs), AIIB promotes the use of this scheme to finance and construct energy infrastructure. The use of PPPs must be reconsidered as the public sector is disproportionately impacted with the financial risks, and the lack of transparency and accountability of the private sector. Instead of promoting private sector-led development, a focus on the most vulnerable countries and communities is critical and urgent for developing member countries’ climate adaptation. 

Private sector regulation. The regulation of the private sector is crucial in providing access to clean energy resources and services for all. Regulatory mechanisms shall adhere to the member country’s action plans, as well as to human rights and the development effectiveness principles. While developing member countries’ governments should strictly enforce international and national regulatory mechanisms, the private sector, including the AIIB, must genuinely comply with these processes. Private sector regulation should also extend to startups and emerging technologies. Furthermore, an accountability mechanism must also be established to ensure that the private sector remains answerable to the impacts they have caused. 

In this regard, the bank should prioritize support for developing member countries’ micro, small, and medium-sized enterprises (MSMEs) in the energy sector, which are vital for developing member countries in reaching their adaptation goals. The AIIB must assist the local MSMEs to embark on clean energy projects, with the transfer of technology and knowledge. The promotion of the use of local goods and services can foster self-sustaining economies, which helps communities become more resilient to climate change.

Development priorities determined by countries should reflect the needs of the people, and not the private sector nor the local elite. The bank’s energy projects should contribute towards eradicating poverty, reducing inequalities, and upholding sustainable development. 

The bank’s processes must be inclusive and participatory, ensuring that the democratic rights of communities, peoples’ organizations and civil society organizations are upheld in the design, implementation, and monitoring of projects. Transparency in its investments and accountability in its project implementation are also demanded from the bank. 

Democratic country ownership. Abandoning conditionalities and policy-based lending will allow for the upholding of self-determination and sovereign rights of developing member countries. Under the leadership of developing member countries, energy projects must be undertaken to reflect the development priorities of the people. Catering to the member country’s specific needs and priorities are essential in promoting country ownership. The right to self-determination and to Free, Prior and Informed Consent (FPIC) of affected communities must always be upheld.  

Focus on results. The bank’s projects must contribute to genuine inclusive and sustainable development in its member countries. The Energy Sector Strategy must not further perpetuate underlying inequalities, impede on people’s development and contribute to environmental degradation. Developing member countries should also be given sufficient knowledge and technologies that can serve to enhance their capacities in achieving their development priorities. Upholding a rights-based and people-centered approach, the AIIB must tackle the climate crisis with a focus on the marginalized sectors, as they are the most vulnerable to its impacts. 

Inclusive partnerships. The planning, design, and implementation of energy projects should be inclusive and participatory, especially to the vulnerable and marginalized populations. Communities should have a principal role in the identification, definition, implementation and evaluation of energy projects. 

While the bank has recognized the imperative to include women and people with disabilities in the consultation for its projects, these processes must also include the voices of Indigenous Peoples, farmers, fisherfolk, workers, and urban poor, who continue to be the most impacted by the climate crisis. 

Furthermore, environmental and social assessments must guarantee genuine free, prior and informed consent from communities. By strengthening these institutions, a people-centered and rights-based approach to development must be pursued, ensuring equal and affordable access to basic social services.

Role of civil society. Despite seeing merit in enhancing collaboration with other development actors such as other financial institutions, multilateral agencies, and think tanks, there remains no space for the civil society to participate in forwarding clean energy in the region. The bank must recognize civil society as development actors that will aid the transition of developing member countries and communities to clean energy. Civil society organizations, peoples’ organizations and communities have the duty and right to criticize and welcome policies, as development actors in their own right and in their own contexts. Clearly defining the role of civil society secures the obligations of developing member countries to respect the voices and spaces of civil society. 

Transparency and accountability. To facilitate the transition to clean energy, a range of development actors such as civil society organizations, peoples’ organizations, media and local authorities, must be consulted by the AIIB. The AIIB has been widely criticized for its hands-off lending, which has rid them of any responsibility for the negative impacts they have caused in the region. In partnering with the private sector and other financial institutions, the bank must remain transparent and accountable for its activities. 

The civil society asks the bank to provide full transparency and disclosure on where their investments end up. As earlier argued, the bank must stop disbursing funds to financial intermediaries, which continue to finance coal projects and plants. Furthermore, comprehensive information regarding projects’ prospective development impacts must be made available. This information should highlight the impact on marginalized sectors of society, by providing disaggregated data and statistics. 

In implementing the Strategy, accountability is essential in securing energy access for all and in promoting a people-centered and rights-based approach. Accountability mechanisms to hold the bank and developing member country governments liable for energy projects and impacts must be set up. Information and documents from the PPM and project consultations should be made accessible to the public. Through these, the bank makes itself accountable to the people, who should be benefiting from these projects.