By Ellinor Häggebrink, Engagement Manager at GES
Hydropower and the construction of dams has become a hot topic in the investor community. On one hand, it is a relatively green source of energy and can help countries to build infrastructure for basic services and economic growth. On the other hand, it can equally constitute an environmental threat with severe impacts for local populations, including indigenous people, and biodiversity. This is why a number of hydropower operations are considered controversial and cause significant stakeholder protests.
The main ESG risks are related to forced relocation of local communities, negative impacts on biodiversity, changing livelihood and lack of recognition of indigenous people’s rights. Many of the controversial hydropower projects are based in countries and a context where there is a lack of transparency and weak governance systems. Then again, proponents often argue that hydropower production has the potential to decrease climate change with a fairly clean energy production compared to coal and gas, and contribute to an improved access to electricity for population in the host country, while providing benefits such as employment and income if well-designed. Opponents, on the other hand, argue that many hydropower projects are creating a high amount of methane gas, contributing to global warming.
Whatever one believes, hydropower production seems to be here to stay and the International Energy Agency expects production capacity to double between now and 2050. As an institutional investor, there are several material risks that needs to be addressed before directly or indirectly investing in hydropower projects. There is a significant level of reputational risks due to the media attention to these large projects and the potential negative impacts on local communities. Additionally, local communities in conjunction with NGOs and media are often able to stall and delay project development, which impose added costs to the projects. Inadequate management of elevated environmental and social risks can also result in the risk of costly legal processes.
To add to the controversies mentioned above, hydropower projects often have a political dimension too. This is clearly seen in Thailand, where I recently spent a week engaging with a range of actors relating to hydropower projects such as operators, financiers and NGOs. The Mekong River sprawls between China, Burma, Thailand, Laos, Cambodia and Vietnam; a mighty river which shapes the lives of tens of millions of people and is now under rapid transformation. At the time of writing, 11 large-scale dams are under construction or in the planning phase on the river. Upstream China has already put in place almost as many dams. This has seen a lot of criticism from NGOs, local communities and to some extent also from governments. More of this can be expected in the future as the hydropower projects are assumed to have huge impacts on fish production and the ability to grow rice in South Asia’s breadbasket, the Mekong delta.
A lot of focus has been on the Xayaburi dam in Laos, an example that ticks most boxes when it comes to criticism of hydropower projects: Allegedly, the dam threatens the extinction of migratory fish species through a blocked fish migration route, as no sufficient baseline study has been made to measure the impact on the fish stock which in turn is believed to affect the livelihoods and food security of millions of people from the regions of Thailand, Laos, Cambodia and Vietnam. Furthermore, the project will forcibly resettle over 2,100 people and directly affect over 200,000 people, according to the international NGO International Rivers.
Although being built in Laos, the dam will have transboundary impacts and according to the Mekong River Agreement, a treaty from 1995, all member countries of the inter-governmental Mekong River Commission (Laos, Cambodia, Vietnam and Thailand) need to consult one another on any development of the river to prevent unilateral actions imposing unmitigated transboundary impacts on other countries depending on the river. Despite ongoing protests from the neighbouring governments and calls to halt the project until further studies on the impacts of the dam was performed, the Lao government announced it would continue construction of the dam which in November 2015 was said to be 60 per cent complete.
All companies involved in the Xayaburi project have all along claimed that the necessary legal permits are in place, and that the dam is fully in compliance with international norms. What was interesting to learn during my week in Bangkok was that, despite the unanimous mantra from those involved that everything is in order, the Lao government earlier this year decided to make major changes to the original design of the dam. This comes as a response to the NGO criticism about the potential environmental and social impacts on local communities. However, it is too early to conclude what the effect of these changes will be and if those are sufficient to bring the project in compliance with international norms.
The recent COP21 agreement to a level that will limit the global average temperature below two degrees Celsius will inevitably lead to cuts in greenhouse gas emissions. If hydropower projects are properly managed and well designed, they can contribute significantly in making the Paris agreement happen. If not, especially if methane emission are not mitigated and sensitive rainforest areas are allowed to be flooded, they might instead act contrary to what world leaders just agreed on in Paris.