International Development Committee

Inquiry into the UK’s strategy towards development finance institutions

Submission by Counter Balance

 

  1. Counter Balance is a Belgium-based coalition of non-governmental organisations, including UK organisations, whose mission is to make European public finance a key driver of the transition towards socially and environmentally sustainable and equitable societies. Our main focus is on the European Investment Bank (EIB), but we also work on other public finance institutions.
  2. In the last decades, the European Investment Bank (EIB) has become a significant player in the field of development finance. With the creation of its new ‘EIB Global’ development branch in 2022, the bank is planning to step up its development role in support of EU development policies.
  3. This submission addresses the bank’s record on climate, human rights and environment. It is intended to assist the Committee by addressing lessons that might be learned by BII from the EIB’s record on climate, human rights and environment.

EIB and Climate

  1. In 2019, the EIB took a landmark decision to end support for fossil fuels, including for investments outside Europe. It also committed to unlocking €1 trillion in climate and environmental investments by 2030 and to earmark at least 50% of its finance to climate action and environmental sustainability.
  2. This policy decision is welcomed by Counter Balance. Nevertheless, concerns over the climate impacts of the development model promoted by the EIB remain legitimate. For example, the bank is still supporting the expansion of ports and roads for exporting raw materials, as well as airports, special economic zones and logistical centres.
  3. The gigantic scale and global nature of this infrastructure will have a devastating impact on the climate. Mega-corridors all over the world are based on high-carbon transport (e.g airports and motorways) and energy infrastructure (including fossil fuels). As a result, this infrastructure agenda does not fit with the EIB’s recent commitments to align with the objectives of the Paris Agreement, nor is it compatible with the European Green Deal.
  4. The EIB should instead aim to support infrastructure that prioritises social and environmental justice and is demanded by communities in the global South, instead of scaling up efforts to de-risk projects which harm the poorest and most marginalised communities. EIB Global’s interventions should be recentred around the public good for a truly just ecological transition that meets the needs of people and their territories.
  5. We believe that BII should similarly reorientate its development policies.
  6. We also note that research in 2020 by Global Justice Now has identified £355.7 million of direct investments in fossil fuel infrastructure made by CDC Group, the previous name of BII,  since the Paris Agreement was signed. Although BII has now committed to exclude new investment “in the vast majority of fossil fuel subsectors”, significant exceptions remain. We would strongly recommend that BII moves swiftly to exclude support for all fossil fuel investments.

EIB and Human Rights

  1. Counter Balance has monitored the EIB since 2007. It has documented serious problems with EIB-funded projects which include a lack of development orientation and transparency, failures in due diligence and major shortcomings in environmental, social and human rights standards. The harmful impact of diverse projects from Nepal to Kenya and Georgia to Bosnia and Herzegovina has been consistently criticised by Counter Balance and local civil society organisations.
  2. In 2020, Counter Balance detailed the significant gap between EIB standards and their implementation on the ground. Counter Balance found:

        The EIB supports projects that violate human rights because of its failure to conduct proper human rights due diligence; human rights issues have been given a low priority by the EIB Management Committee for years.

        The EIB pays little attention to the development impacts of its operations. It does not have enough expertise or sufficient presence on the ground to provide genuine added-value outside of Europe.

        The EIB tends to prioritise an extractivist development model, sidelining infrastructure that would be in line with social and environmental justice.

        The EIB favours a financing model of leveraging scarce public funds to trigger private investments, de facto subsidising large companies and multinationals and enabling them to make profits in the poorest regions of the world.

  1. In a letter to the EIB President, 15 non-governmental organisations recommended inter alia that the EIB should commit to:

        A strong and binding human rights strategy that protects communities and human rights defenders, enhances public participation and details how human rights risks and impacts are considered, prevented and mitigated at all stages of the project-cycle, with special attention given to fragile and conflict-affected settings.

        A sound system of human rights due diligence at project level all through the project cycle, via dedicated ex-ante gender-sensitive screening for human rights risks conducted by the bank. When risks are identified, the bank should require mitigation measures that include, as a minimum, a quick response mechanism and actionable leverage points in loan agreements. This due diligence system should be integrated in a new Standard on human rights due diligence.

        Measures to enhance participation and ensure that local communities and people affected by its operations are meaningfully consulted at the project level. The right to free, prior and informed consent should be implemented in a transparent and systematic manner.

  1. Counter Balance is aware that BII has been similarly criticised for the human rights and environmental impacts of its investments. Counter Balance would recommend that BII adopt similar procedures. We would endorse the recommendations in this regard made by Human Rights Watch to the International Development Committee's 2020 inquiry into the effectiveness of UK Aid. In particular, we would urge that BII adopt legally-binding human rights policies that acknowledge its extraterritorial human rights obligations and BII’s duty of care to those affected by its investments, whether direct or indirect.

EIB and Financial Intermediaries

  1. One third of the EIB’s lending is channelled through “financial intermediaries”, such as private banks and private equity funds. This practice comes with a number of important challenges that may undermine positive development impacts, including lack of transparency, insufficient control over funds and the risk of corruption and fraud.
  2. In its December 2019 report “Is the EIB up to the task in tackling fraud and corruption?”, Counter Balance highlighted that, when supporting private equity funds, the bank has no means to carry out anti-money laundering checks on investee companies. Once the EIB supports an equity fund, the bank claims that it cannot refuse to contribute to a call for capital if corruption allegations emerge. The Luxembourg Times reports that an internal audit at the EIB recently revealed serious failings of the bank on the anti-money laundering front, especially as far as support to investment funds is concerned.
  3. The practices of the financial intermediaries with whom the EIB works is also problematic. Many are western commercial banks with little or no interest in development and which often operate through tax havens. The use of private equity funds is also particularly concerning, given their focus on high returns and profit maximisation, which clearly contradicts a “pro-poor” approach to development finance.
  4. Counter Balance is critical of the use of intermediated funding, which it deems incompatible with development outcomes that promote environmental and social justice. More specifically, the funding of the EIB going through financial intermediaries suffers from a lack of transparency, inadequately enforced measures to prevent corruption and conditions which could guarantee a clearly positive development impact. It would recommend that BII, which also uses intermediated funding, should cease the practice.

EIB and Accountability

  1. Although EIB has a Complaints Mechanism (CM) in place, it is seriously flawed. Impacted communities have lodged numerous cases to the EIB complaints mechanism testifying on the seriousness of the impacts of EIB operations on their lives and their livelihoods.
  2. In recent years, complainants have raised issues related to the effectiveness and transparency of CM processes; its over-reliance on data and information coming from project promoters; and a lack of authority to make sure that the CM’s recommendations are properly implemented by the EIB.
  3. Counter Balance has called for the CM to be reformed so that it becomes a more effective and less risky avenue for impacted rights-holders and so that its cases result in enforceable rights-based remedies for complainants.
  4. Counter Balance notes that BII does not have a formal, independent Complaints Mechanism. It would recommend that one is introduced as a matter of priority.

 

A Change of Direction

  1. Counter Balance has called for a profound transformation of the EIB in order that it contributes to, rather than hampers or undermines, ecological and social justice. Calls for change have also been made by the European Council, the European Commission, the European Parliament and academics to strengthen the development orientation and effectiveness of the EIB.
  2. Critically:

        EIB operations outside the EU should demonstrate clear development additionality and contribution towards long-term structural transformation into socially and environmentally sustainable and equitable societies, rooted in the recipient country’s national development.

        Investment and strengthening of public goods and services should be a priority and primary goal for all EIB-funded projects rather than a secondary aim. Public goods and services are essential pillars for pandemic recovery and resilience and also provide positive spill-over effects for the local economy and consequently contribute to long term economic development.

        Focusing on a pro-poor sustainable development agenda should be a priority rather than acting as a tool of economic competitiveness and diplomacy supporting geopolitical interests of the European Union.

  1. Counter Balance would urge that BII is similarly reformed.

 

Counter Balance, Brussels

February 2023