Comments and critiques of EDC’s Environmental Review Directive and recommendations by the Working Group - March 1, 2002

The NGO Working Group on the EDC (WG) is a coalition of Canadian non-governmental organizations concerned about the social, human, and environmental impacts of export credit agencies. The Working Group promotes adherence by export credit agencies, especially Export Development Canada (EDC), to internationally accepted standards regarding human rights, the environment, and sustainable development. The Working Group is hosted by the Halifax Initiative Coalition.

EDC is a public financial institution that enables Canadian companies to be involved in activities abroad that can have serious, negative impacts on local communities and the environment. EDC should therefore have an environmental directive that requires companies seeking its support to avoid, or if impossible, minimize these impacts. EDC’s environmental policy should also be clear, for its clients and the public, in regards to when the environmental or social damage is too great to justify extending public support. EDC’s new Environmental Review Directive has resulted from three years of review, analysis, research and comparison. It should at minimum, match or better the best environmental standards for trade financing. EDC’s new environmental directive fails in all of these regards.

Our comments make a series of recommendations. If adopted, these recommendations would provide the kind of methodological clarity that is required if local communities and the environment are to be protected from publicly-supported Canadian corporate activity abroad. We also raise concerns about the comment period itself, as EDC has made no commitment to take these comments into consideration.

The Working Group questions the process by which EDC released its Environmental Review Directive (ERD). Although EDC claims that a final version of its ERD had to be released concurrently with the proclamation of the Export Development Act on December 21, 2001, it was under no legal obligation to do so. The urgency to release this document for the first time in its final version is, therefore, highly debatable. While EDC has claimed the ERD is “evergreen”, public input into corporate policy related to public interest is crucial and has been overlooked by this process. We are concerned about the poor process, and urge EDC to commit to revising the ERD based on feedback received over this 60-day comment period.

The ERD is written in such a way that if EDC chose to, it could continue “business as usual”. It gives EDC maximum discretion to enter into support for a project, irrespective of the environmental implications. It is written in such flexible language that it gives EDC ultimate discretion. In essence, it provides a framework by which EDC can justify any action, except the rejection of a project for environmental or social impact.

While EDC has stated the importance of considering environmental effects of projects that it supports, the ERD does not lay out a methodology for environmental decision-making that indicates EDC’s commitment to avoiding or if impossible, minimizing impact. The ERD does not use clear language, nor does it use common, internationally accepted standards. Below, we provide a section-by-section analysis of EDC’s ERD.

Scope

“…a repayment term or coverage period of two years or more and a value of more than SDR 10 million and that is related to a project.”

The WG rejects the application of financial thresholds for the ERD. Environmental impact should trigger environmental assessment, not financial values or coverage periods. The WG would like to reiterate the Auditor General’s argument that transactions should be exempted only if no known or potential environmental and social impacts exist. Another possible impact of thresholds could be contract-splitting in order to avoid assessment procedures.

“A transaction is related to a project if, in EDC’s opinion, it is: (i) in respect of goods or services purchased or to be purchased (or with respect to which rights of use are otherwise acquired), by a project sponsor, project company or other entity with prime responsibility for project design, development and construction, for use in a particular identified project;…”

In order to ensure that all transactions fall within the scope of the directive, the WG strongly urges the removal of the word “prime” from “prime responsibility”.

Categorization

“EDC reserves the right to re-categorize any project.”

This discretion makes a mockery of international categorization standards. Categorization is used as a screening technique to give assurances that projects with known or potential adverse impacts go through more rigorous assessment and disclosure processes. It ensures accountability to the public and clarity to industry.

EDC should not be allowed flexibility to downgrade transactions within the categorization system.

Category A
“The environmental assessment for a Category A project will normally be in the form of an environmental impact assessment…but may be comprised of elements other than EA instruments…”

The ERD must make explicit ONE standard methodology. The World Bank standards should be adopted. Also, as the minimum, EDC’s ERD should use best industry practice as its starting point for assessment. Many Canadian companies involved in Category A projects are familiar with World Bank standards. As stated in the ERD, Category A are “likely to have significant adverse environmental effects that are sensitive, diverse, or unprecedented”. Since these effects are significant, EDC has the responsibility to give a rigorous environmental impact assessment. This suggestion concurs with the Auditor General’s May 2001 recommendation: “The Corporation should adopt screening criteria and methodology similar to those used by other international financial institutions such as the World Bank Group’s International Finance Corporation and Australia’s Export Finance and Insurance Corporation”. In a backgrounder to a news release dated June 26, 2001, Minister Pettigrew states: “The framework should clearly identify the environmental standards that EDC will apply in conducting environmental reviews. Particular attention should be paid to the highly developed and widely utilized guidance provided by the World Banks Group”.

There is an enormous gap between ISO 14000 for example, and IFC safeguard policies. By listing such disparate standards, EDC fails to increase accountability or clarity.

“EDC expects that for each Category A project public consultations with affected parties, if any, will be held in the host country…”

The Working Group commends EDC’s recognition of the importance to consult with communities in the host country that will be affected by the project. We urge the EDC to change the wording from “expects” to “requires” in order to reflect this importance.

Public consultations are intricately linked to the level of transparency and disclosure of information related to the project. Yet EDC does not require the early release of environmental and social information and it exempts any release of this information unless the Canadian client is a significant project sponsor. The loophole of requiring release only for significant project sponsors should be removed from EDC’s disclosure policy.

Public consultations that take place with information asymmetries are not genuine. EDC should therefore require its clients to notify all affected parties and release to them all relevant information as early as possible through a medium and in a language which they can understand.

EDC should also require clients to release environmental and social information to the public 120 days in advance of approval and without exception for Category A projects. In addition to locally-affected parties participating in the process, the Working Group concurs with the World Bank’s definition as the “public” being anybody who is interested. The WG would also underline that projects impact on the global environment and on global public goods. To this end, review of the EIA should not be limited to local communities.

EDC should also state in its ERD that the application will not be considered if the client does not comply with these requirements.

The Overseas Private Investment Corporation (OPIC) from the United States, recognizes the importance of meaningful consultation at the host country level:

Host country as well as international non-governmental organizations often have access to information and perceptions about potential environmental impacts and resulting social, economic, and cultural impacts that need to be carefully considered as early as possible in the assessment process. OPIC agrees with the IFC’s observation that “calling attention to environmental and related social issues early in the process and by involving stakeholders in meaningful consultations, helps avoid costs and delays in project implementation and reduces the need for project conditionality to the extent that the appropriate measures are incorporated into project design”. (OPIC Environmental Handbook, Public Consultation and Disclosure Section, http://www.opic.gov/subdocs/public/publications)

OPIC’s policy provides the public with a full opportunity to comment on all Category A projects before making a final commitment to these projects, and requires that information be made available to locally affected people in a medium and language that they understand, in addition to notification of host country government officials. With respect to disclosure, the policy requires that applicants for OPIC assistance for Category A projects submit EA information in a form that can be shared with the public. If the applicant does not agree to the release of the EA, then OPIC will not proceed with consideration of the application.

Environmental Review Information Requirements
“Where a project is located in either of Canada or the United States of America and EDC receives confirmation that the project has been designed in compliance with host country environmental requirements, EDC may determine that it requires no additional environmental information in respect of the project beyond that required for categorization”.

The environmental impact assessment process should be applied to ANY Category A project, irrespective of the location.

Category A
“If the environmental assessment for a Category A project has been completed by an employee(s) of the project sponsor or project company, or an employee(s) affiliate thereof, EDC will require, prior to the time it enters into a transaction related to the project, that independent expertise acceptable to EDC be engaged to review such environmental assessment for potentially significant problems of the analysis.

The Working Group agrees with EDC that independence is crucial in the environmental assessment process. We would, however, underline the importance that a third party carry out the initial environmental assessment, in order for it to be valid, specifically for Category A projects. Independence in the assessment process is a standard requirement in good EIA.

Evaluation and Decision
“In conducting its environmental review, EDC will use, as reference points or benchmarks, the international standards which are in EDC’s opinion the most appropriate to the particular project, and require any adverse gaps EDC identifies between the standards to which the project has been designed and the international standards selected by EDC to be explained to EDC’s satisfaction.”

The Working Group has serious concerns around the “benchmarking” approach to environmental assessment. We echo the Gowlings critique of the Environmental Review Framework (ERF), calling for EDC to “adopt a substantively and methodologically clear and transparent environmental framework”. We feel that like the ERF, the ERD lacks methodological clarity and transparency. Unlike the World Bank, American and Australian export credit agencies, EDC does not adhere to one set of internationally recognized high standards. EDC should agree to use World Bank standards, and for the hydro-electric sector the World Commission on Dams (WCD) recommendations. In the backgrounder to his June 26 news release, Minister Pettigrew states: “EDC should screen projects for environmental risks and impacts, and screening should be based on simple, clear, and objective standards. The framework should be clear about the kinds of environmental information required for screening and review, and stipulate that the decision to provide or decline financial support will not be taken in the absence of sufficient environmental information”.

By using benchmarks, projects are assessed without consistency, eliminating predictability and accountability. At the information session that we attended in Ottawa on January 25, 2001, we were dismayed to learn that EDC has no intention of sharing with the public the kind of standard used for each project assessment. This lack of transparency begs the question: how consistently and how rigorously will these projects be assessed?

The WG rejects a benchmarking approach. However, if EDC continues with this approach, at minimum it must commit to transparency in its choice and application of standard for all projects.

“In addition, the environmental assessment information provided will demonstrate to EDC’s satisfaction that the project in respect of which EDC is conducting a review has been designed to comply with host country environmental requirements…”

Meeting host country requirements may be insufficient to uphold international commitments and best standards. Therefore, in addition to compliance with host country environmental requirements, the Working Group urges EDC to comply with World Bank and WCD standards.

“Grounds which in EDC’s view justify providing support to a project that has environmental effects despite mitigation measures…”

EDC’s attempt to improve on the ERF by elucidating “positive benefits” misses the point of prior critiques. EDC should not enter into a transaction that has severe negative environmental or social effects despite mitigation measures. Instead of listing justifications to continue business no matter the cost, EDC should, like other agencies, define severe negative or environmental social effects. Like the World Bank, American, and Australian export credit agencies, EDC should provide an exclusion list. The backgrounder to Minister Pettigrew’s June 26 news release supports this suggestion: “The framework should clarify that EDC will seek to mitigate the potential adverse environmental impact of projects as much as possible, and should stipulate the environmental grounds on which EDC will decline its support”.

The 5 definitions of positive benefit in the ERD are so subjective, EDC can do whatever it wants without recourse. The presence of these grounds contradicts the very principles of environmental assessment.

Covenants and Monitoring
“Where EDC is unable to secure such rights, assurances, or covenants as it deems necessary in the circumstances, EDC may decline to enter into the transaction”.

EDC must unambiguously commit to supporting only those clients that accept contractual obligations to avoid, or if impossible to minimize social and environmental risk. EDC should hold back money and release tranches to project sponsors only when convenants are upheld.

EDC must commit to releasing monitoring reports for Category A projects.

Annex 1 – Definitions
“‘environment’ means land, water, air, living organisms, and interacting natural systems.”

This narrow definition of “environment” does not include social impacts (such as labour and/or resettlement considerations). The WG urges the broadening of this definition to be consistent with the ERD’s definitions for “environmental assessment”, “environmental assessment instruments”, and “environmental effect”, which include environmental and project-related social effects.

Annex 5 – Illustrative List of Internationally Recognized Good Practices, Standards, and Guidelines
The WG reiterates the urgency for EDC to apply ONE clear methodology for projects with known or potential adverse impacts (for example, internationally accepted high standards such as the International Finance Corporation’s Guidelines and Safeguard Policies), like its American and Australian counterparts.

Concluding Remarks
EDC’s ERD maximizes discretion to the agency to such a degree that there is little to which the EDC can be held accountable. There are few commitments to transparency, rigour, or principle.

If EDC is interested in protecting the environment and local communities, it would agree to:

• a firm system of categorization
• transparency and openness in the environmental assessment process, including full and early disclosure of environmental and social information for Category A and B projects and monitoring reports
• a broad definition of public to ensure the most information is gathered as possible on a project
• requirements for independent assessments for Category A projects
• one set of high, internationally-accepted standards by which to assess Category A and B projects
• clear statements of withholding support for projects that do not comply with requirements.

Lastly, EDC is working towards the creation of a Compliance Officer position to ensure compliance with policies such as a revised ERD. Without revisions, the guidelines will remain ambiguous. How can the Compliance Officer assure her/himself that s/he is working to the letter and intent of the guidelines if these guidelines are ambiguous? How can EDC ensure that it is fulfilling the Auditor General’s expectations unless its guidelines are clear?

As a crown corporation, EDC should support, not undermine, the Canadian government. It is the responsibility of the EDC to ensure coherence with Canadian government policies on sustainable development and good governance. A strong, binding, transparent, and accountable directive would better ensure that EDC is a leader among export credit agencies and upholding international commitments.