Environmental Risk Accountability in International Project Finance

Alex Theuer 
Vol. 40 Associate Editor

Environmental considerations have become an increasingly important part of international project finance in recent years. Project finance generally involves the financing of long-term infrastructure and industrial projects around the world, which comes with unique environmental challenges that are often entwined with international environmental agreements.[1] However, due to the structure of project financing, the responsibility of managing environmental risks has fallen to financial institutions. This post will discuss the environmental standards that banks impose on project borrowers, and it will suggest that while those standards seem to be effective at ensuring legal environmental compliance, the current model is lacking in transparency and accountability to the public. As a result, people living in the vicinity of projects can worry about their environmental safety. This is illustrated in Argentina v. Uruguay, an International Court of Justice case concerning Argentinian citizens’ fear for the environmental safety of a nearby project, although the project was found by multiple independent reviewing bodies to be completely innocuous.[2]

The key to any successful project is securing financing. This money typically comes in part from the equity that sponsors contribute, but it primarily takes the form of debt from various financing institutions. In evaluating whether to loan money to projects, banks engage in meticulous risk analysis, which includes surveying environmental risks. Identifying potential environmental problems is critical, as they could affect the viability of the project as a whole and expose all involved to costly litigation. After identifying possible risks, financial institutions therefore usually impose detailed requirements for environmental monitoring on their borrowers, as well as enforcement mechanisms to ensure compliance. One approach used is the International Finance Corporation (IFC) Sustainability Framework.[3] This method lays out eight “performance standards” that parties implementing and operating a financed project must meet, including requiring borrowers to avoid harming indigenous peoples, protect cultural heritage, evaluate health and safety risks, and put a system in place to monitor and respond to potential environmental risks if they arise.[4] The IFC enforces these criteria through a tracking system, and a borrower’s performance has the potential to affect future disbursement.[5]

Environmentally conscious projects are important to financial institutions, which do not want to lose money due to environmental complications. Receiving money from banks is very important to borrowers, as such funds constitute the primary means of supporting their projects. The incentives to comply with environmental standards thus seem to be adequate. However, mere compliance with financial institutions’ standards may not be adequate for citizens living with these projects, as Argentina v. Uruguay demonstrates.

Argentina v. Uruguay was decided before the International Court of Justice, but its main dispute started well before then.[6] In 2003, Uruguay authorized a Spanish firm to build a pulp mill on the Uruguay River, between Uruguay and Argentina.[7] Several years later, Uruguay contracted with a Finnish firm to build a second plant nearby, on the same river.[8] The projects, still in their early stages, generated strong complaints from Argentinians living in the town across the river, who were “deeply concerned that the pulp mills [would] be harmful to their health, their environment and the tourism industry on which their municipality depends.”[9] This complaint was brought before the IFC, which was at the time considering financing the project, but neither mill had been approved by the IFC’s board.[10]

The IFC thus investigated the matter through a Preliminary Assessment Report compiled by its independent recourse mechanism. The report examined the adequacy of the project’s documentation, IFC’s appraisal process, and the international permitting process. It concluded that although emissions from the plants would be safe, “it is critical now that the IFC act decisively to assure citizens of both Argentina and Uruguay that it has embarked on a credible process of due diligence with respect to its assessment of the cumulative impacts of both projects.”[11] This report was followed by a final audit finding that the mills would not cause damage to the environment, but again recommending that the IFC be more transparent about its appraisal system, in order to clear up the growing dispute between the nations.[12]

However, that transparency was never implemented, and despite the fact that the IFC had legitimately found that the project would not have a negative environmental impact, this information could not dissuade the Argentinian public, which did not trust the IFC’s findings.[13] A near-constant blockade of a nearby bridge between Argentina and Uruguay was kept up by Argentine environmental activists, and even talks mediated by the King of Spain failed to reach a resolution.[14] The dispute, which began in 2003, ultimately resulted in an ICJ opinion issued in 2010. The ICJ found that Uruguay did not breach any environmental obligations in authorizing the construction of the pulp mills, although it did fail to adequately inform Argentina of the plan.[15]

It seems here that the IFC’s standards of assessing environmental impact did not fall short— every subsequent assessment upheld the fact that the pulp mills would not unduly harm the environment. However, it is also clear that the IFC’s standards alone could not prevent the dispute from escalating to costly (and timely) litigation. This is likely due to the fact that bank accountability mechanisms, while potentially sufficient to guarantee environmental safety, are not necessarily sufficient to ensure public acceptance of potentially harmful projects. As the IFC’s initial assessment noted, it is important for those who might be affected by the project to be made more aware of the standards put in place to protect them. It is possible that accountability owed to banks, as opposed to the public, may never be enough to placate some environmental advocates. However, it would be useful regardless for financial institutions to incorporate public disclosures and transparency into their standards for borrowers. This transparency could take the form of mandatory public forums held by the project sponsors or the local government, informing citizens of the details of the project and the methods being used to ensure the safety of their environment. It could also involve financial institutions allowing their documentation of environmental risks to be broadly available to the public.


[1] See Nele Matz, Environmental Financing: Function and Coherence of Financial Mechanisms in International Environmental Agreements, 6 Max Planck Yearbook U.N. L. 473, 475-478 (2002).

[2] Case Concerning Pulp Mills on the River Uruguay (Argentina v. Uruguay), Judgment, 2010 I.C.J. Rep. 14 (April 20).

[3] Environmental & Social Standards in Project Finance: Overview, Current State of Play, Davis, Polk & Wardwell LLP at 9 (Aug. 7, 2017).

[4] Id. at 9-10.

[5] Id. at 10.

[6] 2010 I.C.J. 15.

[7] Id. at 24.

[8] Id. at 27-30.

[9] Preliminary Assessment Report: Complaint Regarding IFC’s Proposed Investment in Celulosas de M’Bopicuá and Orion Projects, Uruguay, Compliance Advisor Ombudsman at 1 (Nov. 2005).

[10] Id.

[11] Id. at 11.

[12] CAO Audit of IFC’s and MIGA’s Due Diligence for two Pulp Mills in Uruguay: Final Report, Compliance Advisor Ombudsman at 26-27 (Feb. 22, 2006).

[13] 2010 I.C.J. at 62.

[14] Id. at 29.

[15] Id. at 96.

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