MIGA Helps Investors Navigate Environmental and Social Risks
April 16, 2012— Driven by social change and successful awareness-raising, "sustainability" has become an increasingly popular catchphrase for many businesses. A broad set of acceptable environmental and social standards, or best practices, has gained significant traction among the drivers of business: investors, lenders, and governments. Underpinning this is the realization by many that adherence to these best practices often goes hand-in-hand with an investment’s economic and financial sustainability: a win-win situation.
Nevertheless, in most cases, private and public sector-led development does have an impact on local environment and social conditions. These effects can run the gamut—from minor implications in, for example, the construction of an office building to major consequences in projects such as those in the infrastructure, mining, and oil and gas sectors. On the one hand, there is a need to create roads that ease movement of people and goods, power projects that electrify hospitals and homes, and mining ventures that contribute to economic development and provide jobs. On the other, there are very real concerns about these activities’ effect on the environment and the well-being of local populations. This is a delicate and complex balancing act.
As a political risk insurance provider that is part of the World Bank Group, MIGA supports investments that are developmentally sound and meet social and environmental standards designed to mitigate or reduce adverse impacts on communities and environment. We apply these standards to all projects and offer our expertise and resources, including trust fund support, to help investors navigate them. They are a powerful tool for identifying risks and improving long-term project sustainability—benefiting affected communities and preserving the environment.
"While larger, more sophisticated investors may have the expertise and resources necessary to ensure that their investments are consistent with international best practice, smaller or less experienced investors often do not,” notes Ravi Vish, MIGA’s Director and Chief Economist, Economics and Policy. “This is where MIGA can add particular value."
Insuring the Frontier of Sustainability and Green Infrastructure Projects
MIGA’s early intervention can help ensure that investors effectively mitigate the environmental and social risks associated with complex projects. We may also take on these projects to push forward innovative technology that has considerable development potential.
MIGA’s involvement in the Weda Bay nickel project in Indonesia is a case in point. The Weda Bay deposit is one of the world’s largest undeveloped nickel projects. Fully developed, it will allow Indonesia to become one of the world’s major nickel producers and provide significant employment, major government revenues, and will have an important impact on the local economy.
In an innovative move, MIGA has insured the exploration and feasibility phase of the project. MIGA’s involvement at this very early stage of the project will ensure that a solid framework is in place for the potential development of the mine, providing the client with the institutional capacity necessary to design and implement best practices right from the start. This project has may set a precedent for how mining projects should be carried out in sensitive and challenging environments, such as those common in Indonesia. More broadly, comments Deniz Baharoglu, Sector Leader for MIGA’s environment, social, and integrity team, "The Weda Bay project will provide an important demonstration of how a major natural resource can be developed in a socially and environmentally sustainable way to benefit the local population."
An example of MIGA’s support to a challenging project pushing the envelope of sustainability and delivering green infrastructure involves Lake Kivu—one of the great lakes of Africa sitting in a volcanic area between Rwanda and the Democratic Republic of Congo. Under the pressure of one thousand feet of water, dissolved and undisturbed methane remains, formed by carbon dioxide that emerges from the lake’s bottom. An earthquake or flowing lava can release these gases and cause an explosion of the lake. Such an event is estimated to occur at some time within the next 100 years.
However, if handled safely, the gas offers significant potential for addressing Rwanda’s acute electricity shortage. MIGA client Contour Global is constructing a methane-gas extraction and production facility and a 25 megawatt power plant on the lake. The project will remove the gas and process it to generate much-needed power for Rwanda. While the technology utilized by KivuWatt has been proven in other circumstances, this particular use is unique. MIGA is absorbing the risk of this innovative project in the interest of developing a quasi-renewable source of power for the country and averting disaster on the lake that would decimate the surrounding population centers inhabited by an estimated two million people.
"For this complex project supported by several public-sector lenders, MIGA coordinated closely with them on the environmental and social due diligence," commented Baharoglu. "MIGA’s efforts will truly have a significant effect on the project’s sustainability."
Innovation and Best Practices: MIGA’s Role
MIGA’s work is firmly rooted in the belief that the private sector can be an important catalyst for change and development. MIGA’s Vish notes, "As more and more businesses understand that environmental and social sustainability is critical to the long-term viability (and therefore profitability) of their investments—MIGA will be at the forefront of innovation and practices by helping investors achieve these objectives."