Corruption Risks and International Climate Investments

The several hundred billion Dollars to be invested in measures to fight climate change over the  coming years, not only encourage the good who seek to halt dangerous global warming, but they also attract the crooks who look for new booty. Transparency International (TI), the renowned international civil anti-corruption organization, recently published a comprehensive report addressing the risks which corruption poses to good climate governance. Entitled “The Global Corruption Report: Climate Change“, the volume is mandatory reading for all governments, corporations, international and non-nongovernmental organizations concerned with climate policy and finance.

TI’s pressing message is: set up effective control mechanisms that prevent, uncover and punish corrupt practices, otherwise too much of the money spent for climate protection will be diverted into private pockets. This is a timely warning, since many of the new internationally sponsored funds designed for climate change mitigation and adaption lack proper regulatory mechanisms and still need to adopt tight oversight procedures. Any loophole can and will no doubt be exploited for fraudulent activities, a lesson already learned from experience with the European Unions’s Emissions Trading Scheme and the UN’s Clean Development Mechanism in poor countries.

Given the corruption risks attached to international carbon markets, emission cutting and accounting schemes, a special focus is directed on forestry. As a significant mitigation initiative, the recent climate conference in Cancun at the end of 2010 adopted the REDD program, which reads “Reducing Emissions from Deforestation and Forest Degradation”. REDD might eventually involve funds of up 28 billion US-programDollar per year. TI rightly points out that international timber trade is highly vulnerable to illegal activities and that establishing good governance in the forest sector constitutes a serious challenge, particularly in remote places. Monitoring and reporting by local communities is required in order to reduce the corruption risks threatening the sustainability of the REDD programs.

The Cancun conference also strengthened the strategy of adapting to the likely future of climate change, which implicates major protective infrastructure investments in those countries that will be hit hardest by the consequences of the global warming. It is no secret that major construction projects are already disproportionally exposed to corrupt practices. Moreover, the largest share of public and private sector money attributed to specific adaptation projects, such as sea walls and dams against floods, drinking water supply systems, resilient housing etc., will also be invested in countries that have a reputation for endemic corruption. The report highlights the fact that more than a dozen of the countries in Africa and South Asia, which will be most affected by climate change and are therefore eligible for financial support from the diverse climate funds, also rank at the lower end of the TI’s Corruption Perceptions Index.

The Wisdom of Integrity Due Diligence

Private companies that are aware of the legal and reputational risk attached to doing business in difficult political environments face a dilemma. They might see endemic corruption as a top political risk and barrier for investing in both renewable energy projects and adaptation infrastructure. At the same time, green investment constitutes both a fundamental area for development and a growth market with huge opportunities for business.

It is therefore highly recommendable, that private companies and investors not only rely on the establishment of governmental anti-corruption mechanisms with regard to international climate finance. Investors must implement political and integrity due diligence procedures for selecting incorruptible and reliable business partners for their projects in the host countries. In any case, this is required in order to comply with international and national anti-corruption legislation. In addition, public opinion also associates green business and climate investments with higher moral standards. Therefore, neglecting corrupt practices in climate related business engagements will be inadvertently be accompanied by increased reputational risks.