Opinion: Public Development Finance investments should be anchored on social and environmental responsibility

Tuesday, February 22, 2022

This article was written for The Star newspaper on the occasion of the launch of Fair Finance South Africa by coalition members Alia Kajee (350Africa.org), Khabonina Masango (FFSA) and Dean Bhebhe (ACRP)

“Where finance goes today, the world goes tomorrow.” The Paris Agreement necessitates that financing of fossil fuels must stop in order to stay within 1.5°C of global heating, funding flows must be consistent with climate objectives. Yet, finance is known to operate beyond the borders of democratic accountability particularly when disbursed in the agreeable name of development, economic growth, or most recently sustainability.

With a mandate of inclusive growth and sustainable development, civil society argues that public Development Finance Institutions (DFIs) have a critical role to play in a people-centred development agenda that is climate resilient. These ambitions, however, are undermined with continued fossil fuel investments, especially where details of unsustainable deals are notoriously difficult to obtain, despite funds being managed in the public interest. 

The 2021 national budget and mid-term statement indicated an austerity approach. Accordingly, the upcoming budget speech is expected to continue public budget cuts, known to threaten socio economic welfare. With the recent State of the Nation Address adopting a strong pro-private sector position, civil society questions how democratic and accountable the public budget is to the public.  

After years of lobbying against DFIs for more sustainable policies and practice, the newly formed Fair Finance South Africa (FFSA) aims to collectively ramp up efforts demanding greater transparency and accountability in public finance institutions amidst dire development and climate challenges. 

Joining the international network of Fair Finance International, FFSA aims to strengthen the commitment of financial institutions to social, environmental and human rights standards. Through targeted research, lobbying and advocacy work, FFSA objectives include promoting socially and environmentally responsible investment that safeguard human rights, reduce poverty and address inequality through inclusive development that is pro-poor. The aim is to ensure that these policies are applied to actors receiving DFI financing to ensure transparency, accountability and responsible investment throughout the financing life cycle. Key to this process would be enhanced South African government regulation of DFIs.

Current socioeconomic conditions of inequality, unemployment and poverty necessitate inclusive growth that enables social resilience. Climate ambitions such as the Just Transition necessitate social protection measures that leaves no worker or community behind in the shift away from fossil fuel. Financial transactions, predominantly those with a public interest, must reflect these measures of equity in their design, but a lack of transparency on social and environmental commitments, let alone impacts, means limited opportunities to assess the extent of responsible financing, let alone hold institutions to those promises. 

Continued investment in fossil fuels could cost South Africa up to R18 trillion in transition risk if the rest of the world aligns with the Paris Agreement, a trend indicated by the EU’s proposed Carbon Border Adjustment Mechanism. With a price tag of R500 billion a year in public health and environmental damages attributed to the fossil fuel industry, this is a strain the public budget cannot handle. Despite this, G20 countries have provided at least $77 billion a year to oil, gas and coal through public finance institutions since the Paris Agreement was signed in 2015, a further $230 billion is earmarked for fossil fuel developments in Africa, and our own Development Bank of Southern Africa has indicated interest in the notorious Karpowership gas-to-power project that has been linked to establishing a gas market in South Africa, as well as agreed to partly finance the Mozambique Liquid Natural Gas (LNG) project. 

Using the Fair Finance methodology in 2020, the Centre for Environmental Rights assessed the IDC’s involvement in the financing of the Musina Makhado Special Economic Zone, (a project that has recently seen China pull out as a financier due to the high emissions); The case study details how the IDC’s investment in MC Mining’s projects exposes public funds to coal mining activities that have threatened the integrity and authenticity of a UNESCO World Heritage Site; affected the rights of local people to practice their spiritual rituals and traditions; lowered the water table and dried up boreholes in a water scarce area; destroyed the surface area of a protected biosphere; and threatens to exacerbate South Africa’s contribution to global warming and climate change. Fossil fuel projects have not led to promises of development for local areas, but more often than not, profits for multinational corporations even when countries have stated the need to build back better. 

Looking forward, climate finance such as the Just Transition Partnership worth $8.5 billion has been regarded as a watershed deal committing to climate ambitions. However, details on how this deal will ensure much needed aspects of equity such as reskilling of workers, local economic rigidity or compensation to coal-affected communities are not clear, at least not to the general public. Civil society has accordingly made calls for climate finance to be shaped, disbursed, monitored and evaluated in a more inclusive manner with labour, community based organisations, research bodies and general society. But what role will our own institutions play?

Considering the risks of megaprojects, including those claimed as green, primarily affected groups are the least likely to be consulted at the early stages of project financing. The African Development Bank claimed The Lake Turkana Wind Project in Kenya as an example of sustainable development, however this has been criticised for not following processes to ensure free, prior, and informed consent  of communities affected by the project.  The absence of an inclusive and transparent process is undermining the land tenure rights of the community, leaving a significant number of people in the Lake Turkana community vulnerable. Projects cannot be at the expense of the social, economic, and cultural rights of communities who depend on the land and are in need of access to energy. Without addressing equity and inclusivity, some say that even the “watershed” Just Transition Partnership appears to follow  a decades-old pattern of foreign investments to Africa.” 

With continued investment in fossil fuels and the impacts of development, new climate finance deals shaping our future and worsening socioeconomic and planetary conditions, how finance is spent for the public should be known to the public. The Fair Finance coalition aims to call for enhanced transparency and accountability of DFIs that act on behalf of the public. Financing must be democratised and people-centred, and include those most affected to become the key to unlocking the world we want to see.

By Alia Kajee (350Africa.org) , Khabonina Masango (FFCSA), Dean Bhebhe (ACRP)

Alia, Khabonina and Dean are members of FFSA. Fair Finance International is a civil society network that seeks to strengthen the commitment of banks and financial institutions to social, environmental and human rights standards. In South Africa, FFSA will focus on public and development finance institutions and is currently made up of CALS, CER, 350Africa.org, OZA, Earthlife Africa , JA! and ACRP.

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