TWN Info Service on Climate Change (Jul15/02)
14 July 2015
Third World Network  

GCF accreditation poses reputation risk for the Fund, say civil society

New Delhi, 14 July (Indrajit Bose) — At the recently-concluded 10th meeting of Board of the Green Climate Fund (GCF) in Songdo, South Korea, the GCF Board accredited 13 new institutions. Among the institutions accredited include the Deutsche Bank, which has reportedly been embroiled in controversies on money laundering, and the World Bank, which is also the interim trustee of the GCF, leading to possible concerns around conflict of interest.

The accreditation decision turned out to be the most controversial among the decisions taken at the meeting (See: ‘Green Climate Fund Board adopts key decisions after intense debate’).

Accreditation of some of the entities drew sharp reactions from the civil society for reasons spanning from lack of transparency, to accrediting all the entities together as a package rather than assessing the merit of each entity separately for accreditation. The names of the applicants were not disclosed until after the accreditation process. Discussions on these entities happened in a closed-door session called an ‘executive session’ of the Board, as developing country Board members wanted to raise issues of concern including over the Deutsche Bank and the World Bank applications. The executive session was closed to observers.

Prior to the executive session held on 7 July, there was a discussion around whether the applicant entities would be adopted as a ‘package’ or if each one would be considered separately. Andrea Ledward, Board member from the United Kingdom, suggested the package approach whereas Zaheer Fakir (South Africa) said, “I would not do a package. We need to see each entity for their merit and what they get to the Fund.”

Following the executive session, when discussion on the topic resumed on 9 July, Board members reflected on the draft decision text, which was supposed to have been revised. However, differences remained with developing country Board members wanting to ‘prioritise’ national and direct access entities for accreditation over international entities, whereas the developed country Board members objected to the word ‘prioritise’.

“We will have potentially 20 entities (seven entities were accredited at the ninth meeting of the GCF Board) and we do not know how many others of a similar nature there will be in the next round. One of the unique features of the GCF is direct access. National and sub-national implementing entities are central to the GCF. This is not a numbers game of international entities. Based on the actual utilization of the Fund’s resources (according to the levels of funding the entities are accredited for), national entities will have just 1 or 2 per cent (of the resources), whereas international entities will have 70 per cent. That is not what we want. I cannot support the direction in which this (decision) is going. Put this in the backburner and we can take this up at the next meeting,” said Fakir (South Africa). 

Fakir also reminded the Board about their discussion on safeguarding against reputational risk of the Fund during the executive session. “We had raised the issue of reputational risk of the Fund in terms of the activities taken by entities outside of the work we are doing. We would like this risk reflected and find ways of mitigating it. Here, we are talking about an entity engaged in climate activity, but also other activities outside of the scope of work we are doing here,” he added.

Ledward (UK) said that she could not accept the prioritizing of entities as that would mean capping international organisations. She suggested separating the decision on the accreditation of the entities from the portion of the decision that reflected the process for accreditation. 

Fakir disagreed with the UK’s proposal and said, “There is no consensus on all the entities here…what is needed are checks and balances in place, which is incumbent on this body for good fiduciary standards so that we do not expose the Board to reputational risk. If we de-link the two (the accreditation of the entities and the process of accreditation), let us look at the entities again. If we do this together, we must include the checks and balances.

In response, Leonardo Martinez-Diaz (United States) said this was the second time they were using the (current) accreditation system (referring to the accreditation of entities in the previous Board meeting). “We were able to come to a decision the last time. We should continue to use that system and have a conversation on the 13 (entities). If folks have concerns about the merits of specific entities, we can go back to an executive session. There are systemic issues here. It sends a message that this lot (of 13) is tainted and that we have agreed on process that does not work,” said Martinez-Diaz.

Omar El Arini (Egypt) added that the imbalance (in the nature of the entities being accredited) needs to be redressed “for this Fund to be different from other Funds”. He expressed concerns that there was a preponderance of financial institutions in the accreditation process. 

In the decision taken however, the word prioritise was replaced and the paragraph (h) which reads: “Also decides that…the Secretariat will actively support applications for accreditation received from subnational, national, regional, public and private sector entities to ensure a balance of diversity, including between entities under the direct access and international access modalities, in the list of entities being considered for accreditation by the Board”.

Following the adoption of the decision, Meenakshi Raman of Third World Network, an active observer, spoke for the civil society constituency and said the results in relation to some of the entities accredited represented a “deeply flawed process which is not only not transparent to us but also does not even follow the minimum standards set by the Adaptation Fund to disclose the entities prior to Board approval, after the Accreditation Panel (AP) makes the recommendations”.

In the accreditation decision taken, the matter on disclosing the names of the entities has been deferred to the 11th Meeting of the GCF Board.

“Paragraph k of the decision is a step in the right direction but we regret that it did not come much sooner and we will still have to wait for the next Board meeting before the rule changes, if at all,” said Raman. (Paragraph K of the decision reads: Requests the Secretariat, as part of the information disclosure policy to be considered by the Board at its 11th meeting, in consultation with relevant stakeholders, to develop a proposal to increase the transparency of the accreditation process, including the modalities for the disclosure of the names of applicant entities and/or those recommended by the AP to the Board for accreditation;)

Expressing deep frustration over the decision, Raman said, “You as a Board have allowed the accreditation of applicants where there are clear concerns over their integrity over their activities.”  She then gave the examples of Deutsche Bank, World Bank, the African Finance Corporation and the Corporacion Andina de Fomento (CAF or Development Bank of Latin America) and elaborated why the accreditation of such institutions posed a reputational risk for the GCF.

“In the case of the Deutche Bank accreditation, news has already gone around that the GCF is accrediting a partner who is a top coal funder and has been widely criticized for serious human rights concerns, was awarded the ‘Black Planet Award’ for environmentally destructive business policies. To make matters worse, it is public knowledge—broadcast in international  news media—that the Duetsche Bank has been involved in serious breaches of money laundering and Libor manipulation leading it to be fined millions—and even US$2.5 billion—and yet they are being accredited,” said Raman.

On the World Bank accreditation, Raman said, “The World Bank, acting already as an interim trustee and now an accredited entity is performing two functions, leading it to being in a position of possible conflict of interest - as interim trustee and also possessing all information of the Fund on a daily basis akin to having ‘insider’ information.”

Raman recalled that that during the design of the GCF by the Transitional Committee (TC), Nicaragua, had cited the case of Arthur Anderson and the Enron scandal, where Arthur Anderson served both as an auditor as well as provided consultancy services to Enron, which was found to be a violation of internationally accepted fiduciary standards. She reminded the Board that Nicaragua had raised these concerns as the services of the World Bank staff were being considered for the technical support unit of the TC, when the Bank was to serve as the interim trustee to the GCF.

Raman stressed that “You do not need actual conflict of interest but even a perception of this existing, raises reputational concerns.”

As regards the African Finance Corporation, Raman added that it has been accredited to deal with large, high-risk (category A) projects. However, the entity only adopted environmental/social policy in February 2015, which is just a statement to apply Equator Principles/World Bank safeguards and has no track record of applying this policy, she said further.

“We have similar concerns over the CAF that has been accredited for high-risk ‘category A’ projects, where we have heard of cases of  projects financed by the applicant have led to displacement of communities, land speculation, accelerating the unsustainable extraction of resources, rapid deforestation and threatening the territories of indigenous peoples. We are not convinced that the track record of these entities have been reviewed adequately,” said Raman and asked, “How can these be justified and allowed?”

She reminded the Board members that they have fiduciary duties to protect the interests of the Fund. “You should act in objective fashion based on sound assessments. We question how you arrived at your decisions. This is not about horse-trading or making decisions based on considerations beyond our comprehension. It defies logic and common sense. The package approach that you adopted is baffling, to say the least and smacks of political concerns overriding the principles of integrity and fiduciary responsibility,” emphasized Raman.

Expressing further concern, she said, “It was shocking for us to see how some of you were prepared to adopt a quick decision approving all the applications without an executive session to discuss each of the options on their individual merits.”

Pointing to the decision, Raman said, “After that lengthy session, you now have a long decision, which tries to do damage control, akin to bolting the stable door after the horse has bolted! For the non-native English speaker, it means improving the security system after the theft has been committed. It would have been more prudent for you to have followed the age-old adage that prevention is better than cure, or it is better to be safe than sorry. We note the reference in the appendix to the decision on a ‘comfort letter’ to be given by the Deutsche Bank. I am not sure how comforting that is going to be,” said Raman.

(In the Board decision, with respect to the Deutsche Bank, there is a conditional provision prior to the first disbursement by the Fund for an approved project/programme to be undertaken by the applicant. The condition reads: “Provide the Fund, through the Secretariat, a comfort letter executed by the appropriate authority within the applicant entity stating that it is taking the necessary actions to strengthen its internal controls related to compliance with relevant regulations, including, but not limited to, risk management, management of operational risk and anti-money laundering and countering financing terrorism”.)

Raman added that the CSO constituency remains deeply concerned about following the precedent the Board has set for such a “package approach”. “We are concerned that both the small and national entities with the international entities are put in the package together and not a thing is agreed unless everything is agreed approach. This is not prudent at all,” she said. 

She raised the same point as the Board members from South Africa (Zaheer Fakir) and Egypt (Omar El Arini) had asked: where are the resources of the Fund going? “There is a preponderance of financial institutions. It is also an issue in relation to the access to the resources of the Fund, according to the size of the activity they are accredited for. We are concerned about the international entities getting the biggest share of the pie, compared to the national entities,” said Raman. “Your reputation is indeed on the line, and so is ours. We are being challenged by our social movements and CSOs on the ground on why we engage here and appear to legitimise processes with unsound outcomes. The Fund is young and new. The last thing you need is controversy right now,” added Raman.

Continuing with the intervention, Raman reflected, “You talk of setting high fiduciary standards, respecting ethics, norms and principles. There is rhetoric about the need for a paradigm shift, and to quote Liane Schalatek (an observer with Heinrich Boll Foundation), ‘all these values just died and ring hollow by your accreditation decision in relation the entities we have concerns over today’. Is it paradigm shift or sh**?” asked Raman sternly.

Making the terms clear that civil society has no role to play in the decision, Raman said, “Let it be recorded that we had no part in this and we tried to warn you but the process is indeed flawed and that does not bode well for the health of this institution. We hope to God and pray that we will not have to come back to this institution one day to say: we told you so.”

In response to Raman, Martinez-Diaz (US) said, “We had a long executive session. We asked a lot of hard questions about the process. We will develop and live up to higher standards. This is an opportunity. They (accredited entities) have ambition and plans to be greener. Many of them have long histories; they have made mistakes. The question is whether we can help drive change. If they do not, then we have controls in place to remove them. That is why we have an independent Accreditation Panel. We will have three independent Accountability Units. We will be reviewing each and every project. This is an important experiment.”

Following the Board decision, 29 organisations issued a public statement of concern and included ActionAid USA, Asian Peoples Movement on Debt and Development,  Center for International Environmental Law (CIEL), Friends of the Earth, Germanwatch, Global Alliance for Incinerator Alternatives (GAIA), Heinrich Böll Stiftung, Institute for Policy Studies – Climate Policy Program, Interamerican Association for Environmental Defense (AIDA), Oil Change International, Pan-African Climate Justice Alliance, Tebtebba Foundation and Third World Network

In their statement, the organisations said, “As representatives of development, environment and social justice organizations engaged with the Board of the GCF in Songdo, South Korea, we are tremendously discouraged and disappointed by today’s decision of the Board to accredit Deutsche Bank to receive and distribute GCF funds.”

“Deutsche Bank is one of the world’s largest financiers of coal. It has been criticized for its very poor record on human rights monitoring, was awarded the ‘Black Planet Award’ for environmentally destructive business policies, and recently received a record fine for market manipulation and obstructing regulators. The GCF claims zero tolerance towards money-laundering, but has accredited Deutsche Bank despite the fact that two national regulators have this year fined it for the poor state of its anti-money-laundering governance.”

“The World Bank was also accredited by the GCF, despite its top-down, donor-driven nature that flies in the face of the GCF’s mandate to be more directly responsive to developing country and community needs, not to mention its poor track record on climate finance and concerns around human rights. Two other multilateral development banks with similar records, the European Bank for Reconstruction and Development (EBRD) and the Inter-American Development Bank (IDB), were likewise accredited,” the statement reads.

“Civil society has pushed for the creation of the Fund since the beginning, seeing it as an opportunity to break from bad existing practices and shift towards a model that is more responsive to the needs of vulnerable countries and communities, adopting a gender-sensitive approach and supporting a real paradigm shift to low-carbon, climate-resilient societies. By rushing the accreditation of large international private entities like Deutsche Bank through a non-transparent process, the Fund is at a real risk of losing credibility,” the organisations said in their statement.

“This is an outcome none of us want. We want the GCF to succeed. But for it to do so, it needs to change direction away from accrediting controversial big banks that are heavily invested in fossil fuels and thus actually exacerbating climate change. If the GCF continues in such a direction, this would reinforce our fears that in the near future we may have to protest an institution we have thus far been supportive of and integral to creating.”

“The issues here go deeper than the individual entities mentioned. We are concerned that the GCF is becoming evermore like the multilateral development banks and international private banks that it was meant to provide an alternative to. The GCF decided to outsource the management of its programmes and projects to other institutions (“entities”), originally with the idea of making decisions more responsive to the needs of the countries and communities most affected by climate change. But the accreditation of many of the first 20 of these entities, and the process leading to their accreditation, tells a different story.”

“The Board chose to approve all 13 applicants presented for accreditation at the current GCF meeting in a single bloc, accrediting groups of entities in one go. This encouraged political horse-trading between Board members over which applicants get approved, leading to tit-for-tat approval of applicants despite very serious reservations. Some Board members raised concerns about Deutsche Bank, while other concerns were raised about the ability of the newly accredited CAF and the public-private African Finance Corporation to conduct due diligence on the highest risk (category A) projects.”

“Information presented to the Board by the Accreditation Panel was often partial and one-sided, with no substantial assessment of the track record of the institutions concerned, and reliance on official sources that are long on glowing praise and short on critical information about shortcomings and controversies. Civil society groups are not allowed to know the names of the applicants in advance of their approval. This makes it impossible to provide input on the track records of applicants, despite civil society’s in-depth, on the ground experience of the work of these institutions,” the statement read.

Other institutions accredited during this round of the Board meeting included Agence Françaisede Développement, a development finance institute, headquartered in France; Caribbean Community Climate Change Centre, a public organization that coordinate’s the Caribbean’s response to climate change, headquartered in Belize; Conservation International Foundation, a non-profit environmental organization based in the US; Environmental Investment Fund of Namibia, EBRD, Inter‐American Development Bank, Ministry of Natural Resources of Rwanda and the National Bank for Agriculture and Rural Development based in India; and the United Nations Environment Programme. +