Regulating Economic Development: Environmental and Social Standards of the AIIB and the IFC

By Jisan Kim*

This year, the Asian Infrastructure Investment Bank (“AIIB”) will officially initiate its operations with $100 billion of capital. The AIIB aims to fund much-needed basic infrastructure projects in Asia, and it seeks to differentiate itself from existing multilateral development banks (“MDBs”) like the World Bank by not requiring privatization or deregulation as conditions for funding.

Some experts project that the AIIB will merely be a “symbolic institution with no real significance for the global financial system.” However, China has brought on board major U.S. allies, including France and the United Kingdom, as founding members of the new Bank. On the other hand, the United States and Japan, the largest shareholders of the World Bank and the Asian Development Bank respectively, declined to join the AIIB. The two countries likely view the new China-led Bank as “a lending rival that will reduce [their] leverage,” and they do not want to grant more power and credibility to the AIIB by joining it.

Even without the United States and Japan as members, the AIIB will have a significant impact on Asia and the world. However, whether that impact will be positive or negative is under debate. Although the AIIB will help fill the “massive infrastructure funding gap” in Asia, it may fund projects that do not meet the high international standards enforced by existing MDBs. If the AIIB does not operate under adequate standards, its projects may have negative consequences in many areas, including environment protection, human rights, and labor rights. China claims that the AIIB “will be rigorous in adopting the best practices of institutions such as the World Bank.” But critics are wary of this claim, given China’s track record with international standards.

No one can be certain until the new Bank decides which projects it will fund, but an assessment of the AIIB’s Operational Policies may shed some light on the direction toward which the AIIB is headed. Because the structure and function of the AIIB is similar to that of the International Finance Corporation (“IFC”), the private sector arm of the World Bank, the IFC Performance Standards on Environmental and Social Sustainability (“IFC Standards”) are the appropriate benchmark to evaluate the adequacy of the AIIB Environmental and Social Standards (“AIIB Standards”). Many parts of the AIIB Operational Policies mirror the text of the IFC Standards. But notable differences exist, and they may lead to distinct outcomes in practice. This feature will discuss some of the provisions pertaining to environmental and labor issues.

I.  Environmental Standards

Many environmental provisions of the AIIB Standards are on par with that of the IFC Standards. For instance, in its pollution prevention section, the AIIB cites the World Bank Group’s Environmental, Health and Safety Guidelines (“EHSGs”) and ensures that its projects will follow the EHSGs. The AIIB in some areas (e.g. commercial logging operations) adopted “more progressive positions” than some of the other multilateral development banks. However, in other areas, AIIB Standards lack detail or are different in ways that may lead to arbitrary outcomes. The following are a few examples.

The IFC provides a detailed explanation on how adverse effects on the environment should be mitigated. Concepts such as “no net loss of biodiversity” and “set-asides” make the guidelines more specific and clear. On the other hand, the AIIB leaves out such details and simply requires “measures acceptable to the Bank.” Under this standard, if the AIIB is not rigorous in its evaluation of mitigation measures, recipients of funding may be able to get away with implementing measures that are superficial, cheap, and ineffective.

For projects in natural habitats, the AIIB requires a cost-benefit analysis whereas the IFC has no such requirement. Because the IFC does not have this requirement, the IFC may allow projects even if the overall benefit does not “substantially outweigh” environmental costs. However, cost-benefit analysis will not always lead to wise decisions. For example, the AIIB may allow projects that significantly destroy natural habitats by concluding that the overall benefit is higher than the cost. Also, because it is unclear how the AIIB will conduct cost-benefit analyses, the ultimate decision could be arbitrary. The cost-benefit analysis might be used to justify or defend AIIB’s decisions to value economic gain over environmental protection.

When critical habitats are involved, the IFC considers a project’s impact on “biodiversity values for which the critical habitat was designated” and the “ecological processes” supporting those values, whereas the AIIB focuses on the habitat’s “ability to function.” The IFC would not allow a project that would destroy biodiversity values, even if the habitat were able to function. On the other hand, the AIIB may allow a project by determining that a habitat may be able to function even if many of its biodiversity values are lost.

II.  Labor Standards

The Core Labor Standards (“CLS”), which refer to a group of eight fundamental labor conventions, are regarded as the “international consensus on minimum best practices.” The CLS covers four general rights and principles of labor: child labor, forced labor, freedom of association and collective bargaining, and discrimination in employment and occupation. This feature will proceed to look at how the AIIB and IFC treat the four general issues of labor.

A.  Child Labor

The Minimum Age Convention and the Worst Forms of Child Labour Convention (“Worst Forms Convention”) are the two “basic child labour Conventions” of the International Labor Organization (“ILO”). And complementing the two Conventions, the United Nations Convention on the Rights of the Child (“UNCRC”) “lays down a full range of children’s rights.”

The IFC Standards cover issues raised in all three of the instruments mentioned above. The opening sentence of the child labor section closely mirrors the language of Article 32 of the UNCRC:

“The client will not employ children in any manner that is economically exploitative, or is likely to be hazardous or to interfere with the child’s education, or to be harmful to the child’s health or physical, mental, spiritual, moral, or social development.” (para. 21, IFC Standards)

The following two IFC clauses on hazardous work incorporate language from the Worst Forms Convention and its supplemental Recommendation No. 190:

“Children under the age of 18 will not be employed in hazardous work.” (para. 21, IFC Standards)

“Examples of hazardous work activities include work (i) with exposure to physical, psychological, or sexual abuse; (ii) underground, underwater, working at heights, or in confined spaces; (iii) with dangerous machinery, equipment, or tools, or involving handling of heavy loads; (iv) in unhealthy environments exposing the worker to hazardous substances, agents, processes, temperatures, noise, or vibration damaging to health; or (v) under difficult conditions such as long hours, late night, or confinement by employer.” (n. 12, IFC Standards)

Unlike the IFC Standards described above, the AIIB Standards seem to be focused on only the Minimum Age Convention:

“[I]n conformity with the International Labour Organization’s Minimum Age Convention, 1973, [] children at least 16 years of age may be employed for such work on condition that their health, safety and morals are fully protected.” (sec. D, AIIB Standards)

The Worst Forms Convention and the UNCRC do not appear in the AIIB Standards. The two Conventions may seem superfluous, but they each play an important role.

Several scholars have voiced concern that the Minimum Age Convention, standing alone, may fail to achieve its objective. The Minimum Age Convention requires that specific industries, such as mining and electricity, should be regulated as a minimum. If only some industries are regulated, the supply of child labor could move into other unregulated sectors. The Worst Forms Convention does not have this loophole because it lists the types of hazardous work that should be prohibited, regardless of industry.

Although the two Conventions together seem to grant full protection, another loophole still exists. Children between the age of 16 to 18 will be allowed to work as long as their “health, safety and morals . . . are fully protected” (Minimum Age Convention) and the work is not categorized as “worst forms of child labor” (Worst Forms Convention). Without the protection offered by the UNCRC, these children are simply treated as “regular workers” under the two ILO Conventions. But because the IFC Standards incorporate language from the UNCRC, the IFC additionally protects the “education” and “health or physical, mental, spiritual, moral, or social development” (UNCRC) of these child workers. The AIIB Standards, on the other hand, offers no such protection.

The IFC, by embracing all three Conventions, provides a stronger protection for children than does the AIIB.

B. Forced Labor

The AIIB provides the same level of protection as the IFC when it comes to forced labor. The AIIB explicitly prohibits forced labor, which it defines as “work or service not voluntarily performed that is exacted from an individual under threat of force or penalty.” This language is similar to the IFC Standards on the subject. Additional details are substantially the same as well.

C. Freedom of Association and Collective Bargaining

As for collective bargaining, the AIIB requires that clients adhere only to national laws in the countries where they operate, while the IFC attempts to offer further protection. When “national law substantially restricts workers’ organizations,” the IFC prohibits employers from “[restricting] workers from developing alternative mechanisms to . . . protect their rights” and “[influencing] or [controlling] these mechanisms.” IFC also protects participants in workers’ organizations from discrimination, retaliation, or discouragement by employers.

The AIIB, however, urges clients only to “[comply] with national law relating to workers’ organizations and collective bargaining” and does not attempt to provide any further protection on this matter.

D.  Discrimination

The AIIB’s provision against discrimination is limited: employers should ensure, “consistent with relevant national law, employment on the basis of the principle of equal opportunity, fair treatment and non-discrimination.” The AIIB does not provide any additional detail or explanation.

The IFC Standards, on the other hand, includes important details in addition to enumerating the basic principles of equal opportunity, fair treatment, and non-discrimination. The IFC prohibits “employment decisions on the basis of personal characteristics (Such as gender, race, nationality, ethnic, social and indigenous origin, religion or belief, disability, age, or sexual orientation)” and “harassment, intimidation, and/or exploitation.” The IFC Standards also emphasizes that women and migrant workers should be well-protected.

E.  Additional Considerations

While the IFC’s labor standards cover both the public and private sector, the AIIB Standards do not offer protection of many important rights—including prompt payment, access to grievance mechanisms, equal opportunity, fair treatment, and non-discrimination—to public sector workers. In the third paragraph of Section D, the AIIB Standards requires employers to protect those rights only for “private sector Projects.”

The IFC, unlike the AIIB, provides additional protection regarding retrenchment and compensation. IFC demands “retrenchment [] based on the principle of non-discrimination and will reflect the client’s consultation with workers” and insists the payment of any outstanding back pay or benefits. The AIIB, mostly silent on this matter, mandates only a “timely” notice of termination.

The AIIB follows many of the high standards set by the IFC and other international organizations. However, in several important areas, AIIB Standards do not offer sufficient environmental and social protection. These shortcomings could become more problematic if coupled with ineffective implementation.

III.  Implementation and Oversight

The recently elected President of the AIIB promised that the new Bank would be “lean, green, and clean.” Although a lean bank will reduce costs, it may have trouble operating effectively. Without “a resident staff involved in the day-to-day project oversight,” some critics doubt that the new Bank would be able to successfully enforce high standards.

In order to implement its labor standards, the IFC went through an intensive implementation process: hiring labor experts, establishing a Labor Advisory Group, providing specific training for thousands of staff, and conducting comprehensive labor audits and internal reviews. In fact, IFC is considered to have “one of the most comprehensive procedural frameworks” for implementing labor standards. But even with such effort, the IFC was not aware of violations in some on-going projects until other organizations reported them.

The ILO emphasizes that “legal prohibition, essential though it is, will not by itself suffice.” Especially in regulating child labor, inadequate implementation and oversight may lead to disastrous consequences. Prohibiting child labor may “[foster] illegal and hidden forms of [child] employment.” And without proper oversight, child labor will proliferate in the shadows. The AIIB must ensure that its operations are not only “lean” but also effective in protecting fundamental values.

IV.  Going Forward

While basic environmental and social values should not be sacrificed for economic growth, rules and procedures have a tendency to become cumbersome. A former World Bank Director commented that many standards and procedures of existing MDBs are “frustratingly bureaucratic, costly and ill-suited to dealing with the real needs of client borrowers.” Improving rules and procedures to be more efficient does not necessarily lead to lower standards. The key is to find the right balance between efficiency and comprehensiveness.

The AIIB expressed its commitment to adopt the “highest possible standards.” Although the AIIB has much room for improvement, its efforts show that the new Bank has the potential to become an institution that sets, rather than follows, international standards.


* Jisan Kim is a 2017 J.D. candidate at Harvard Law School and an Executive Editor of the Harvard International Law Journal.