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Environmental impact assessment for sustainable agricultural sector lending
A checklist for agricultural lenders of the elements for environmental impact assessment of sustainability
Once it is accepted that it is in the long-term financial interest of banks to begin to develop environmental impact assessment capabilities, the question arises as to the model and the process to be used to institutionalize and nurture this new set of activities within the institutional framework of a banking organization.
We wish here to outline a model that will provide a basic capacity to evaluate the environmental consequences of lending. This model is not to be considered as other than illustrative; many alternate models are equally applicable.
The model put forth here is for Environmental Impact Assessment (EA), instead of a more formal cost-benefit analysis. As noted above, there are numerous approaches to evaluating the environmental consequences of lending. None is applicable to all cases. Furthermore, most of these techniques are still quite new and many are openly experimental.
Environmental Impact Assessment (EA) relies upon a systematic approach to enumerating the effects of a proposed loan-financed investment. It does not require specialized personnel, as does a more formal cost/benefit analysis, along the lines outlined in Chapter Four; instead, it can be incorporated into the existing bank operating routines and utilize present staffing at the local level. The process is less rigorous than a cost benefit analysis, as it does not assign monetary values but, instead, permits more intuitive qualitative and quantitative judgements as to the impact of the loan. Using EA permits banks to study the major potential areas of the environment on which their loans may have some effect and therefore to determine whether the proposed project is likely to be satisfactory in terms of environ mental consequences. The EA process can (and does) incorporate both information and value judgements into the loan approval process. These judgements however must be made explicit and the consequences weighed against other uses for the resources, and against the cost of environmental protection and remediation.
Environmental impact assessment for sustainable agricultural sector lending
Sustainable agricultural sector lending can be defined quite simply as the financing of activities whose impact upon the environment and the natural capital does not exceed the regenerative capacity of the environment. 22 If the income of a project derives from the consumption of natural capital more rapidly than the environment can regenerate it, then it is, in effect, decapitalizing the environment and impairing the future capacity to generate income at the same rate by liquidating resources. 23
22 A more extensive definition is found in FAO/Netherlands Conference on Agriculture and the Environment. Issues and Perspectives in Sustainable Agriculture and Rural Development. Main Document No. 1, 'S-Hertogenbosch, The Netherlands, 15-19 April 1991. This definition stresses the maintenance of the natural resource base while meeting basic human needs, present and future, through conservation of natural resources by engaging in environmentally non-degrading economic-activities and appropriate technology.
23 The reader should be aware of the extended, and sometimes heated, debate that has characterized the utility of "sustainability" as a key organizing concept. The definition put forward here is designed to be a functional concept to enable banking and other professionals involved in making lending decisions to focus upon the essential feature of the issue-whether a resource is being harvested at its maximum sustainable yield. Here, it is used as a physical concept with the goal being the management of a renewable resource stock (be it trees, fish in the sea, or aquifers).
It is clear that some types of sustained yield resource management can produce the degradation of other resources. Monocultural forests, such as rubber reduce species diversity by destroying the original flora and fauna. These forests, once established, form a closed and sustainable ecosystem that causes little further damage, as the canopy closes over. This conversion from one type of forest to another is neither intrinsically desirable or undesirable. The costs must be measured against the benefits.
Again, the rubber industry provides an illustrative case. In Brazil, the forests were not stripped and planted to rubber, but instead the wild rubber was tapped without clearing forests. The cost of doing so was such that Brazilian rubber was priced out of the market by the new British plantations in Asia and its market share fell from 60% to only 1% of total natural rubber exports. In Malaysia, rubber plantings grew from 150 Ha. in 1897 to over 1.4 million Ha. in 1940, almost 5X of the surface of the country (and a larger percentage of peninsular Malaysia). The exports constituted over one-half of the total world exports, and as such were a major source of employment and foreign exchange.
The principal challenge to sustainability is not a definition of what is sustainable and what depletes the resource, or even whether changing from one type of forest to another is an acceptable price to pay for the employment and exports generated by the change but instead the fact that the maintenance of physical stocks produces a decreasing per capita availability over time due to population growth. Sustainability is therefore not a static concept. There are constant trade-offs to be made between sustaining the original ecosystems, sustaining access to crop and grazing lands, and sustaining growth, jobs, and exports. Thus, sustainability cannot be discussed without setting it in the political, economic, social, and demographic context which permits one to view it both as a set of trade-offs for present and future generations. Social welfare gains deriving from destruction or degradation of a resource, may, in some cases, be inevitable, though undesirable, in the circumstances of a rapid population growth poverty, and limited resources to pursue alternative strategies. Sustaining the present and future level of societal and individual welfare may, sadly, but almost inevitably, imply resource degradation until population growth is slowed.
The steep hillsides of the Philippines provide an interesting
case. Farming these slopes, even with diminishing fertility,
declining yields, heavy erosion and downstream sedimentation, is
the only source of livelihood for perhaps 10 million people. They
have been "pushed" into these hills by a lack of
economic opportunities in the lowlands. Given the present growth
rate of 2.3X per annum, which will increase the population from
about 60 million today to over 75 million in the year 2000, just
9 years hence, the expulsion of people from the lowlands can be
expected to continue, notwithstanding that there is no likelihood
that this population can be accommodated in a sustainable,
environmentally non-degrading farming system. It is a "cruel
choice" between present consumption of environmental
resources to sustain life and its protection both for its
services and its value to future generations. The alternative,
that is, massive job creating investment in the lowlands, is
effectively closed by the poverty constraint.
See John A. Dixon and Louise A. Fallon, The Concept of
Sustainability: Origins. Extensions. and Usefulness for Policy.
Washington, World Bank, July
When this definition of sustainability is adopted, the natural capital is given an implicit value. The difficulties of applying the sustainability criteria can be overcome by breaking it down into a number of component fields. When the effects of the proposed loan on each of these components is studied in some depth, and when it is detailed as part of the loan evaluation and review process, the overall environmental sustainability of the loan comes into clearer focus. Bankers can then make informed decisions as to the impact of their lending activities on the environment .
AIR QUALITY
- greenhouse gas production
- particulates and contaminates
LAND CAPABILITIES, STRUCTURE, AND RESOURCES
- wet and wild lands
- tropical forests
- deforestation and reforestation
- arid and semi-arid lands
- coastal zones
- flood protection
- soil depletion and erosion
- watersheds
- irrigation and drainage
- livestock and rangeland
- roads, dams and other infrastructure
FLORA AND FAUNA
- biological diversity
- habitat destruction
HUMAN ECOLOGY AND SOCIAL INFRASTRUCTURE
- agrochemical discharges and waste water effects on health
- voluntary and involuntary relocation and settlements
- native peoples and cultures
- agroindustries' impact on local communities
SURFACE AND GROUND WATER QUALITY AND QUANTITY 24
- surface and ground water pollution
- availability and quality of water to downstream users
- flooding
- sediments, the effect of nutrients and pollutants on marshes, wetlands, submerged aquatic vegetation (SAV), epiphytes (fouling plant growth), the microscopic (zooplankton, phytoplankton, bacteria), the permanent and migratory nekton (swimming) and benthic (bottom) communities.
24 This discussion follows World Bank Environmental Assessment Source Book. Vol. 1, Policies. Procedures. and Cross Sectoral Issues, Washington, 1991.