JOIN USBanks must adopt ESS safeguards in lending
As we observed environment day during one of the hottest Indian summers, the near absence of climate change as a civic discourse is alarming. At a time when the world finds itself in the swirl of destructive effects of climate change there is an urgent need to act. Accountability towards the environment and people has to be embraced not only by governments but also by institutions which play a critical role in determining the movement of development and capital. While the government does find itself under some pressure owing to the global discourse on sustainable development, the public sector, corporates and finance institutions have confined themselves to do the barest minimum possible.
Environmental and Social Safeguard (ESS) policies are associated with international finance institutions (FIs). ESS outlines procedures of assessment, mitigation and redressal of the detrimental impact of development projects funded by these institutions. People’s movements across the world against ecological and social impact of development projects have ensured that today safeguard policies are a given for any international development financial institution with accountability mechanisms where one can file complaints in case of any violation. Over the years the safeguard policies have expanded in scope to include domains such as environment and social impact assessment, pollution control, labour, community health, land acquisition and resettlement, indigenous people, biodiversity and natural resource conservation, cultural heritage, and role of financial intermediaries.
The irony is that social movements in India were instrumental in the development of safeguard policies and their adoption by international finance institutions. The Narmada dam project, which displaced, and destroyed the lives of lakhs of people, became a prime example of the destructive effects of the World Bank funded projects. Protests by civil society in India and abroad compelled the World Bank to withdraw its funds. Similarly, the struggle of the fisherfolk community in the coastal town of Mundra in Gujarat against the Tata-led, coal-based power plant led the US Supreme Court to recognise that finance institutions do not enjoy absolute immunity and can be tried in the court of law. In the second decade of 2000s the World Bank attempted to organise safeguards in a coherent framework that came to be known as the ‘Environmental and Social Framework’ (ESF). This framework provided the architecture of safeguard policies adopted by various other Multilateral Development Banks.
Indian financial institutions have long evaded their commitment to responsible investments by shifting the onus on the existing domestic laws. Earlier, commercial banks were involved in small-scale and retail lending; there was no issue of having a safeguard policy, but this started changing in the 2000s. A report in 2016 by the Centre for Financial Accountability studying thermal power projects over 1000 MW found that 90% of the finance for these projects were being given by domestic banks. Another report by Oilchange International in 2021 found that Indian banks, both private and public, were the fourth biggest financiers of coal-based projects globally.
Despite lending for high ecological and human impact development projects, Indian banks did not feel the responsibility to institute a safeguard policy. As a result of international agreements and domestic regulations, many Indian banks have now adopted environment and social policies under the Environment Social and Governance (ESG) framework in the credit appraisal process. Lack of transparency makes it unclear if ESG is implemented by the banks in actual practice. Mere reporting and setting credit appraisal criteria is not enough. There is hardly any mechanism to hold them accountable in case of violations, without which safeguard policies are toothless.
The need is for safeguard policies with mechanisms for assessment, monitoring, compliance and grievance redressal that are set in the Indian context. Such a policy should include thresholds of impact beyond which development projects should not be funded at all.
There is a need to move beyond the narrow understanding of ‘economic frame’, which finds safeguards useful only because they ostensibly protect banks’ investments from what is perceived as problematic projects. From a peoples’ perspective, adoption of safeguards is part of an approach which prioritises the environment, people and human rights before profits.
(The writers are associated with Centre for Financial Accountability, New Delhi)