Law scholars shine spotlight on MDBs’ climate loopholes

Two legal scholars have written a detailed opinion, affirming that multilateral development banks — and governments, acting as their shareholders — are obliged under international law to make every effort to avoid financing development projects with high greenhouse gas emissions.

This duty requires them to use the “best available science” to assess the climate impacts of projects, which essentially means excluding fossil fuel investments in all but exceptional cases, the opinion argues.

The 44 page document was sent on November 18 to the Asian Development Bank, International Finance Corp and World Bank, as part of a multi-year campaign by NGOs to stop them financing climate-harming infrastructure such as gas-fired power stations and liquefied natural gas terminals, which can prolong the use of fossil fuels.

Over 20 NGOs and NGO alliances, led by San Francisco-based Bank Climate Advocates, have also sent the opinions to all the executive directors on the MDBs’ boards who represent their member countries.

“We think this is a watershed moment for climate change reform at the MDBs and helping to prevent severe harm to the Global South communities these banks are supposed to benefit,” said Jason Weiner, executive director of BCA. “It’s a critical missing piece helping to align the MDBs’ financing policies with 1.5°C. It’s authoritative and all MDBs should take note.”

Scientists argue the world must try not to exceed 1.5°C of global warming, or it will face severe and possibly uncontrollable damage to the ecosystems that support civilisation.

The timing is pointed, as on November 24 the Asian Development Bank’s shareholders will vote on a set of amendments to its energy policy.

In the NGOs’ view, if adopted in their current form the amendments will fail to adequately strengthen the ADB’s climate practices, and could even weaken them.

General — known as customary — international law and specific treaties appear to enshrine many duties on states and public bodies not to harm the environment. But governments and international organisations do not act as if they took these prohibitions seriously, it is alleged.

When deciding how vigorously to promote action to slow climate change and enable countries to adapt to its effects, MDBs and their shareholders are guided by a host of considerations — scientific, pragmatic, political — but rarely by the law.

The issues have not been thoroughly tested in litigation, and the area of international financial institutions’ (IFIs) responsibilities remains particularly unexplored.

Multilateral banks have made substantial efforts to promote the transition to a low carbon economy, which has led to them becoming leading green bond issuers and increasing their climate finance to significant shares of their overall lending.

The World Bank Group, for example, committed in 2023 to increase its climate financing from 35% to 45% of annual financing by June 2025. It exceeded the target, at 48%.

But MDBs continue to fund some fossil fuel-based projects, often with little evidence that they have thoroughly explored low carbon alternatives.

Climate activists hope to prove that existing law binds IFIs to make every effort to minimise carbon emissions.

In July, the International Court of Justice wrote an advisory opinion strongly supporting that argument. The NGOs drew it to the World Bank Group’s attention during the summer and again just before its Annual Meetings in October, but have so far managed to elicit only a guarded response from the WBG.

The NGOs backing the engagement include the NGO Forum on ADB, based in Manila, Accountability Counsel in San Francisco, Oil Change International in Washington DC, Recourse in Amsterdam and Power Shift Africa in Nairobi.

The ICJ opinion covers international public bodies in general, but not IFIs specifically. The legal scholars’ opinion fills that gap.

It was written by Dr Johanna Lorenzo of the University of Amsterdam Law School and Dr Jolene Lim of the National University of Singapore Faculty of Law.

Dated November 7, it was commissioned by Bank Climate Advocates and funded by the University of Oxford’s Climate Research Forum.

“BCA did an extensive search,” said Weiner. “The academics we selected have expertise in law governing international organisations and particularly MDBs and also in the climate change obligations of states.”

The opinion was also reviewed by academics and lawyers who are part of the Climate Research Forum.

Lorenzo and Lim make two main, parallel points. First, IFIs, and second, governments when voting as their shareholders to approve their projects and policies, are compelled by customary international law and treaties to avoid wherever possible supporting projects that pose climate risks, and to promote those aimed at a clean and just energy transition.

The scholars go on to consider whether IFIs’ current policies on aligning their lending with the goals of the Paris Agreement are legal under international law.

The opinion specifically examines the World Bank Group’s International Bank for Reconstruction and Development and IFC, and the Asian Development Bank, which it says together account for more than half of global development finance.

It also refers particularly to eight ‘major shareholders’ of these MDBs: the US, Japan, China, Germany, France, the UK, India and Australia. These countries have particularly large influence — in many cases they are permanently represented by their own directors on the MDBs’ boards.

The scholars draw detailed evidence from a wide range of legal rulings and agreements.

As long ago as 1980 the ICJ, interpreting a 1951 agreement between Egypt and the World Health Organisation, found that “general rules of international law” apply to international organisations. The UN Convention on the Law of the Sea (UNCLOS) of 1982 gives further support to international organisations bearing the same responsibilities and liabilities for damage as states.

The general duty in international law to avoid “significant transboundary environmental harm” is established in several places, including an ICJ case in 2010 between Argentina and Uruguay on pollution from pulp mills.

These duties have also been codified. In 1972 the UN’s Stockholm Declaration stated: “States have, in accordance with the Charter of the United Nations and the principles of international law, the sovereign right to exploit their own resources pursuant to their own environmental policies, and the responsibility to ensure that activities within their jurisdiction or control do not cause damage to the environment of other States or of areas beyond the limits of national jurisdiction.”

It also said: “The environmental policies of all States should enhance and not adversely affect the present or future development potential of developing countries, nor should they hamper the attainment of better living conditions for all” and “The discharge of toxic substances or of other substances and the release of heat, in such quantities or concentrations as to exceed the capacity of the environment to render them harmless, must be halted”.

UNCLOS — although the US is not a signatory to it — calls for protection of the marine environment, including from damage from the atmosphere.

States’ duties to avoid harming the climate are made much more explicit by international treaties such as the UN Framework Convention on Climate Change — of which the US is still a member — and the Kyoto Protocol and Paris Agreement.

While MDBs are not parties to these treaties, they have voluntarily agreed to align their financing policies with the Paris Agreement.

“It’s one thing when we [at BCA] develop our legal opinions based on the ICJ opinion and published literature,” said Weiner. “We think our analysis is valid and we haven’t been challenged on it. But true experts in the field at the highest level of academia also reach this conclusion.”

An important source of legal precedent was an advisory opinion given by the International Tribunal on the Law of the Sea (ITLOS) in May 2024, in response to a request in 2022 by a commission of small island states. They asked whether states that were parties to UNCLOS were obliged to prevent pollution of the marine environment as a result of climate change and to protect that environment from climate change impacts.

The tribunal ruled unanimously and in detail that countries did have those duties. They said the obligation “to take all necessary measures to prevent, reduce and control marine pollution from anthropogenic GHG emissions” was “one of due diligence” and that “the standard of due diligence is stringent”. Countries should take into account “the best available science”.

Weiner highlighted what he called the “biggest takeaways” from the opinion.

The scholars argue that each member state and each MDB has its own responsibility under international law and the treaties it is party to — including the treaties establishing each MDB — to protect the environment, irrespective of whether other states and MDBs are fulfilling their obligations.

“Often [the MDBs’] policies, while they do include some good requirements, fall so far short of customary international law obligations,” said Weiner.

A particular beef for the NGOs has been the MDBs’ argument that when deciding what projects to finance, they can be guided in their environmental considerations by the national climate plans of the project’s host country.

Many countries’ Nationally Determined Contributions under the Paris Agreement are not consistent with keeping global warming to safe levels.

“The legal opinion specifically stated it’s legally impermissible for states or MDBs to defer to a country’s climate plans to determine consistency with their own objectives,” said Weiner.

In other words, the opinion argues multilateral banks have an absolute obligation to try to prevent disastrous climate change in their lending, even when the countries they lend to are not ready to be that strict themselves.

Moreover, the opinion “clarifies that fossil financing, up, down and midstream, must be prohibited except in truly exceptional circumstances,” Weiner said. “And then for all investments there need to be more stringent due diligence obligations that meet the best available standard set forth in the ICJ opinion. That means before project financing you need a full and comprehensive Scope 1, 2 and 3 greenhouse gas quantification, and a full, cumulative impact assessment for consistency with 1.5°C in comparison with the global carbon budget.”

BCA has analysed the IFC’s environmental assessments for 11 natural gas power plants it invested in between 2015 and 2023. In three cases, it found, the IFC analysed renewable energy alternatives, but only “in a cursory, non-credible fashion”.

In the other eight cases, the alternatives analysis did not consider renewable options, but only compared the project with coal plants or different configurations of gas plant.

“The scholars’ opinion talks about this,” said Weiner. “You need a full and supportive GHG alternatives analysis that thoroughly examines whether renewables are technically and economically feasible to meet power demand. Then you have to release all this analysis for public review and comment.”

Environmental groups across Asia have been pressing the ADB for years to tighten up its energy policy, the current version of which was adopted in 2021 and due for revision this year.

The ADB has consulted civil society organisations in a number of sessions since August 2024, and published summaries of the seven amendments in August this year. It published the full text three weeks before the scheduled vote on November 24.

On November 13, fourteen NGOs wrote to Masato Kanda, the ADB’s president, and other senior officers. This week they also wrote to member state shareholders via their directors.

The legal opinion, they said, “underscores that if each of ADB’s member states and or ADB desire to meet their own climate change legal obligations,” the energy policy vote must be postponed or shareholders must vote against the amendments.

The energy policy review, the groups charged, “has been fraught with a complete disregard and or lack of awareness” of the ADB and member states’ legal obligations on climate change.

Many member states are unaware, while those that are have not conducted legal analysis on the policy or considered the legal risks they face. ADB had refused to give its members guidance on these obligations even when they asked, BCA said.

In a letter to BCA on October 10, the ADB was more explicit than the WBG in revealing its thinking on international law.

It was categorical that the ADB “possesses an independent legal personality distinct from that of its member states and does not assume or enforce their legal obligations”.

Moreover, as an international organisation, ADB “is bound only by those treaty obligations to which it itself is a party”. Since it was not a party to any of the treaties, conventions or protocols BCA had cited, it was not subject to them. The ICJ opinion did not apply to it, the ADB said.

Its duty was to follow its Charter, “which provides that only economic considerations will be relevant to ADB’s decisions”.

BCA replied to the ADB on November 13 that “the Scholars’ Opinion dispels a misinformed and false narrative that civil society repeatedly hears” from the ADB, that the Bank and its member states “do not have their own climate change legal obligations that must be met”.

Quoting the scholars, it said “the most relevant international legal obligation applicable to IFIs — with respect to their support of development projects posing risks of climate harm — is the customary duty to exercise due diligence in order to prevent significant harm”.

Rayyan Hassan, executive director of the NGO Forum on ADB in Dhaka, said in a statement: “As this legal opinion makes crystal clear, ADB and its major shareholders are not doing us a ’favour’ when they avoid fossil fuels — they are complying with binding international obligations to prevent significant climate harm, act on the best available science, and align all operations with the Paris Agreement."

In the energy policy review, ADB’s board "must therefore stop hiding behind borrower sovereignty, weak NDCs, or creative ‘Paris-alignment’ methodologies, and instead use their voting power to categorically reject any project that expands or prolongs fossil fuel dependence."

The ADB has proposed seven amendments to its energy policy and two changes to the list of prohibited activities in its environmental and social framework.

The existing policy arguably has stricter exclusions than the WBG’s, in that it excludes — as well as coal — upstream or midstream oil projects; natural gas exploration or drilling; and production of or trade in radioactive materials, including investment in nuclear reactors.

The amendments remove the prohibition on nuclear power, and include two paragraphs expressing support for it. Bans are lifted on nuclear reactors and nuclear fuel for the commissioning and decommissioning of power plants.

A new exception is introduced to the bar on upstream or midstream oil projects: the ADB can finance investments in reducing methane leakage and gas flaring in existing sites.

Although this should reduce wasteful emissions, environmentalists worry that if it leads to oil infrastructure being seen as cleaner it could prolong its use, raising total emissions.

The carbon capture policy has had a recommendation of blue hydrogen with net GHG reductions added. Blue hydrogen is made using natural gas with the CO₂ captured.

Another amendment is to the language requiring the ADB to review the energy policy. In 2021, this said the review in 2025 would “assess the progress on the objectives of this policy to accelerate the development of sustainable and resilient energy systems”.

The proposed 2025 policy will just say there should be a “comprehensive review” in 2030 after it has been evaluated by the Independent Evaluation Dept.

“They took out any language that would mean they had to think about their climate obligations,” said Weiner.

Perhaps more threatening to the climate than the proposed amendments are changes the ADB does not propose.

Midstream and downstream gas infrastructure is not excluded and will not be. Nor is the ADB going to introduce a requirement to conduct thorough due diligence before making fossil fuel investments, to consider whether a renewable energy alternative would be technically and economically feasible.

“There is nothing about LNG or natural gas power plants, and no 'best available science' standard,” said Weiner. “It’s very problematic. That is not being strengthened, and arguably it could be weakened because their policies don’t have the proper due diligence requirements.”

BCA’s letter concluded that the ADB and member states had failed to assess the energy policy’s consistency with their climate change obligations under international law, recently clarified by the ICJ and ITLOS opinions, or amend it to align with a 1.5°C global warming target.

The ADB had failed to adhere to the requirement in the 2021 policy to review its sustainability effects; and had failed to produce a Strategic Environmental Assessment of the policy amendments for public review.

Going ahead with the amendments, BCA argued, would therefore violate international law.

Hassan at the NGO Forum on ADB said: “Every approval of a gas plant, LNG terminal, or fossil-heavy transmission line from this point forward is not just bad development — it edges ADB and its shareholders closer to clear legal breach. The Board’s choice is stark: either they become a genuine agent of a rapid, just energy transition, or they preside over an institution that knowingly finances climate damage in defiance of its own legal duties.”

The ADB did not respond to a request for comment.

BCA and the other NGOs are challenging the legal looseness and inconsistencies that surround MDBs’ and their member states’ response to environmental and social problems.

“It goes beyond climate change,” said Weiner. “It goes to other environmental and social impacts — ensuring there is adequate due diligence and harm prevention.”

Countries, he said, were not upholding the Aarhus Convention of 1998, which gives the public rights to demand transparency and accountability from governments about environmental information. Nor were they respecting the Kyiv Protocol of 2003, which requires states to make strategic environmental assessments of their plans.

“The broader issue,” Weiner said, “is there’s not action on states acting on their own legal obligations at MDBs.”

In 2021, 35 countries including the UK, France, Germany, Canada and Australia signed the Clean Energy Transition Partnership, which committed them to ending international public financing for fossil fuels, except in limited, clearly defined circumstances consistent with 1.5°C.

“A lot have done it through their own development banks and export credit agencies, but none of them are carrying it over to their votes at the World Bank Group and ADB,” said Weiner. “They’re still financing fossil fuels.”

The chances of litigation on these issues are rising. In July BCA sued the US Treasury in a federal court in California under the Freedom of Information Act for failing to disclose the environmental analysis that allowed the IFC to finance 13 projects that it says will cause high greenhouse gas emissions.

In 2019 the US Supreme Court ruled in the case of Jam v International Finance Corp that international organisations such as the IFC could be sued in US federal courts for the results of their commercial activities.

The case had been brought by Gujarati fishermen whose community suffered loss of freshwater habitats and respiratory problems from the Tata Mundra coal-fired power station, whose construction the IFC had financed with $450m in 2008.

“We’re at a moment when there is an explosion of climate litigation around the world against governments and businesses,” said Weiner. “There’s a crystallisation of climate law. Courts are willing to hear claims against states. Our opinion is the courts must hear claims against states for their actions and decisions at MDBs. This independent opinion confirms that.”

Picture: Sembcorp's Myingyan IPP combined cycle gas power plant in Myanmar, financed by the IFC and ADB, which started operating in 2019