World Bank, carbon markets and accountability

Legal assistance paper

All reasonable efforts have been made to ensure the accuracy of this information at the time the advice was produced. However, the materials have been prepared for informational purposes only and may have been superseded by more recent developments.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. To the extent permitted any liability is excluded. Those consulting the database may wish to contact LRI for clarifications and an updated analysis.

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Date produced: 23/07/2011

1. Is there any legal conflict of interest being a trustee and a carbon market player buying/selling carbon credits?

2. Can the World Bank act as both trustee and Secretariat of the FPCF? Which are the rules that allow both roles?

3. What are the legal fiduciary duties as trustee for the WB? Which accountability rules WB must follow?

4. The WB manages carbon funds of governments but also enters into contracts to purchase emission reductions on behalf of buyers. Is this a “barely” legal situation?

5. Is there any enforcement mechanism to make sure WB is held accountable for the lack of performance of projects funded/channelled through GCF: which are those rules?

6. How can civil society can make sure project approval and screening is subject to public scrutiny?

7. Which laws apply to access to information for the trustee role of the WB?

8. It is our understanding that the WB is a development Bank by essence. Can the WB play a prominent role in carbon finance in the future? Which are the rules that entitle the WB to do so?

9. How civil society can make sure other carbon finance option are developed (e.g. UNDP) to manage Green Climate Funding?

10. How different governance structure/options might look alike to manage climate funding to be delivered to developing countries?

Introduction and background: The above questions arise at a time when the World Bank’s (“WB”) appointment as interim trustee of the Green Climate Fund (“GCF”) is causing controversy. The WB has long been criticised in some quarters for a failure to reflect adequately the priorities and needs of the developing countries whom its poverty reduction remit is supposed to benefit. Since the late 90’s, the WB has adopted a role in facilitating the development of carbon markets and finance, but its suitability for that role has been doubted by some. In particular, criticisms include; (i) presently whether it is appropriate for WB staff to be seconded to the Technical Support Unit (“TSU”) which supports the Transitional Committee (“TC”) in the design of the GCF, (ii) the structure and legitimacy of existing Climate Investment Funds (“CIFs”), which the WB has arguably created without significant COP input to complement UNFCCC initiatives, and (iii) more generally the WB’s role as trustee of the Global Environment Facility for the UNFCCC (“GEF”). The scope for conflicts of interest has been a recurrent theme of such criticisms, arising, for example, due to the WB’s role as both trustee of CIFs and purchaser of emissions reduction credits on behalf of public and private participants in the relevant funds, or its potential dual role as interim trustee of the GCF and consultant on design of that fund’s future structure. It has been suggested that the WB is, with the support of donor countries, positioning itself as the de facto global climate finance institution. The above are all in large part issues of trust and credibility with a significant political element to them, the merits of which we do not comment on here.

Questions 1 & 4 – Conflict of interest and fiduciary duties of trustees of international funds

As a general point, international law trusts tend to be sui generis (i.e. unique) 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 WB nor the UNFCCC have developed a standard set of procedures to deal with the potential conflict situation which arises if, for example, the WB is appointed as trustee and as a consultant in relation to the design of a trust such as the GCF.

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 WB 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” .

The CIFs created by the WB, such as the Forest Carbon Partnership Fund (“FCPF”), each have founding documents which authorise the WB to act as trustee and to engage in the particular operations of the fund. For example, the disclaimer referred to immediately above is included in clause 6.01 of the standard form Donor Participation Agreement for the FCPF. Where such disclaimers are used in trust fund constitutional documents which authorise the WB to act as trustee and perform market functions, perceived conflicts in such roles will not represent breaches of the relevant constitutional documents or general principles of trust or fiduciary law.

We do note criticisms of the constitution of the Clean Technology Fund (“CTF”) made by Addie Haughey which suggest that despite efforts in the CTF’s founding document to demonstrate consistency and collaboration with the UNFCCC, there are in fact significant areas of inconsistency, namely (i) inadequate provision for “new and additional funding”, (ii) a failure to ensure equitable governance in the form of input from developing countries, and (iii) the open-endedness of the ‘sunset clause’ intended to bring the fund to an end at the appropriate time and thereby prevent the undermining of the UNFCCC process by the CTF. Donor countries and the WB are entitled to reach agreement in order to create CIFs although the terms of these should not materially conflict with their treaty obligations under the UNFCCC. If borne out, Haughey’s criticisms may imply a need for changes to the operation of such CIFs but they do not, in our view, mean that the WB cannot perform its current role in climate markets and finance.

Criticisms of apparent ‘conflicts of interest’ may still nevertheless be important politically for challenging the suitability of the WB for any particular climate finance or market role.

The constitution of the GCF is, of course, being drawn up at this time, and this may provide more scope to challenge the WB’s role on a constitutional basis. We note that para 104 of the relevant Cancun Agreement (Decision 1/CP.16) states that the trustee of the GCF should manage the fund “in accordance with internationally accepted fiduciary standards.” Paragraph 111 of the Cancun Agreement makes provision for the secondment of staff from agencies such as the UN, multilateral development banks, etc to support the work of the TC for the design phase of the GCF. Paragraph 2(b) of the TC’s terms of reference in Annex III of the Cancun Agreement, also provides that the TC shall “encourage input from all Parties and from relevant international organisations and observers.”

It remains to be seen how this will be translated into the GCF’s constitution and also into the GCF design process, bearing in mind that the WB is playing a role in that alongside other entities. We note that the TC’s first technical workshop of 25 May 2011 proposed a specific workstream “to look at the relationship between the trustee and implementing institutions, particularly in relation to internationally accepted standard” as well as the “review [the] process for interim trustee and process for selection of permanent trustee.”

Although there may not be any clearly defined internationally accepted “best practice” standards which apply to international trustees, there are some valuable lessons which could be drawn from the corporate fiduciary space. For example, in one of the UNFCCC meetings in Bangkok in April 2011, Nicaragua criticised the involvement of WB staff in the TSU design input for the GCF by reference to US domestic law post-Enron which precludes the combination of fiduciary and consultancy functions. However, such domestic law is not directly applicable and 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).

The COP clearly envisaged an initial role for the WB in the GCF and also for multilateral development banks , such as the WB, in the design process. It does, however, seem reasonable to suggest that the Enron example combined with the general international trust duty to refrain from conflicts and self-dealing referred to above, are proper constitutional justifications for asserting that the WB should, as a minimum, not participate in the design of the review process for the interim trustee or the selection of the permanent trustee. Note that we currently lack clear information about whether the WB is involved in this particular workstream or whether its involvement is pursuant to any agreement containing the standard disclaimer referred to above.

It is worth elaborating on the structure of the GCF briefly in order to put the above concerns into context. Para 105 of the Cancun Agreements provides 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”, i.e. the WB 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. In addition, the TSU will include representatives of numerous organisations, of which the WB is only one. Any advice given to the TC (which is constituted by 15 developed country and 25 developing country representatives) by the WB 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 WB secondees to exert any greater influence or power than any other organisation’s seconded staff, with respect to any decision of the TC 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).

Question 2

The WB can act as both the trustee and secretariat of the FCPF. Article 14.1 of the FCPF Charter provides for a facility management team to be established by the WB to be responsible for day to day operations. Article 14.1(h) provides for the facility management team to provide secretariat services to relevant meetings. Article 14.2 provides that the WB shall be the trustee of the two funds under the FCPF.

Question 3

As stated above, fiduciary duties of international trusts will be governed by the agreements which create them. The WB’s anti-corruption guidelines state that the WB has fiduciary duties under its Articles of Agreement. The relevant articles for these purposes are those of the International Development Association (“IDA”) which is one of the two key institutions making up the WB. Section 1(g) of Article V: Operations of the IDA’s Articles of Agreement state that;
“The Assocation shall make arrangements to ensure that the proceeds of any financing are used only for the purposes for which the financing was provided, with due attention to considerations of economy, efficiency and competitive international trade and without regard to political or other non-economic influences or considerations.”
As also noted above, when entering into specific arrangements with donors, such as CIFs, the WB typically includes a standard disclaimer of all fiduciary duties except those contained in the particular Administrative Agreement.
For comments on the accountability of the WB, see the answer to question 5 below.

Question 5

The question asks if there is any enforcement mechanism to hold the WB for lack of performance of projects funded under the GCF. The design and governance of the GCF is being discussed presently and we do not know if accountability mechanisms are being discussed. In the absence of anything specifically included in the design of the GCF, the following existing WB accountability mechanisms are likely to be relevant.

The WB has a series of operational policies for its staff which cover, for example, appropriate project supervision (OP 13.05), environmental assessments to ensure funds support sustainable projects (OP 4.01) and the WB’s administration of trust funds in accordance with the WB’s purposes and mandate (OP 14.40) .

The WB has a number of mechanisms for scrutinising its activities, including: (i) the Inspection Panel; (ii) the Independent Evaluation Group; iii) the Integrity Vice Presidency; (iv) the Office of Ethics and Business Conduct ; and (v) the Office of the Compliance Advisor and Ombudsman . We provide more detail below on items (i) to (iii) but we are not in a position to comment on how effective these mechanisms are in terms of holding the WB to account in practice.

5.1 The Inspection Panel (the “Panel”) is an independent vehicle for people who believe that they have been, or are likely to be, harmed by a WB funded project . It is supposed to give such people direct access to the WB’s Board of Executive Directors. The Inspection Panel’s mandate covers any project or program financed at least in part by the WB. Complainants must submit eligible requests for inspection which are then considered by the Panel with a view to whether it should recommend an investigation to the WB’s Board of Executive Directors (the “Board”). If the Board approves such a recommendation, the Panel investigates and reports on the matter to the Board which will make a decision based on the Panel’s report. This decision is made public.

5.2 The Independent Evaluation Group (“IEG”) is an independent unit within the WB which reports directly to the Board. Its mandate is to carry out independent and objective evaluation of the strategies, policies, programs, projects and corporate activities of the WB. It produces a range of country, sector and thematic evaluations designed to improve accountability and results. In order to protect the IEG’s independence, WB management cannot alter such evaluations or prevent their release.

5.3 The Integrity Vice Presidency (“IVP”) has a mandate to investigate allegations of fraud and corruption related to WB supported activities (external investigations), as well as allegations of significant fraud or corruption involving staff (internal investigations). The IVP handles complaints from WB and non-WB staff alike and it covers issues such as bid manipulation and collusion, forgery, procurement irregularities and kickbacks. Firms or individuals that have engaged in fraud, corruption, collusion, coercion or obstruction in connection with World Bank Group-financed operations are subject to administrative sanctions. There are five possible administrative sanctions: Public Letter of Reprimand, Debarment, Conditional Non-Debarment, Debarment with Conditional Release, or Restitution.

Question 6

Provision has been made in the design of CIFs for civil society to input its views on policies and projects. It is not clear that there is consistent treatment across all the CIFs. We analyse here the rules applying to a number of key CIFs such as the Climate Transformation Fund (“CTF”), Strategic Climate Fund (“SCF”) and the FCPF. It is not clear that the rules for civil society access to meetings of the CTF and SCF compared with, for example, the FCPF are entirely consistent. We cannot comment here on how effective the rules described below are in ensuring adequate public scrutiny of decisions.

At their January 2009 meetings, the CTF and the SCF Trust Fund Committees approved guidelines for promoting the participation of civil society in their meetings . As a result, civil society representatives should be invited to participate in the meetings of these Trust Fund Committees as ‘active’ observers, with similar status to UN agency observers at such meetings. Civil society observers may therefore make interventions during such Trust Fund Committee discussions, propose the addition of agenda items to the provisional agenda and recommend external experts to speak on specific agenda items. Civil society is expected to self-select 4 representatives to attend the meetings. There is an annual CIF Partnership Forum which is a further opportunity for CIF stakeholders generally, including from civil society, to have their views heard. This year’s forum took place in Cape Town recently.

In October 2010 the CTF and SCF Trust Fund Committees produced a review of the self-selection procedure of observers to CIF Committees and effectiveness of participation . Paragraph 23 of this report acknowledges that through this form of participation “the CIF is truly experimenting with a new form of stakeholder involvement in decision-making on climate financing.” However, the report also acknowledges room for improvement in terms of, for example, the observer selection process, reporting by observers to their constituencies, and availability of documents and other information sufficient in advance of meetings.

The FCPF is another key CIF and its charter and rules of procedure make specific provision for participation by observers. The key institution within the FCPF is the Participants Committee. Section 11.2 of the FCPF Charter provides that the Participants Committee selects eligible REDD countries to participate in the fund and approves their ‘readiness’ proposals. The Participation Committee has 28 members, of which 14 are drawn from REDD Country Participants and 14 from Donor Participants and Carbon Fund Participants. Section 11.7 of the FCPF Charter provides that, among others, one NGO representative and one representative of the UNFCCC Secretariat will be invited to attend Participant Committee meetings as observers without voting rights . Such observers may express their views on issues under discussion, subject to relevant rules of procedure, but without voting rights on any decision. Interested stakeholders must agree the process for selecting such representatives with the FCPFs’ Facility Management Team.

Question 7

The WB has a formal policy on access to information which was published July 1, 2010 . This is a new policy which is supposed to ensure that significantly more information about WB operations and Board proceedings will be available. It allows the WB to disclose any information in its possession that is not on a list of exceptions. It contains an appeals mechanism to provide public recourse should the WB violate its own policy by improperly or unreasonably restricting access to information (see paragraph F of section IV) which provides for an ‘independent’ appeals board. The policy is helpful but the WB nevertheless retains considerable discretion over what information is released. Furthermore the members of the independent appeals board are nominees of the President of the WB and endorsed by the Board. We cannot comment on the effectiveness of the above policy in promoting access to information.

Question 8

The WB was created by agreement of sovereign states and given a mission to promote economic development and raise living standards in the less-developed areas of the world . Such sovereign states have the power to give the WB a mandate to operate in the field of carbon finance. While the Articles of Agreement of the entities making up the WB do not specifically refer to climate change or carbon finance, it is clear that there has been considerable debate about how the WB, as a development bank, should respond to these issues. In September 2008, the WB published ‘Development and Climate Change: A Strategic Framework for the World Bank Group’ (“Strategic Framework”) . This justifies the WB’s climate change activities in development terms and seeks to set them in the context of, and as a complement to, the UNFCCC process.

Paragraph 7 of the Strategic Framework states that “the adaptation dimension of the climate change agenda, in particular, is directly linked to the WB’s mission of fighting poverty and will grow in importance.”
Paragraph 8 of the Strategic Framework states that “as a global player, the WB sees its role in helping to steer the global economic transformation required by climate constraints in a manner that enhances growth and development outcomes in developing countries. The WB’s experience with global issues such as agriculture trade and HIV/AIDs shows that it can make an impact ….The WB has influenced the establishment of the GEF and through prototyping and demonstration, the development of a global carbon market.”

Criticisms have been raised concerning whether the WB has the required mandate for the above, but it is at least arguable that climate change is, as the WB suggests, a relevant part of the development agenda. The WB has also been criticised for allegedly undermining the UNFCCC process. However, such criticisms do not appear to be mainstream and the WB appears to have successfully persuaded key stakeholders, and in particular, donor countries, that it should play a role.

Question 9

This query does not have a strictly legal answer. Non WB climate finance options will of course require their own appropriate rules and governance; see for example the answer to question 10 regarding alternative structures such as the Adaptation Fund. However, the issue of how to make sure such finance options become available or are promoted ahead of the WB is essentially political and dependent upon effective lobbying. Effective lobbying for a particular finance option would probably need to include a description and justification of its governance.

We note the question’s reference to the UNDP and that as part of its work the UNDP regularly liaises closely and partners with civil society. Earlier in June 2011 the UNDP launched a guidebook on “Catalysing Climate Finance”, advising decision makers in developing countries how to tap into growing environmental finance markets . The UNDP itself suggests that its global presence, expertise in capacity building, and extensive development finance experience allow it to help countries to enter the complex and highly technical climate finance landscape, by supporting them to develop capacities to attract and drive investments towards sustainable human development. One way forward may be to contact the UNDP about this in order to discuss its plans in this area.

Question 10

This is a very broad question and we cannot cover all possible answers here. One alternative model, the Adaptation Fund Board (the “AFB”) already exists and is understood to have support and credibility in the developing country constituency.

The AFB was established as the operating entity of the Adaptation Fund (the “Fund”) with the mandate to supervise and manage the Fund under the authority and guidance of the UNFCCC CMP . The AFB has 16 members with 16 alternates, making 32 in total, of which a majority are drawn from developing countries.

The Fund became operational in 2009 and supports developing countries that are particularly vulnerable to the impact of climate change and are signatories to the Kyoto Protocol. The Fund is financed by a share of the proceeds from the Clean Development Mechanism and donations. An almost unique feature of the Fund is that vulnerable countries can access money directly through their own national institutions provided they have been approved for that purpose. Only the Global Fund to Fight HIV/AIDs allows similar direct access to vulnerable countries. This provision for direct access may avoid some of the barriers which are perceived to have been an issue with the distribution of WB funds.
The Fund and the AFB are relatively new and need to develop experience and procedures which ensure that funds are allocated effectively. The AFB has its own code of conduct and rules of procedure and at its 7th meeting it adopted fiduciary risk management standards to be met by implementing entities. As a new institution it will need to ensure that all such procedure are robust and fit for purpose. The AFB and the Fund have been proposed by some as a suitable model for future climate financing mechanisms.