The Beijing-headquartered development bank is considering support for a 584MW gas plant in Narayangonj on the outskirts of Dhaka. A report from the Bangladesh Power Development Board shows the plant will be fuelled by LNG.

Dwindling domestic gas resources, efforts to shift away from coal and phase out polluting diesel plants and the lack of renewable capacity has led Bangladesh to increasingly rely on LNG to meet its energy needs.

But soaring prices caused by Russia’s invasion of Ukraine have left the South Asian nation priced out of the market and facing regular power outages.

“There’s no gas to supply this new power plant. It’s not justified and ridiculous,” Hasan Mehedi, secretary of the Bangladesh Working Group on External Debt, an alliance of 43 local organisations, told Climate Home News.

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Standard Chartered Bank is lead lender on the $613 million project, which is under construction. AIIB’s proposed contribution is a $110m loan.

To build the plant, project developer Unique Meghnaghat acquired 21 acres of agricultural land from local villages, affecting 343 landowners and fishers, according to project documents.

The fast-tracking process allows the bank’s president to greenlight support without going through the board. He could make the decision this month.

Paris alignment

AIIB found the project to be in line with the goals of the Paris Agreement. Petra Kjell Wright, a development finance campaigner at Recourse told Climate Home this was the first time the bank had mentioned a Paris alignment assessment. But it has not published its methodology.

The bank has pledged to fully align its operations with the Paris goals by July 2023. According to E3G analysts, it has work to do to get there.

The International Energy Agency has warned that “a huge decline in the use of fossil fuels” is needed to limit warming to 1.5C – the more ambitious end of the Paris Agreement’s goals.

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The project documents show that renewable alternatives were barely considered. They state that renewable energy “remains a niche area that does not have the capacity to provide the power delivery at the scale and reliability in view of the existing power deficit scenario”.

Land scarcity, high initial cost and the lack of infrastructure for large-scale generation are listed as barriers.

Kjell Wright described the assessment as “very weak” and with “loopholes so big that a gas-power plant can jump through them”.

“This is public finance and taxpayers money and it should play a role in the trajectory towards renewable. Public finance should help countries leapfrog to renewables and not pull them back to the fossil fuel economy,” she said.

A spokesperson for AIIB said the project will help the government avoid using more polluting and less efficient plants and complement the development of renewable energy.

‘Clever framing’

Multilateral development banks, including AIIB, have been working on a joint framework to assess projects against the goals of the Paris Agreement.

A draft from November 2021 rules that mining or burning coal isn’t aligned with the Paris deal but it doesn’t explicitly exclude support for oil and gas. Instead, banks are asked to answer a series of broad questions to determine whether the project is Paris-compatible.

“With a bit of clever framing and number crunching, there are ways of showing that nearly every project apart from coal and peat is Paris-aligned,” said Sonia Dunlop of think tank E3G.

The approval of the Narayangonj gas project could set a precedent for how other MDBs assess similar project, she added. “This is hugely concerning”.

Last month, AIIB approved an updated energy strategy restricting financing for coal and oil projects and gas drilling. But it allows funding for gas infrastructure and power generation in certain circumstances, including if it displaces more polluting fuels and doesn’t displace clean ones.

Delaying the energy transition

More than half of Bangladesh’s electricity generation comes from gas, while grid-connected solar accounts for just over 1% of the mix.

To keep up with growing electricity demand, Bangladesh’s LNG imports have surged. A recent analysis by Ember found that, based on current plans, Bangladesh could spend $11 billion on spot market LNG between 2022 and 2024. Investments in solar power could have reduced this by a quarter and saved up to $2.7bn.

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Shafiqul Alam is the lead energy finance analysts for Bangladesh for the Institute for Energy Economics and Financial Analysis (Ieefa).

He told Climate Home: “Given high LNG prices on the international market and the fact Bangladesh is already facing a gas shortage… this is an opportunity for Bangladesh to transition and design a clear pathway for renewable energy.” Growing the fossil fuel pipeline will only delay that transition, he said. “The government should keep space for renewables and not invest in new LNG-based plants apart from the ones are under construction.”

As of August 2021, AIIB had invested $605m in the energy sector in Bangladesh. According to analysis by the Bangladesh Working Group on External Debt, none of this went to solar or wind projects.

Mehedi, of the working group, said Bangladesh had installed nine grid-connected solar plants. “Solar is bankable and profitable so why are we going for LNG?”

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The Beijing-based development bank describes its mission as being “lean, clean and green”. Its policy, on the other hand, continues to support investments in fossil fuels that “use commercially available least-carbon technology”, including coal.

AIIB president Jin Liqun suggested earlier this week this could soon change.

“Let me be very clear: I am not going to finance any coal-fired power plants… AIIB will not finance any projects that are functionally related to coal – for example roads leading to the plant or transmission lines serving coal power,” he told an online conference.

An AIIB spokeswoman said the bank was “committed to implementing the sentiments expressed by President Jin”.

“AIIB has no coal-fired power generation in our pipeline and we do not think it makes sense to invest in coal or coal-related projects in our direct finance or capital markets portfolios,” she said.

The remarks come as the AIIB opens a consultation on updates to its environmental and social framework, with no mention of coal. Observers expect climate change to feature more prominently in the bank’s first corporate strategy, due for publication later this year.

Sonia Dunlop, who leads think tank E3G’s work on international financial institutions, told Climate Home News, “it would send a huge signal” to investors if the bank enshrined the coal ban in its corporate strategy, putting pressure on other multilateral development banks to follow suit.

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There has been pushback against a coal finance ban from some shareholders, Petra Kjell, campaigns manager at Recourse, which advocates for just and sustainable development finance, told CHN.

“I doubt it will go into writing. It is still politically too controversial. But [ending coal financing] continues to be something President Jin says in his personal capacity,” she said.

“A statement is great but climate can’t be saved with words. It needs to be translated into a strong public policy,” added Lucie Pinson, director of Reclaim Finance, which campaigns for the financial sector to support a transition to clean energy.

Established in 2016 with China as the largest shareholder, the AIIB aims to align to the goals of the Paris Agreement. Under the pact, countries have vowed to cut their emissions and collectively limit global warming “well below 2C”.

In 2019, nearly 40% of the bank’s total financing went to climate finance. It plans to set a target to invest 50% of its annual direct financing into projects linked to climate change mitigation by 2025.

But it has not officially ruled out finance to coal projects. The AIIB’s energy sector strategy states that “carbon efficient oil and coal-fired power plants would be considered” for investments “if they replace existing less efficient capacity… or if no viable or affordable alternative exists in specific cases”.

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President Jin, who was re-elected in July for a second five-year term starting January 2021, previously said in 2017 “there are no coal projects in our pipeline”. Then the bank backed coal-fired cement works in Myanmar through a financial intermediary.

Pinson, of ReclaimFinance, said any AIIB coal policy would need to end all direct and indirect support to coal, including through financial intermediaries.

“Stopping direct financing to new coal projects but financing them through the backdoor would be blatant hypocrisy,” she said, adding that Chinese banks are among the biggest underwriters of companies planning new coal plants.

Besides coal, the AIIB invests more than twice as much in oil and gas as in renewable energy, according to Recourse, with gas seen as an essential part of the energy transition.

Banning coal lending “should be the first step towards saying we are not going to focus on fossil fuels at all,” said Dunlop. Last year, the European Investment Bank extended its lending ban from coal to all unabated oil and gas projects.

“The AIIB has the opportunity to lead on climate change if it wanted to,” Dunlop added, saying rivalry between the AIIB and the Asian Development Bank (ADB) could spur a race to the top. The ADB has also said it was staying away from coal, but has yet to reflect that in its decade-old energy policy, which is due for review in 2021.

For Michael Westphal, a senior associate on Sustainable Finance at the World Resources Institute, a robust AIIB policy on energy lending could put pressure on China to stop funding coal plants through its “belt and road” overseas investment programme.

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Yet in its fourth year in operation, it is becoming increasingly clear that its promises to take action against climate change have been left unfulfilled.

As the bank’s annual meeting kicks off in Luxembourg this week, the accolades have silenced, and instead a murmur of protest against its fossil fuels heavy portfolio is becoming louder.

The numbers speak for themselves. Out of just over $8 billion investments approved to date, the AIIB has put 20% into fossil fuels against just 8% for renewables. This excludes indirect financing through so-called financial intermediaries, such as private equity funds, which if included, would increase the fossil fuel numbers.

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Low-lying and coastal, Bangladesh is on the front line of sea level rise and other climate change impacts. As a founding member of the Climate Vulnerable Forum, the country has been at the forefront of efforts to advocate for a recognition of 1.5C above pre-industrial levels as the maximum ‘safe’ limit to global temperature increases.

The government is also acting at home. For example, in 2008 it set a target to supply 10% of its energy from renewable energy sources by 2020.

A tenth of AIIB’s approved projects to date are in Bangladesh, all in the energy sector. But despite the country’s laudable ambitions to tackle climate change, the AIIB has so far not invested in a single renewable energy project.

A new report by Coastal Livelihood and Environmental Action Network (Clean), NGO Forum on ADB and BIC Europe reveals that the AIIB’s portfolio in Bangladesh instead is clearly biased towards fossil fuels.

Much of this is support for natural gas, including for Bhola IPP, a greenfield gas power plant, and indirect support through a financial intermediary goes to heavy fuel oil plants, too.

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In its 2017 energy sector strategy, the AIIB argues that gas is a key component for some countries’ transition towards a low-carbon economy. Disturbingly, despite its ‘green’ rhetoric, the strategy does not actually rule out support for any type of fossil fuel, even coal.

With no renewable energy projects in its Bangladesh portfolio, the heavy focus on gas can’t just be explained as a ‘transition fuel’ – in fact it has become a dangerous distraction. Power purchase agreements between power plants, such as Bhola, and the Bangladesh government often stretch over at least 20 years. This goes well beyond 2030, when global greenhouse gas emissions should be cut at least 45% from 2010 levels to avoid “long-lasting or irreversible changes” to our planet, according to the Intergovernmental Panel on Climate Change.

The AIIB points to challenges with supporting renewable energy in Bangladesh, such as limited land availability and a lack of bankable projects. While the AIIB can only choose between projects put forward by the host country, it needs to do more to signal its interest in funding renewables and energy access for the poor to encourage the Bangladeshi government to propose these types of projects and not fossil fuel infrastructure.

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Other multilateral development banks have done things differently. While there is still a long way to go, the World Bank and the Asian Development Bank support a renewable energy initiative which has installed almost 5 million solar home systems in the country. The programme has also helped women by training them as technicians for after sales services.

The review of the AIIB’s Bangladesh portfolio reveals other problems, too. Some of the local people have been pushed off the project sites, with little or no compensation. Project information has been difficult to access and some has been strewn with errors. Local communities have expressed significant concerns for the projects’ impacts on the local environment.

It would be easy to blame China, as home of the bank and the largest greenhouse gas emitter in the world. But Europe and other countries around the world play a part too. The annual meeting in Luxembourg, the first to be held outside of Asia, is a testament to this. European governments hold 22% of shares in the AIIB. Many of these governments have stringent commitments to move away from fossil fuels and some, such as the UK, have declared a climate emergency.

It is therefore not surprising that as delegates arrive, many European civil society activists are joining hands with their Asian counterparts, to send a loud and clear message that the AIIB must steer a clear path away from fossil fuels and start tackling the climate crisis.

Petra Kjell is campaigns manager at Bank Information Center Europe

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