World Bank and Green Climate Fund

Legal assistance paper

All reasonable efforts have been made to ensure the accuracy of this information at the time the advice was produced (please refer to the date produced below). However, the materials have been prepared for informational purposes only and may have been superseded by more recent developments. They do not constitute formal legal advice or create a lawyer-client relationship. You should seek legal advice to take account of your own interests. To the extent permitted any liability is excluded. Those consulting the database may wish to contact LRI for clarifications and an updated analysis.

Date produced: 17/07/2011

1. What do international law and best practices and standards (including UNFCCC and GCF rules or standards), World Bank policies and guidelines, and US and EU law and best practice standards say about the fiduciary responsibility of trustees, the obligations of consultants, and potential conflicts of interest where one organization plays both roles? 

2. Is there a potential for breach of any of these rules/standards if the World Bank provided technical advice on governance and other matters via secondment of its staff to the TSU serving the TC (consultancy function) and served as interim trustee of the GCF (fiduciary function)?

3. If World Bank staff were to be seconded to the TSU, which specific elements, if any, of the TC’s Terms of Reference (Cancun Agreements, Annex IV) could the staff member/s advise on without breaching conflict of interest requirements in the above sources of law and best practice standards?

4. Given the provisions of the sunset clause of the CIF, does the secondment of World Bank staff to the TSU serving the TC breach any of the conflict of interest rules/standards, given the World Bank’s ongoing role in the CIF?

5. What are the implications in terms of conflict of interest rules/standards if seconded World Bank staff recommend a CIF-like model in which the World Bank is an implementing agency of the GCF?

Summary: International law trusts tend to be sui generis in nature and are governed by an agreement between the donor and the trustee which will determine, among other things, the fiduciary duties which apply (if any) to the appointed trustee in its relationship with the donors, the beneficiaries and any other stakeholders of the trust. Although it is not settled law, duties including a duty of care and a duty to avoid conflicts of interest and to refrain from self-dealing, are generally accepted as applying to international trusts (except if otherwise provided for in the trust documents between the donor and the trustee). But there are no internationally accepted “best practice” standards relating to conflicts of interest associated with international trustees and neither the World Bank nor the UNFCCC have developed a set of procedures to deal with the potential conflict situation which arises if the World Bank is appointed as trustee and as a consultant in relation to a trust. The structure of the GCF and the TC may in themselves significantly reduce the risk of any actual conflict of interest by the World Bank in its role as trustee of the GCF.

1. Fiduciary duties of trustees of international funds

1.1 It can be problematic to apply domestic law notions of fiduciary duties of trustees to international trusts and their trustees for a number of reasons. In particular, if an international law trust fund is created by treaty then the legal nature of the fiduciary duties applicable to the trustee of that trust fund must be guided by reference to trust fund instruments and the operational and financial regulations, if any, of the appointed trustee, rather by any domestic (or international) legal or equitable trust principles. That is, international trust arrangements generally exist on the basis of agreement and that agreement will determine the fiduciary duties which apply (if any) to the appointed trustee in its relationship with the donors, the beneficiaries and any other stakeholders of the trust.

1.2 Because trusts created under international law tend to each be sui generis (i.e. unique) in nature, the set of standard fiduciary duties which is applicable to trustees of international funds is not necessarily settled law. However, it seems to us that the following duties are supported by customary international law at this time :

(a) to care. This duty relates to the trust fund’s assets and their administration for the eventual benefit of the beneficiaries (although the duty is owed to the donor). It is the overarching duty which informs all other duties;

(b) to invest. This duty may either be expressed by the terms of the relevant treaty or may be implied by the trustee’s operational policies or the fund’s terms of reference;

(c) to separate trust fund accounts from the trustee’s own accounts (but see para 105, Cancun Agreements which permits the co-mingling of GCF Funds with other funds for which the World Bank is trustee, for administrative and investment purposes);

(d) to report to the donors and undertake financial audits; and

(e) to avoid conflicts of interests and to refrain from self-dealing .

1.3 However, although as a matter of customary international law a trustee may owe certain duties to the donors of a trust fund, including a duty to avoid conflicts of interest and refrain absolutely from self-dealing, the duties owed by a trustee to donors under a particular trust arrangement may be limited or excluded through the terms of that trust arrangement. As a matter of practice, the World Bank includes a standard disclaimer in all Administrative Agreements with donors which limits its duties and responsibilities to “those duties specifically set forth in this Arrangement and will not be subject to any other duties or responsibilities to the Donors, including, without limitation, any duties or obligations that might otherwise apply to a fiduciary or trustee under general principles of trust or fiduciary law” . Presumably the GCF Administrative Agreement will reiterate the requirements in relation to fiduciary responsibilities which are set out in the Cancun Agreements, including the express reference to the requirement for the trustee to prepare financial statements and other reports for the GCF board “in accordance with internationally accepted fiduciary standards” (para 104).

1.4 It should also be noted that under international law, as a general rule, trustees of international trusts rarely owe any duty to beneficiaries of those trusts (even if duties are owed to the donors), except under any agreement for the distribution of funds under the trust which is made directly between the trustee and a beneficiary. Again, however, even in the situation of a distribution arrangement any obligations are likely to be limited to those which are agreed to by the trustee.

1.5 Although there may not be any internationally accepted “best practice” standards which apply to international trustees, there are very likely some valuable lessons which could be drawn from the corporate fiduciary space (e.g. the use of competitive tender process to fill the position of trustee) but great care would need to be taken to ensure that these standards and processes are, in fact, appropriate for the purpose of an international trust (which has quite distinct legal and political structure which is not necessarily directly analogous to corporate structures).

1.6 The World Bank has its own standards, procedures and policies which may be applicable to Financial Intermediary Funds (FIFs – which is the World Bank category that would apply to the GCF). But precisely which of the internal World Bank regulations are to apply is determined in the context of the requirements of each FIF. The information which is publicly available on the World Bank website does not provide any guidance as to the management of conflicts of interest which could arise (or could be perceived to arise) as a result of the World Bank performing both a trustee role and a consultancy role in relation to a particular trust fund. The only reference to conflicts of interest appears in World Bank policy OP 14.40 which provides that the World Bank will not accept a role or responsibility proposed in relation to a trust fund unless the “risks…arising from any conflicts of interest or any restrictions on [the trust fund’s] use, are explicitly considered and are judged to be acceptable and manageable by the Bank”. There does not appear to be any publicly available information as to the criteria by which the World Bank would assess such acceptability and manageability.

1.7 Likewise, the UNFCCC does not appear to have developed a specific policy in relation to conflicts of interest in the trustee/consultant situation or even more generally in relation to trustees. This may be because it relies on the existence of appropriate policies within the relevant trustee organisation. The GEF is vague with respect to the duties owed, simply referring to the World Bank’s policies and by-laws and the terms of the GEF (which does not detail the fiduciary duties of the trustee).

1.8 However, it is open to the parties to the UNFCCC to require that the Administrative Agreement between the UNFCCC and the World Bank (which appoints the World Bank as trustee of the GCF) expressly provide for the manner in which the World Bank is to manage the conflict of interest risk (perceived and actual) associated with its appointment as trustee of, and as consultant to, the GCF. If appropriate and if agreed to by the World Bank, this could include the implementation of comprehensive conflict of interest management protocols (e.g. similar to those employed in the accounting and legal professions) that require, among other things, the creation of physical and virtual information barriers between the relevant World Bank staff who will be appointed to work in each of the roles. An equivalent provision would then need to be included in the agreement between the UNFCCC and the World Bank for the consultancy services to the GCF Technical Support Unit.

2. Breach of duty

2.1 It is not clear to us that the appointment of the World Bank as trustee and also as a consultant would necessarily result in a prima facie breach of the World Bank’s fiduciary duty to the donors of the GCF to avoid a conflict of interest. In particular, we note that it could be argued that the risk of a conflict of interest with respect to the World Bank’s role as trustee and as consultant is very low (and therefore it may be difficult to insist on the implementation of administratively complex protocols) because:

(a) the structure of the GCF is such that the trustee must “administer the assets of the Green Climate Fund only for the purpose of, and in accordance with, the relevant decisions of the Green Climate Fund Board” (para 105, Cancun Agreements) i.e. it does not have the power to decide about investment and distribution of assets independently of the GCF Board. In turn, the GCF Board is constituted by 24 members with equal representation from developed and developing countries. This is a very different role from that of a trustee who is given wide discretionary decision making powers with respect to investment and disbursement of trust funds. It inherently reduces the risk of trustee-related conflicts of interests or self-dealing; and

(b) the TSU will include people representing numerous organisations, of which the World Bank is only one. Any advice given to the Transitional Committee (which is constituted by 15 developed country and 25 developing country representatives) by the World Bank staff will be included in the mix of views provided by staff from other organisations. Nothing in the Cancun Agreements appears to provide for a structure or function of the TSU which would enable World Bank secondees to exert any greater influence or power than any other organisation’s seconded staff with respect to any decision of the Transitional Committee when deciding on the design elements of the GCF (noting also that all design elements must be consistent with the terms of the Cancun Agreements).

3. GCF – Terms of Reference

3.1 For the reasons given in paragraph 2.1(b) above, we are not convinced that there are any areas within the Terms of Reference which the World Bank’s staff might advise on which would necessarily result in the World Bank breaching any of its duties as trustee.

3.2 In addition, we note that the World Bank’s bias with respect to its advice will be obvious to those who are receiving it i.e. it can be expected that World Bank staff are likely to provide advice that reflects the World Bank’s experience in relation to the creation and administration of international trust funds. Presumably, the World Bank has been asked to second staff to the TSU because there are members who believe that the extensive experience that the World Bank has accrued in the area of trust management can contribute positively to the development of the GCF design, even if that is to identify those aspects that are not relevant or appropriate for the purpose of the GCF.

3.3 We also presume that the TSU will operate in a manner which will enable staff from other organisations and representatives of member countries to test and challenge any of the recommendations made by the World Bank secondees (or any other organisation or member representative, for that matter).

4. CIF sunset clause

4.1 Again, it is not clear to us how the secondment of staff to the TSU would necessarily create a conflict of interest or a “self-dealing” issue with respect to the World Bank’s role as trustee of the CIF. This is because it seems unlikely to us that any World Bank staff seconded to the TSU would be in a position of sufficient influence or power (greater than any other organisation or member representative) with respect to decisions that would prolong the life of the CIF (in circumstances where the parties would otherwise have terminated the CIF).

5. Recommendation of CIF-like model

5.1 We do not think that the fact that staff from the World Bank seconded to the TSU might recommend a CIF-like model to the TC necessarily indicates a breach of duty by the World Bank as trustee of the GCF. As noted at paragraph 3, it can be expected that staff from the World Bank will draw on the experiences of that organisation when providing recommendations. However, the recommendations will need to be supported by evidence and will likely need to stand up to challenge and testing against the specific requirements of the GCF as set out in the Cancun Agreements.

5.2 Ultimately, it is up to the TC to ensure that the advice that it receives from the TSU is robust and it will be in a position to direct the work of the TSU in this regard.