The Asian Infrastructure Investment Bank’s (AIIB) 2023 Climate Action Plan (CAP 2023) highlights the institution’s strategy for renewed energy sector aimed at pushing back against the climate crisis.
While such a policy pronouncement projects a confident and convincing narrative, the implementation of this strategy still leaves room for improvement.
CAP 2023 highlights four main commitments. First, AIIB aims to meet the needs of its members for a “Just Approach on Climate Finance” by customizing climate solutions based on individual needs and circumstances. Second, it intends to take a wholesome approach through proposing solutions which “simultaneously mitigate climate change, build resilience, enhance adaptation, and offer cobenefits for biodiversity and nature conservation.” Third, it aims to mobilize funding for climate projects. Lastly, AIIB will promote technological innovation for climate mitigation and adaptation efforts.
The document also highlights specific efforts that will be carried out by AIIB. First, AIIB will not channel funds to coal-related projects. Second, despite stopping funding coal projects, AIIB will still invest in the oil sector to ensure energy provision in remote areas. Third, AIIB will be strictly selective in deciding on projects related to natural gas. Fourth, AIIB will emphasise on climate adaptation and resilience for energy infrastructure, while also further emphasizing on gender equality.
However, from these commitments, AIIB still appears to be hesitant on its anti-climate crisis and sustainability agendas. These two imperatives are interrelated and complementary. When funding goes to projects that do not support sustainability, the climate as a whole will be affected.
This is why it is important for AIIB to align its funding scheme to the Environmental, Social, and Governance (ESG) standards, while also obligating recipient countries to adhere to their sustainability and climate action commitments.
Questions about Commitment to Climate Action
Prior to CAP 2023, AIIB has been seemingly hesitant in investing in clean energy. This is demonstrated from its investment pattern in recent years, where most investments were channeled to “dirty energy” sectors. This is evident in several examples, despite the palpable effects of such projects to the climate. For example, in 2020, investment in fossil fuel still dominated with a 54% share of AIIB’s total funding in the energy sector. This is more than double the 24% share of investment in renewable energy.
AIIB had also indirectly financed such sectors through intermediaries. In 2017, the AIIB backed the IFC Emerging Asia Fund (EAF) in its acquisition of the equity of Shwe Taung Cement to construct a new kiln aimed at increasing cement production. Interestingly, higher cement production means higher demand for coal from a nearby coal mine.
Furthermore, EAF has also channeled funds to Summit Power International, a Singapore-based company, which operates 13 power plants in Bangladesh with fossil fuels. This investment is also considered a high risk, considering the potential implications on land acquisition problems and pollution.
Therefore, CAP 2023 can be seen as an attempt by President of AIIB, Jin Liqun, to temper down such concerns (e.g. no longer funding coal-related projects).
Coal was highlighted because majority of its investments in the coal energy sector goes to Asian countries including Indonesia. Considering the Asia-Pacific region produces the largest volume of Greenhouse Gases (GHG) – including half of carbon dioxide worldwide – the region is thus vulnerable to the impacts of the climate crisis. This might have been one of the reasons prompting AIIB to transition to renewables across Asia.
While the recent strategies laid out by AIIB is well-intended, there is still a lack of clarity on achieving the desired outcomes. This could lead to questioning the institution’s commitment towards instilling positive changes. For example, AIIB does not have a specific GHG emission reduction target. Unlike AIIB, the Asian Development Bank (ADB) appears to be more serious, targeting to peak GHG emissions by or before 2030. ADB and other Multilateral Development Banks (MDBs) have also pledged to channel US$175 billion per year in climate finance by 2025, as announced at the UN Climate Action Summit in 2019. Though AIIB has stated that it will strictly select natural gas projects for funding, without clear oversights, there is a still a possibility of AIIB pivoting largely to funding to gas exploration. Though
Meanwhile, the AIIB’s commitment remains vague. There is already a concern that its strategy pronouncements will be a half-hearted commitment to stop investment in dirty energy and shift funding to gas exploration, as indicated in its CAP 2023. Though touted as “relatively clean burning”, natural gas itself is not only a strong greenhouse gas but also its production can lead to environmental issues such as water contamination. Notably, natural gas is mainly methane. Methane has the potential to accelerate global warming 86 times more than CO2 over 20 years.
Questions about Commitment to Sustainability
Despite the push for renewables, CAP 2023 still falls short on ensuring sustainability, especially on issues relating to social and environmental commitments. Similarly, there are no specific targets set to address these issues in the funding segment.
AIIB’s Environmental and Social Framework (ESF) also fails to comprehensively address labor rights and protection. Furthermore, AIIB’s Environmental and Social Standard (ESS2) does not regulate informal land rights and gender equality, the latter of which is considered a “mandatory” imperative. Moreover, as exemplified in the Mandalika Urban Tourism and Development Project, the people consulted had minimum awareness regarding grievances and compensation mechanism, which are essential to address problems that might arise.
These highlighted issues indicate that the AIIB’s commitment to sustainability still has room for improvement.
Impact on Indonesia
Indonesia has been a part of AIIB since its establishment in 2015. In fact, the Vice President and Chief Administration Officer of AIIB today is Luky Eko Wuryanto, an Indonesian.
Since 2016, there have been 11 projects funded by AIIB in Indonesia. Of these 11 projects, the most problematic is the aforementioned Mandalika Project worth US$248.4 million in 2018. On this issue, AIIB is considered negligent in conducting due diligence to avoid and minimize the risk of involuntary resettlement and eviction of affected indigenous peoples. Even before the project was greenlit, land disputes were rampant in Mandalika, West Nusa Tenggara.
Based on a survey from the Indonesian Infrastructure Development Monitoring Coalition (KPPII), as many as 98% of respondents were not asked for their consent regarding the Mandalika project – only 6% had ever attended consultation meetings held by AIIB. The survey involved 105 respondents from affected communities.
This is despite the requirement in AIIB’s ESF for its clients to consult affected communities and provide evidence of support from indigenous peoples. The survey results strongly indicate a possible violation of AIIB’s ESF itself, due to the institution’s lack of due diligence.
KPPII also reported that affected women have been ignored in consultation meetings with the Indonesia Tourism Development Corporation (ITDC) and AIIB. Many families are forced to live in unhealthy conditions for more than three years in temporary shelters. Children are also not spared. These children have limited access to schools due to the remote location of their permanent settlements. All of these indicate that AIIB-funded project has caused socio-economic difficulties to the surrounding communities.
The above case reflects that AIIB’s sustainability standards are still inadequate, which is also exacerbated by the Indonesian government’s ineffectiveness to anticipate this problem and supervise the project properly. Thus, there is a need for all stakeholders to continue to supervise/monitor AIIB’s investments in the country.
In addition, in the context of supporting the energy transition agenda, AIIB might be seen as a more “lenient” investor as it imposes no strict conditions and requirements when it comes to social and environmental protections, compared to Western-led funding schemes such as the Just Energy Transition Partnership (JETP). However, the implication is that the implementation of its projects often results in social and environmental problems, such as the Mandalika Project above.
Regardless, the Indonesian government should not solely rely on AIIB as an investor, considering the institution’s ongoing struggle to become “greener” in its financing schemes. The government should look at other funding opportunities from Western countries and most importantly, it needs to encourage AIIB to properly implement CAP 2023 to ensure destination countries can fully benefit from the projects it funds. While investment in infrastructure projects would certainly be beneficial economically to countries like Indonesia, the sustainability aspect of such projects should be considered, so that it could assist the countries in meeting its commitments in the Environmental, Social, and Governance (ESG) sphere.