Fossil fuel exclusion policies

Coal  

AIIB President Jin Liqun announced in 2020 that the AIIB would not finance any coal-fired power plants or projects functionally related to coal. This commitment is reaffirmed in the AIIB’s Energy Sector Strategy (updated in 2022), which states that “AIIB will not finance thermal coal mining, coal-fired power and heating plants or projects that are functionally related to coal”.[1] Instead, the AIIB will support projects that aim for the early retirement of coal plants, as well as for replacement of, decommissioning, remediation, and redevelopment of previous coal facility sites with affected communities. More broadly, the AIIB Climate Action Plan acknowledges the need for global coal phase-out, committing the Bank to “support international efforts to coordinate and more effectively deploy international financing through country platforms, such as the J-ETPs”.

Oil and gas 

The consultation draft of the Energy Sector Strategy initially stated that the AIIB would not finance any oil sector investments. However, this language was unfortunately weakened in the eventually published Energy Sector Strategy. This states that the Bank will continue to support oil sector investments “under exceptional circumstances to improve basic energy access and control GHG emissions from flaring and leakage”. This includes support for hybrid renewable energy systems to supply reliably energy for isolated locations, island communities, and as part of disaster response. Any such investments are required to demonstrate that an entirely renewables-based approach is not technically or financially feasible, and commit to minimise the non-renewable share of the investment “within the limits of financial feasibility and the targeted level of grid reliability”. There is no explicit indication that these investment criteria differ across the oil industry, suggesting up-, mid- and downstream oil activities could in theory be permitted under these conditions.

With regard to natural gas, the Energy Sector Strategy makes clear that AIIB views this as a transition fuel. As developed countries phase out coal, AIIB states that natural gas use (as opposed to oil and coal) has helped to reduce emissions and pollution, and that consequently “many developing countries also plan for natural gas to play a transitional role in their energy systems”. To this end, the AIIB will not support upstream gas exploration and drilling activities but may consider gas flaring avoidance projects.[2] The AIIB will continue to support mid- and downstream facilities under the following comprehensive criteria: 

1. Investments will not conflict with, or will actively contribute to, the achievement of a member’s climate policy and commitments including its NDC, LTS, and net zero/carbon neutrality pledges.
2. Investments will not create a risk for carbon lock-in or stranded assets, taking into account the member’s long-term decarbonisation trajectory consistent with the goals of the Paris Agreement. 
3. Investments will reduce the energy sector’s carbon intensity immediately or over time.
4. Investment will represent advanced technologies and sector best practices in limiting methane emissions.
5. Investments will not displace low-carbon solutions, or a mix of such solutions, that are equally or more technically and economically feasible and are able to provide the service at an equivalent quality and scale as proposed for the natural gas investments.  
6. Investments will consider shadow costs of carbon. 

The AIIB recognises that implementing the first two criteria in practice may suffer from the specified reference pathways, commitments, and plans being either unavailable or insufficiently granular. The Bank states that in such cases it will “explore relevant references to inform the Paris alignment assessment” alongside the client and development partners. No concrete details regarding what this entails in practice are provided. However, the AIIB does make the welcome commitment to “where possible” support members to design and update their climate plans and commitments (in particular NDCs and LTSs), including through translating these into investment plans.   

In terms of implementation, results remain to be seen. Nonetheless, in December 2022, less than one month after the Energy Sector Strategy was updated, a project which supports the expansion of the largest gas power plant facility in Bangladesh was approved by the AIIB’s President (without requiring a decision by the Board of Directors, in line with the Bank’s accountability framework). Moreover, civil society voices have called into question how robustly the AIIB is implementing frameworks and mandates in practice.

Supply-side energy efficiency 

The guiding principles of the Bank’s Energy Sector Strategy state that the AIIB “will help its members tap the existing large, but dispersed, potential for energy efficiency in their energy infrastructure, industry, buildings, and transport”. In terms of implementation, the strategy refers to the Bank supporting the rehabilitation and reinforcement of existing power transmission and distribution infrastructure, generators and utilities, as well as hydropower infrastructure. The strategy makes no explicit distinction between support for brown and greenfield energy efficiency improvements, nor does it set out a minimum emissions performance standard. Moreover, in terms of outcome indicators, the AIIB includes a single energy efficiency indicator in the Results Monitoring Framework of the Energy Sector Strategy. This considers the amount of primary energy consumption saved in GWh from AIIB investments in energy efficiency, with no reference to the type of energy (e.g. fossil or clean). While at the project level this information may be deducible from the context of the project, at the aggregate level, this limits monitoring and evaluation relating to the Bank’s overall energy efficiency contributions.  

Supply-side energy efficiency improvements to fossil fuel power generation infrastructure can reduce emissions temporarily but risk extending the lifespan of the infrastructure. This has the potential to delay the transition to renewable energy sources, potentially undermining long-term climate goals through locking in emissive infrastructure, as well as leaving countries with increasingly uncompetitive stranded assets. As a result, it is vitally important that supply-side energy efficiency improvements are guided by robust safeguards to prevent these potential adverse impacts. Although the AIIB does not specifically mention supply-side energy efficiency projects explicitly in its PAA methodology, this does ensure that all operations are screened for stranded asset and carbon lock-in risks.

Recommendations:

• To build on the existing full exclusion for coal financing and criteria governing the limited oil and gas investments permitted, the AIIB should consider establishing a timeline towards a full fossil fuel exclusion. In the interim period, the Bank should strengthen its approach to oil and gas investments by:
  • Providing further clarity on the full set of “exceptional circumstances” under which oil sector investments are considered permissible by publishing the decision tree or methodology for how they evaluate and approve such investments. Such a framework should detail how exactly these “exceptional circumstances” are defined and determined, including all relevant assumptions and thresholds used in the analysis and the relevant decision making process. The Bank should also clearly specify whether these conditions apply equally across prospective oil industry investments, or whether they differ depending on whether a project is up-, mid-, or downstream.
  • Providing more concrete details regarding the “relevant references” that it suggests will inform the Paris alignment assessment in place of country level transition and decarbonisation pathways, commitments, and plans, if these are either unavailable or insufficiently granular. While the Bank’s recognition of this scenario is a welcome addition to its criteria for mid- and downstream gas projects, it is critical to evidence how it will overcome this challenge in practice. Considering the Bank will continue to actively consider mid- and downstream gas investments, it is critical to ensure the associated financing criteria are implemented robustly in practice to avoid contributing to risk of lock-in and stranded assets.
• The AIIB should consider adopting explicit criteria for screening and mitigating potential risks pertaining to locking in emissive infrastructure as a result of supply-side energy efficiency improvements to energy infrastructure. In particular, this should include strict dedicated safeguards relating to supply-side efficiency improvements to fossil fuel infrastructure, to ensure these contribute to shortening, as opposed to extending the lifetime of these assets. This screening process should be anchored in context-specific data, to account for the individual just transition pathways of a given country. If deemed viable, energy efficiency investments in fossil fuel infrastructure should be accompanied by a net zero transition plan for the relevant asset(s), aligned with the country’s climate commitments and development strategies.

[1] The Bank’s Environmental and Social Framework’s exclusion list similarly explicitly excludes thermal coal mining, coal-fired power and heating plans or projects that are functionally related to coal.  

[2] Information received directly from the AIIB.