Knut H. Alfsen
CICERO - Center for International Climate and Environmental Research, Oslo
1. September 2013

AfDB – Second opinion
Contents
Summary and conclusion ............................................................................................................................. 2
Introduction and documents received .................................................................................................... 3
Documents received .................................................................................................................................. 4Discussion........................................................................................................................................................... 4
Strength (clear areas) ............................................................................................................................... 6
Weakness (unclear areas, too broad/subjectivity) ....................................................................... 6
Pitfalls.............................................................................................................................................................. 6
Overall assessment..................................................................................................................................... 71

Summary and conclusion
CICERO - Center for International Climate and Environmental Research, Oslo, hasconsidered the framework for the Green project portfolio of the African Development
Bank (AfDB) with respect to their likely impact on climate change.
The documents provided by AfDB give the impression of an institution that is very
aware of environmental concerns including the challenges associated with climatechange. Being mainly at an early stage of development and industrialization, it is very
important that Africa is choosing a low carbon development path that avoids ‘lock in’
investments in infrastructure which later will make it very difficult and costly to abide
by future climate requirements. It is therefore of the outmost importance thatinstitutions like AfDB are taking the following points into account:-Avoid investments in projects that have the potential of creating ‘lock in’ that inturn will make a transition to a low carbon society difficult in the not too distantfuture.

-While investments that lead to emission reductions are good, small reductions
are not enough for the longer term, even for Africa. Thus, one should avoid
investing in projects that only leads to ‘small’ reductions over time and that may
stand in the way of the more radical shift in technologies that are needed for thelonger term. Such ‘blind alley’ projects are not ‘green’. An example could beretrofitting a coal fired power plant.

-Thus, in general the projects area of influence should considered to be wide bothin space and time when assessing projects.

"Eligible projects" for the Bank’s Green Bonds Portfolio is defined by the Bank as a poolof projects that have been selected firstly based on the Bank’s methodology for tracking
climate change mitigation and adaptation finance and secondly based on additional
criteria to be applied for the specific purpose of the Bank’s Green Bonds Portfolio.
The tracking methodology has been developed in cooperation with other multilateraldevelopment banks, and the additional criteria are principle based and secure in ouropinion that selected projects are in accordance with good climate governance.
The standards are transparent and reasonably simple to apply. The rules andprocedures will be made publicly available on a dedicated internet site of the bank.
In conclusion, we find the rules and procedures employed by AfDB to select projects for its
Green Bonds Portfolio to be sound and in accordance with good climate governance.

2Introduction and documents received
As an independent research institute, CICERO - Center for International Climate andEnvironmental Research, Oslo, elaborates second opinions on institutions’ frameworkand guidance for assessing and selecting eligible projects for green bond investments,
here defined as investments in projects that will or may have effects on the mitigation of,or adaptation to, anthropogenic climate change.
These second opinions are normally restricted to an evaluation of the mechanisms orframework for selecting eligible projects at a general level. CICERO does not validate orcertify the climate effects of single projects, and, thus, has no conflict of interest in
regard to single projects. CICERO is not responsible for how the framework ormechanisms are implemented and followed up by the institutions.
Typical issues that we look into during the formulation of our second opinion include:
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Are the procedures for internal assessment sound seen from a general level?
Do the projects deemed to be 'green' according to the rules and procedures
have a high probability of being climate 'sound'?
What is the room for subjective assessments within the framework?
Are the procedures standardized, transparent and reasonably simple toapply?
Are the procedures and rules publicly available?
Are the potential for rebound effects from actions related to the projects
included in the assessment?
Are the potential for technological lock ins that may hinder future climate
friendly solutions considered?
How are external effects of 'green' projects taken into account in theassessment procedure?
Are there routines for monitoring of projects and verification of results andimpacts?

Our opinion with a conclusion and details on why we have concluded the way we do iswritten in a brief draft report. This is then discussed with the client before we produce a
final second opinion.
The final report typically points out:••••

Weak and strong points of the rules and procedures (the framework).
What types of projects will be fairly assessed as green by the existing rules andprocedures.
What types of projects could potentially have problems related to climate changeeven though assessed as 'green' by the existing rules and procedures. What are
the problematic issues?
Ideas for improving the rules and procedures.

The second opinion is based on documentation of rules and frameworks provided by theinstitutions themselves (the client) and information gathered during meetings and email correspondence with the client.

3CICERO has been asked by SEB to provide a Second Opinion on the rules and regulations
employed by the African Development Bank (AfDB) for its Green Project Portfolio (GPP)
selection procedures.

Documents received
Documents received and forming the basis for this second opinion were contained in thefollowing files:
DocumentNo.
123456789101112File name
AfDB Green Bond Framework.doc
2 Environment Policy ( selected pages).pdf
3 Environmental review for private sector operations (full document).pdf
4 Environmental review procedures for public sector operations (fulldocument).doc
5 DRAFT African Development Bank Group's Integrated Safeguards System( selected pages).pdf
6 Energy Policy ( selected pages).pdf
7 AfDB Strategy for 2013–2022.pdf
8 - Private sector development strategy 2013-2017.pdf
9a Joint MDB Mitigation Finance Tracking Approach & 2012 report (fulldocument).pdf
9b Joint MDB Adaptation Finance Tracking Approach & 2012 report (fulldocument).pdf
10 AfDB climate finance tracking methodologies EN final (fulldocument).pdf
AfDB Green Bond Framework_August_2013.docDiscussion
Documents 1-11 were in the initial package received from AfDB. After the discussions
with the Bank, the revised document no. 12 was produced.
Quite a number of the documents are concerned with general bank strategies andpolicies, in addition to rules for tracking climate related financing (financing ofmitigation as well as adaptation related projects). This tracking is done within theframework of a broader international effort to establish a common practice among themultilateral development banks (MDB), but with some variations for individual MDBs.
The main difference being that the Joint MDB mitigation methodology follows arestricted positive list of eligible mitigation activities (to be counted as climate related)while AfDB, like IBRD, IFC and IADB, follows a wider illustrative list of activities. We
note that the annexes are missing from document no. 3 and 4. Otherwise there is a fairamount of overlap between the different documents.

4Document 5 describes the bank’s Integrated Safeguard System. The objectives of thesafeguards are to avoid, or when avoidance is not possible, to minimize and mitigate
negative impacts of projects on the environment and affected people.
The Integrated Safeguard System consists of four interrelated components:
1. The Integrated Safeguard Policy Statement, which describes common objectivesof the Bank’s safeguards, lays out policy principles, and outlines the delivery
process for the safeguard policy.
2. Operational Safeguards,
3. Environmental and Social Assessment Procedures (ESAP),
4. Integrated Environmental and Social Impact Assessment (IESIA),The Operational Safeguards cover themes like: Environmental and social assessment,
involuntary resettlement, biodiversity and ecosystem services, pollution prevention andcontrol, greenhouse gases, hazardous materials and resource efficiency, and labour
conditions, health and safety.
The overall impression from the initially received documents (no. 1-11) is that of an
institution which takes environmental and sustainability concerns seriously, seen in thelight of the development mandate of AfDB. For instance is ‘energy for all’ a primaryobjective, with environmental concerns coming as a strong priority backed by anunderlying Environmental Policy which need to be enforced through all activities. Thedocuments describing the approach to classifying projects are comprehensive. The AfDB
has through document no. 12 committed to provide investors easy access to relevant
documents through a homepage dedicated to their Green Bonds. The administrative
responsibilities are described and assigned in the original documentation, but withrelatively little details on the ‘algorithm’ for which department or section is reporting towhom. This was improved in document 12.
When it comes to the selection of ‘green projects’, we initially found document no. 1 andno. 11, supported by no. 9 and 10 most useful. We had some critical remarks inparticular to some specific elements in document no. 1, which after discussions wasupdated to document no. 12. In this new document the eligibility criteria andadministrative procedures for selection of green projects was much clarified. The list is
now as follows:
1. Greenfield Renewable Energy Generation (e.g. solar, wind, geothermal and oceanpower)
2. Demand-side Brownfield and Greenfield Energy Efficiency (e.g. energy efficiency
improvements in lighting and equipment; retrofit of transmission lines,substations or distribution systems to reduce technical losses)
3. Vehicle energy efficiency fleet retrofit or urban transport modal change
4. Biosphere conservation projects (reduce emissions from deforestation anddegradation of ecosystems)
5. Solid Waste Management (e.g. incineration of waste, landfill gas capture andlandfill gas combustion)
6. Industrial Processes (reduce GHG emissions from industrial processesimprovements and cleaner production)57. Fugitive emissions and carbon capture (e.g. carbon capture and storage,
reduction of gas flaring or methane fugitive emissions in the oil and gas industry,coal mine methane capture)
8. Urban Development (e.g. rehabilitation and upgrade of urban water drainage
systems in areas vulnerable to frequency and/or severity of flash floods andstorm surges brought by climate change)
9. Water Supply and Access (e.g. water saving measures such as introduction of lesswater intensive crops or preservation of soil moisture and fertility)
Document 9-11 give brief descriptions of the climate finance tracking methodology
which is a sound methodology (based on a no-project baseline) seen from a climate
perspective.

Strength (clear areas)
The environmental (including climate) awareness of the bank seems from thedocuments provided, to be high. In particular, we note from document no. 4 thedescription of the Environmental and Social Assessment Procedures (ESAP). Here it iswritten:“External impacts: A sectoral or regional ESA shall be carried out to evaluate thelikely environmental and social consequences of a proposed sector-wide or regionwide plan or program. The plan or program may be related to a sector such as
water and sanitation, energy, transport, etc. or it might be related to ageographical area or region. The main benefit of a sectoral or regional ESA is that itallows for the consideration of more far-ranging and cumulative impacts andbroader types of alternatives than provided by a project-specific ESA.”This awareness of far-ranging and cumulative impacts is key in making a proper
assessment of the climate impacts of projects.
The illustrative list above contains types of projects that most likely are without or with
only minor problems when it comes to likely climate impacts.

Weakness (unclear areas, too broad/subjectivity)
We find no obvious weaknesses in the AfDB framework as it now stands.

Pitfalls
A common pitfall is to invest in projects that may improve the climate impacts from theactivity today, but may lead to a postponement for even more climate benign projects.
This will always be difficult to assess in an objective manner, but should nevertheless bepart of the project appraisals. The long term goal of low carbon societies will eventuallyrequire a near phase out of fossil fuels, and marginal climate improvements ‘today’should not come in the way of more future oriented solutions that eventually will berequired. One should avoid investments in projects that lead down ‘blind alleys’.
A somewhat related pitfall is associated with the so-called rebound effect. This may
occur in projects that aims at improving the efficiency for a single unit activity, butwhich then in turn may lead to a higher overall activity level. Thus, for instanceinvestments in transport infrastructure may make every trip more climate efficient(lower emissions), but may invite to a larger number of trips.
6

We include these issues here because they are recurrent themes that come up times andagain in discussion with many financial institutions, and are not particularly related toAfDB. To be climate conscious requires a focus also on this aspect of investments. We
feel ensured by the provided documentation that AfDB have these aspects in mind whenselecting projects for the Green Bonds.

Overall assessment
The documents provided by the bank give a clear impression of an institution that are
well aware of the challenges posed by climate change as well as other environmental
and social concerns that may be associated with investments projects. In particular weare pleased with the consciousness shown towards the external impacts of projects bothacross space and time.
The eligibility criteria used for ‘green projects’ are now described as follows in
document no. 12:“The selection of eligible projects will be done in two phases:Phase 1: the Energy, Environment and Climate Change Department will identify
and categorize among all projects approved in any given fiscal year the climatechange projects using the Joint MDB and AfDB’s climate finance tracking
methodologies.
Phase 2: the Energy, Environment and Climate Change Department will apply theadditional selection criteria under the AfDB’s Green Bonds Program andcategorize the projects that can be part of the that program. The final list ofprojects to be part of the portfolio for any Green Bonds issuance will be agreed
upon jointly by the Bank’s Energy, Environment and Climate Change Department
and Treasury Department based on the proposed list by the former.”

Furthermore:“Additional selection criteria to be applied for the specific purpose of the Bank’s Green
Bonds Portfolio include: Projects that are eligible for financing under the African Development Bank.
Projects eligible for financing under the African Development Fund and Nigerian
Trust Fund will be excluded.
 Projects whose financing by the Bank can be qualified in full as promoting either
low-carbon or climate resilient development. Projects whose financing by theBank can be qualified only partially as promoting either low-carbon or climate
resilient development will be excluded.
 Projects that will lead to significant accumulated GHG emissions reduction overthe lifetime of the asset.”
We find these procedures and criteria sufficient to safeguard the climate integrity ofselected project to a reasonable degree. The standards seem to be transparent andreasonably simple to apply. The rules and procedures will be made publicly available ona dedicated internet site. Thus, the revised document 12 says about monitoring thefollowing:7

“To enable investors to follow the implementation of the AfDB’s Green Bonds Program,the Bank will establish a dedicated website which will include, among other things:
1) key documents related to the AfDB Green Bonds Program and links to otherrelevant Bank documents such as the Long-Term Strategy or the Environment
Policy;2) Key information about the AfDB’s Green Bond Program and Framework,
including project selection criteria;3) progress status report on the selection and implementation of the projects which
are part of the Green Bonds portfolio (e.g. information on implementation status,
disbursement status and other relevant indicators as they are collected as part ofthe Bank’s project monitoring procedures).
In addition, the Bank will produce an annual newsletter for investors which will include
a summary of the information under points 2) and 3) above.”8