Maryland Journal of International Law Volume 16 | Issue 1 Article 3 The orW ld Bank and the Environment: a Legal Perspective Ibrahim F.I. Shihata Follow this and additional works at: http://digitalcommons.law.umaryland.edu/mjil Part of the International Law Commons Recommended Citation Ibrahim F. Shihata, The World Bank and the Environment: a Legal Perspective, 16 Md. J. Int'l L. 1 (1992). Available at: http://digitalcommons.law.umaryland.edu/mjil/vol16/iss1/3 This Article is brought to you for free and open access by DigitalCommons@UM Carey Law. It has been accepted for inclusion in Maryland Journal of International Law by an authorized administrator of DigitalCommons@UM Carey Law. For more information, please contact [email protected]. ARTICLES THE WORLD BANK AND THE ENVIRONMENT: A LEGAL PERSPECTIVE IBRAHIM F.I. SHIHATA* I. INTRODUCTION This article deals with the policies and procedures of the Interna- tional Bank for Reconstruction and Development (IBRD) and the In- ternational Development Association (IDA) in relation to the environ- ment.1 While environment as such is not mentioned in the Articles of Agreement of either institution, both have a mandate under their re- spective Articles to promote economic development in their member countries through making or guaranteeing loans for specific projects and, in special circumstances, for other purposes which facilitate in- vestment.2 Each of the institutions has thus assisted in financing a broad array of development projects and programs, most of which have had an impact on or have been influenced by the environment. The effect of these projects on the environment both in the countries con- cerned and beyond their boundaries received much attention in the 1980s. In the process, conflicting conclusions have been reached about the nature of the performance of the Bank and the environmental im- pacts of its projects.3 An objective assessment must rely on a broad * Vice President and General Counsel, the World Bank. This article is based on a chapter in IBRAHIM F.I. SHIHATA, THE WORLD BANK IN A CHANGING WORLD (1991). 1. The International Finance Corporation has similar environmental policies and procedures which have been tailored to suit its distinct operations. The IBRD and IDA will hereinafter be referred to as the "Bank," unless the context requires otherwise and the word "loans" in the text will include "credits" made by IDA. 2. Article III, §§ 1 (a) and 4 (vii) of IBRD Articles of Agreement; Article V, § I (b) of IDA Articles of Agreement. 3. See, e.g., FINANCING ECOLOGICAL DESTRUCTION: THE WORLD BANK AND THE INTERNATIONAL MONETARY FUND (1987), published by a group of non-governmental organizations (NGO's); Bruce M. Rich, The Multilateral Development Banks, Envi- ronmental Policy and the United States, 12 ECOLOGY L. Q. 681 (1985); John Horberry, The Accountability of Development Assistance Agencies: The Case of Envi- ronmental Policy, 12 ECOLOGY L. Q. 817 (1985); ROBERT L. AYRES, BANKING ON THE POOR: THE WORLD BANK AND WORLD POVERTY (1983). 2 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 16 understanding of the Bank's work in this important area. The purpose of this article is to provide the background information needed for such understanding and to clarify, in particular, the regulatory aspects of the Bank's involvement and contribution. II. DEVELOPMENT AND THE ENVIRONMENT-THE INTRINSIC RELATIONSHIP The intrinsic relationship between development and the environ- ment, though somewhat controversial in the past, seems now to be uni- versally accepted. This is certainly the case in the World Bank at pre- sent, following a series of developments. The Brandt Commission noted in its report that the United Nations Conference on the Human Envi- ronment, held in Stockholm in 1972 (Stockholm Conference), was an important milestone in environmental awareness.4 Building on the con- clusions of this conference, the Commission indicated that protection of the environment could no longer be seen as an obstacle to development but rather needed to be considered as an essential aspect of it. More specifically, after stating that environmental impact assessments should be undertaken whenever investment or other development activities may have adverse environmental consequences, the Commission urged multilateral development banks to be ready to assist in carrying out environmental assessments to ensure that an ecological perspective would be incorporated into development planning.5 The relationship between development and the environment has been further sharpened by the work of the World Commission on Envi- ronment and Development (WCED), also known as the Brundtland Commission, which followed the same line of thinking but added an important contribution. It gave prominence to the notion of "sustaina- ble development," defined as "development that meets the needs of the present without compromising the ability of future generations to meet their own needs." 6 This concept has since been broadly accepted as an important goal by all international institutions involved in the develop- ment process. The WCED noted that the multilateral development banks should take a leading role in assisting developing countries to 4. INDEPENDENT COMMISSION ON INTERNATIONAL DEVELOPMENT ISSUES, NORTH- SOUTH: A PROGRAM FOR SURVIVAL 114 (1980). 5. Id. at 115. 6. WORLD COMMISSION ON ENVIRONMENT AND DEVELOPMENT, OUR COMMON FUTURE 43 (1987) [hereinafter OUR COMMON FUTURE]. See also WARREN S. BAUM & STOKES M. TOLBERT, INVESTING IN DEVELOPMENT: LESSONS OF WORLD BANK Ex- PERIENCE 527-38 (1985). 1992] THE WORLD BANK AND THE ENVIRONMENT make the transition to sustainable development. In particular, it spoke of the significant lead that the World Bank had taken to reorient its lending programs to reflect a much higher sensitivity to environmental 7 concerns. The Bank's concern with the environment, however, predated the work of these commissions. Projects financed by the Bank since the 1950s took into account some aspects of what are now being classified as environmental concerns. However, the broad realization that devel- opment projects have an impact on the environment was clearly articu- lated by the President of the Bank for the first time in a major speech before the United Nations Economic and Social Council in 1970. In that speech, Mr. Robert McNamara stated the Bank's deliberate con- cern with environmental issues and the manner in which it planned to address them in what may now seem to be only a modest beginning: The problem facing development finance institutions, in- cluding the World Bank, is whether and how we can help the developing countries to avoid or mitigate some of the damage economic development can do to the environment, without at the same time slowing down the pace of economic progress. It is clear that the costs resulting from adverse environmental change can be tremendous. It is equally clear that, in many cases, a small investment in prevention would be worth many times over what would have to be expended later to repair the damage. In the Bank, therefore, we recently have established a small unit to foresee, to the extent possible, the environmental consequences of development projects proposed to us for financ- ing. Even more important, we want to work toward concepts that will enable us and other development financing agencies to consider the environmental factors of development projects in some kind of cost-benefit framework.' This modest beginning soon led to further steps. Under Mr. McNamara's guidance, the Bank played a significant role in delibera- tions leading to the drafting of recommendations in 1981 for incorpo- rating environmental policy into the development process.9 These rec- 7. OUR COMMON FUTURE, supra note 6, at 337. 8. Robert S. McNamara, Address to the UN Economic and Social Council (No- vember 13, 1970). 9. The Cocoyoc Declaration,in IN DEFENSE OF THE EARTH: THE BASIC TEXTS ON ENVIRONMENT, (United Nations Environment Programme Executive Series No. 1, 4 MD. JOURNAL OF INTERNATIONAL LAW & TRADE [Vol. 16 ommendations were intended to be taken into account by the Bank and other multilateral funding agencies in the appraisal of projects to be financed by them. In his subsequent address before the 1972 Stockholm Conference, which led to the establishment of the United Nations Envi- ronment Programme (UNEP), Mr. McNamara, speaking for the Bank, established the nexus between environment and development in clearer terms. The question, according to him, was not whether economic growth should be continued at the expense of the environment. Nor was it whether these two considerations were interlocked. Rather, the solution to the dilemma revolved only around how to address the rela- tionship between the two. 10 The Bank's President gave an account on that occasion of how the Bank had dealt with environmental issues in its day-to-day operations. In fact, as noted in that speech, guidelines had been prepared in 1970 for use by Bank staff in determining how to weigh environmental fac- tors in any given project.1" Basically, the procedure required first that all identified projects under consideration be sent to the Bank's Office of Environmental Affairs as early as possible in the project cycle. 12 Sec- ond, if the project warranted it, a detailed investigation was to be un- dertaken to provide a better understanding of the nature, dimension, severity, and timing of the problems likely to arise with respect to the project. The results of the investigation were to be taken into account in devising appropriate safeguard measures which were then to be in- corporated into project design and discussed with borrowers. Where necessary, appropriate commitments were to be obtained from the re- cipient government to carry out the required actions. In connection with its work, the Office of Environmental Affairs issued guidelines as well as a comprehensive checklist which illustrated the typical environ- mental issues which may arise in different types of projects and sectors.