Federal Department of Economic Affairs FDEA State Secretariat for Economic Affairs SECO

Policy Paper on the Environment Environmental aspects of economic development cooperation

September 2010

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1 The environment as a global public good Environmental concerns play an important role in economic development cooperation, underpinning the objectives of sustainable economic growth and of integrating countries into the global economy. The efficient use of environmental resources is a fundamental principle of sustainability. In other words, any economic development that is not environmentally sound is not sustainable. The rapid pace of global growth in recent years has often come at a heavy environmental cost in terms of pollution and the depletion of natural resources. Deteriorating environmental conditions not only diminish living standards and locational quality but also increasingly hamper economic growth. The issue of ecological externalities must therefore be better addressed in economic decision-making. The environment is a complex set of interrelationships among natural resources – the soil, water, countryside, air/climate and biodiversity. To varying extents, these environmental components display the characteristics of a public good, whether at a local level (e.g. air quality, ground water) or global level (e.g. biodiversity, climate, oceans). In general, property rights to the environment cannot be adequately assigned and exercised (“non-excludability”), and the environment is something that can be consumed by different individuals at the same time (“non-rivalry”). These typical characteristics of a public good have, with increasing industrialization, resulted in a misallocation of the environment as a resource, prompting market failure. In the developing world, most especially, such market failure has had a particularly detrimental impact, often accompanied by state or political failure: insufficient environmental legislation and standards, inadequate mechanisms for their control and implementation, insufficient institutional capacities, technical equipment, human expertise, and bypassing controls by way of corruption. There is thus a lack of incentive to take any measures or make investments to reduce the environmental impact. Moreover, many such measures are simply not commercially viable, particularly for poorer countries and communities. This is why there is a need for development funding: WE is in a position to make economic development ecologically sustainable and help counteract such market and political failure.

2 Building on the pioneering role of Switzerland and SECO Scenario: Switzerland and the Swiss economy are international leaders in environmental issues and resource efficiency. As a country with few natural resources, a dense population, high educational standards and a multitude of awareness campaigns, Switzerland has been working on finding solutions to wastewater, hazardous materials, waste and landscape erosion since as early as the 1960s. By now, Swiss business has amassed world-class expertise in end-of-pipe technologies (filters, clarification plants, etc.) and in green process technologies, energy efficiency and renewable energy sources, including the design and technical aspects. Research institutes and public utilities companies also have a wealth of knowledge and experience to offer countries in transition and newly industrialized countries.

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Prompted by demand from the Swiss market, many retailers have taken the lead in building in as much sustainability as possible into their supply chains. Switzerland is thus exceptionally well placed to play a credible pioneering role in ecologically sustainable development, combining world-class, proven authorities with a vast range of technologies. SECO has a number of strategic partnerships in environmental issues, most of which have been in place for many years. Through these, SECO enjoys the benefits of direct access to institutionalized knowledge-sharing mechanisms and a wealth of Swiss and international expertise: Federal specialist institutes and universities EMPA E-waste; cleaner production; LCA

EAWAG water supply / wastewater

FHNW cleaner production; POPs

EPFL Biofuels

Federal Offices FOEN

SFOE

Multilateral environmental agreements; interdepartmental coord.

UNIDO

UNCTAD

SECO fosters a healthy exchange of information and ideas and enjoys a high profile as a donor

WTO Preferential treatment of environmental goods

SDC Environmental portfolios of development banks’; env. events

Executing local partners

Development banks

Civil society

International partners

UNEP

Renewable energy and energy efficiency promotion

SECO WE

Swiss partners

UN system and WTO

Private sector Integration of expert knowledge (e.g. Swissmem environmental group)

World Bank

EBRD

KfW

Regular exchange of ideas among like-minded donors; co-financing / parallel financing

Project work with development and environmental organizations

Policy coherence: Through these long-term partnerships, SECO is a key contributor to developing a coherent and responsible policy for Switzerland, e.g. in designing international processes (environmental agreements) and promoting complementarity between the interventions of the various federal offices. SECO’s development projects can serve in negotiations as concrete examples and real-life solutions that also address the specific situation of poorer countries. SECO also supports its partner countries in meeting their commitments under environmental agreements and in seizing the economic opportunities thereby created. This Policy Paper on the Environment is laid out according to the various WE sections actively involved in environmental issues: Trade Promotion (Chapter 3), Infrastructure Financing (Chapter 4), Private Sector Development (Chapter 5), Macroeconomic Support (Chapter 6) and Multilateral Cooperation (Chapter 7). Chapter 8 sets out the safeguard policy for all sections. The following figure shows the structure of this policy pa-

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per (yellow) and links it to the four axes and three core regions on which SECO focuses its environmental efforts. Core regions

South

Private Sector Development

Transition aid East

Infrastructure Financing

Enlargement contribution

Trade Promotion

Macroeconomic Support Multilateral Cooperation Instruments / Sections

3 Making world trade sustainable With consumers becoming more discerning and better informed, changes are happening in consumer and lifestyle attitudes. The economic downturn and the global environmental crisis (climate change, loss of biodiversity) are fuelling the need for and a trend towards greater resource efficiency, more transparency with regard to product sources (traceability) and the quality of products in general. Consumers are increasingly demanding access to goods produced in a socially and ecologically responsible manner. They want to see more regional products, but they are also looking for exotic products. And the businesses supplying such goods have to satisfy an increasing circle of stakeholders: employees, consumers, NGOs, owners, etc. While sustainability will continue to gain ground, it is no longer simply about forgoing certain products, as at the start of the environmental movement; these days, sustainability also means new markets and business opportunities. Globalisation opens up new opportunities with a win-win situation for business and the environment. Efforts to keep the environment intact are becoming increasingly important, as demonstrated by the various conventions enjoying international support (Climate Convention, Stockholm Convention, Rotterdam Convention, Basel Convention, Biodiversity Convention, etc.). International standards and agreements thus set guidelines for environmental protection. The specific trade and investment mechanisms outlined in these seek not only to protect the environment but also to ensure its sustainability.

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Example: Recycling e-waste in South Africa

Electrical and electronic waste from discarded computers, televisions, mobile phones and other such devices contains a variety of materials, some of which are of value and may be reused but others that are highly toxic. This e-waste poses a serious health and environmental risk. SECO’s project in South Africa helps to mitigate this risk while, at the same time, creating jobs in a profitable recycling business. Traditionally, the recycling of electrical and electronic waste in developing and newly industrialized countries is often carried out by the informal sector, where improper handling results in the release of hazardous substances such as lead, mercury and dioxins, damaging both workers’ health and the environment. The market for new electronic goods in developing countries is growing rapidly; already in 2004, trade in IT equipment accounted for 8% of global GDP. Since 2003 SECO has contributed CHF 4 million to fund international knowledge partnerships to set up environmentally sound and efficient recycling systems for e-waste in China, India and South Africa. EMPA provides specialist consulting in the areas of regulation (legislation, standards), the organization of collection systems, and recycling technologies (contact with Swiss recycling operators). This technology and knowledge transfer facilitated by SECO helps protect workers’ health and the environment, opens up new opportunities for trade, and creates valuable jobs in the recovery of secondary resources. For instance, specialist global companies achieve a 95% recovery rate for precious metals contained in circuit boards, three times more than informal recycling businesses in developing countries. Switzerland is thus contributing to poverty reduction and, at the same time, helping to overcome the global shortage of resources. In South Africa, Green e-Waste Channels have been funded in Cape Town, Durban and Johannesburg, guaranteeing the safe and regulated disposal of e-waste.

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The WTO takes a neutral stance on sustainability, a concept that has no specific role in WTO Agreements. Instead, environmental issues are governed by international environmental agreements. It should be noted that trade and environmental agreements are mutually supportive, with neither one taking precedence over the other. A clearer correlation is difficult to define today: The WTO deals with products and services (seeking equal treatment of imports irrespective of the process and production methods (PPMs)), while the environmental agreements refer to substances and production processes. One of the few exceptions is the area of environmental goods and services: these are a subject of negotiation for the WTO though are also relevant within the context of climate talks (transfer of clean technologies; possibility of border adjustments if CO2 costs for industrialized countries produce a tangible competitive disadvantage). Opinions differ, however, on the criteria for defining environmental goods. WE has an interest in these discussions, particularly given the importance of anticipating developing countries’ needs in reaching a consensus. Of central significance are the non-tariff trade barriers (norms and standards, TBTs) as well as sanitary and phytosanitary (PSP) measures and their relation to voluntary and private standards. Voluntary sustainability standards for commodities supported by various interest groups (Better Cotton, Common Code for the Coffee Community 4C, FSC; biofuels, etc.). are credible and, in fact, more exacting than many of the publicly sanctioned norms and standards. WE is particularly active in three aspects of this: (i) formulating such standards, by supporting the corresponding multi-stakeholder processes, (ii) providing information at the import end with regard to sustainable procurement, and (iii) enabling SMEs in partner countries to comply with such standards. SECO’s approach fosters harmonization of the trade and environmental/social regulations. A good example of this is the BioTrade Initiative created by SECO in association with UNCTAD and the implementation of Access Benefit Sharing (ABS) as defined in the Biodiversity Convention. This converts local genetic and biological resources into exportable goods and services, ensuring that local communities receive a fair share in the profits. Implementing this concept calls for specific expertise in trade matters (e.g. CITES, EU Novel Foods Regulation), which SECO can organize.

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Example: Protecting biodiversity through trade in biodiversity products

What have Sacha Inchi (the Inca peanut) from Peru, caiman leather and meat from Bolivia, cosmetic and edible oils from southern Africa and medicinal herbs from Vietnam got in common? They are all being promoted as part of the Biotrade Initiative (trade in biodiversity products and services) by Switzerland and UNCTAD, the United Nations Conference on Trade and Development. SECO promotes trade in biodiversity in keeping with the three main objectives of the Biodiversity Convention: (1) conservation of biodiversity, (2) sustainable use of its components, and (3) fair and equitable sharing of benefits arising from genetic resources. The underlying idea is to help protect ecosystems by using them sustainably and, at the same time, create new income opportunities for local communities. Trade in exotic, innovative foods comes up against the same problems all the time: in addition to the usual export formalities regarding technical quality standards, logistics, Customs clearance and commercialization, they are often also subject to trade restrictions based on the conservation of species (CITES) and health and hygiene requirements as well as the latent risk of resources being rapidly plundered if the market proves a success. The Biotrade Initiative thus helps developing countries to identify products with market potential. The indigenous communities’ traditional knowledge and uses have an important role to play in this respect. Governments receive advice on creating an appropriate legislative framework for the sustainable use and trade of biodiversity products. Often this also includes the protection of geographical appellations of origin. Exporters benefit from the necessary business know-how – sustainable management of ecosystems, marketing, product development – as well as introductions to importers in the industrialized world. Thanks to persistent lobbying by UNCTAD, the EU has adopted a proposal to revise its overly stringent Novel Foods Regulation. Meanwhile, national producer groups from Latin America and Africa have set up the Union for Ethical Biotrade, a worldwide association for trade in biodiversity products and services.

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SECO has been promoting environmental technology transfer since 1998, after it led the associated IDA in the follow-up to the 1992 Rio conference. With regard to the transfer of environmental technologies in industrial production, a comprehensive concept plan was formulated, which was also elaborated within the framework of the OECD-DAC. This focuses on Cleaner Production Centers (raising eco-efficiency as a means of improving competitiveness and integration into global value chains) and on Green Credit Lines (see Chapter 5) as well as the work being done in intellectual property / TRIPs. As part of this network (CPCs), specific efforts are also being made to make more efficient use of chemicals, mitigate risks and comply with the relevant environmental agreements (POPs). With regard to cushioning the impact of environmental risks, SECO – working with the World Bank and the Swiss insurance industry – is a pioneer in the development and realization of index-based weather insurance. Within the context of modern commodityprice risk management, this concept enables poor farmers, e.g. in India, Peru or Colombia, to insure against drought or other extreme conditions and thereby preserve their long-term capacity to supply commodities to the global markets.

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Example: Contribution to EU enlargement – Renewable energy sources, energy efficiency and reduction in air pollution

Within the context of Switzerland’s contribution to EU enlargement, major infrastructure programmes have been agreed on with various EU-12 partner countries in the areas of renewable energy sources, energy efficiency and the reduction of air pollution. Numerous projects in renewable energy and energy efficiency have been planned for Poland, Latvia and Slovenia. In Slovenia and Poland, for instance, electricity and heat will be generated for various public buildings using biomass, photovoltaics, solar power and heat pumps. Large-scale programmes for reducing air pollution have been planned for Hungary, the Czech Republic and Estonia. These include converting part of the bus fleets of several Czech towns to greener technologies, using various measurements to select the routes and vehicle types likely to produce the best results. Projects in environmental monitoring are planned for Hungary and Estonia.

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4 Modernizing the environmental infrastructure With respect to public infrastructure projects, SECO focuses on ecologically sustainable technology transfer so as to counter the prevailing market failure. A case in point is industrial sites pumping untreated sewage into water bodies, with dire consequences for the environment in some cases: investments in wastewater treatment and processing, waste disposal (including the appropriate treatment and reduction of toxic gases), public transport (trams), cleaning up contaminated sites or the safe removal of dangerous and pollutant chemicals have a very positive impact on the environment 1. For one thing, such investments serve to eliminate or at least reduce existing environmental damage and polluting activities. In addition, however, the new plants and installations are run in an ecologically efficient manner, in compliance with internationally recognized environmental standards. Another ecologically important aspect of these projects concerns the planning phase, which takes care to address specific development parameters such as population growth or the composition of the wastewater, e.g. when dimensioning systems for wastewater treatment plants, thereby ensuring the plant can be run in an optimum and environmentally sustainable manner. The ecological repercussions of poorly dimensioned plants or inappropriate technologies or processes should not be underestimated, as these also have a significant impact on system efficiency, particularly in terms of power consumption or consumables such as chemicals. By involving technical experts at an early stage in the planning phase and providing specific training during implementation, the objective is to optimize the running of the plant and ensure its correct operation. Knowledge about operation and maintenance is important for the sustainability of the investment and consequently has an impact on the environment. For instance, operating the plant appropriately will significantly lengthen the service life of the individual components. A decision is taken on a case-bycase basis as to whether a temporary support measure introduced after commissioning the infrastructure (e.g. within the guarantee period of the construction work) would further improve sustainability and the positive environmental impact. Finally, during the construction work itself, checks are made to ensure this is conducted with maximum regard for the environment. Another obstacle frequently encountered in partner countries is government failure. For instance, national environmental laws and guidelines may exist and be quite appropriate but not sufficiently implemented. Also, in some cases, the prevailing laws do not meet current standards. Thus, in parallel with environmental investments, SECO also places much importance on policy dialogue, proposing and supporting environmentrelated reforms and laws. Policy dialogue in this case is more than a “direct” link to the investments made: it also includes ecological aspects in various sectors such as water, waste or energy, thereby raising their importance. This is subsequently reflected in a greater emphasis and new priorities within partner governments’ long-term plans, en-

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Investments in climate-related projects concerning renewable energy sources and energy efficiency also play a major role in this respect. These aspects are further elaborated in the SECO-WE climate strategy.

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suring that positive environmental effects can also be achieved in the medium term. Capacity building in numerous institutions is also supported in parallel with the investment measures. For example, in its cooperation with Eastern Europe, SECO ensures that projects meet the prevailing EU environmental guidelines. In supporting the operating companies at both an organizational and commercial level, measures are identified and implemented to both reinforce the institutions and guarantee environmentallysound operation. This should meet and guarantee the basic needs, including those concerning the environment. For example, operating costs are lowered by switching off power-hungry and/or inefficient devices when not in use. Price adjustments and introducing a systematic and more transparent accounting system also have an environmental impact, fostering a more economical attitude to the use of resources. The Economic Cooperation and Development division supports the “polluter pays principle” and aims to introduce and implement this approach both in national environmental legislation and in customers’ bills from their operating companies. Apart from the operating companies’ customer service, which plays an important role in capacity building efforts, measures are also taken to involve the local community. For example, general awareness campaigns are supported or specially devised with user associations. Raising the awareness of the value of natural resources and adapting behaviours towards a more economical use of natural resources reduces the negative environmental impact considerably. Some of the more recent projects on sustainable waste management are an example of such additions to the infrastructure portfolio. Furthermore, as part of Switzerland’s contribution to EU enlargement, SECO also supports measures to reduce air pollution and improve energy efficiency (e.g. cladding), which also have an impact on air quality and energy consumption respectively. The main objective of environmental investments may be to improve the environmental situation, as in the case of building a wastewater treatment plant. However, reducing detrimental environmental conditions may sometimes be only a side effect, as in the case of energy and climate projects focusing on energy efficiency and renewable energy sources. Moreover, in general, environmental guidelines are checked and adhered to for such investments. For example, the need for an environmental impact assessment is evaluated and, if applicable, steps are taken to ensure this is properly conducted (for more details, see Chapter 8 on Safeguards).

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Example: Wastewater treatment plant in a mountainous region of Macedonia

The Bregalnica river is of great importance for Macedonia, in both ecological and economic terms. Nonetheless, wastewater from industry, agriculture and households is pumped directly into the river, threatening the drinking water supply and disturbing the fragile ecological balance. As part of its efforts to improve the situation, SECO is building a wastewater treatment plant in the upper course of the river. Berovo is a small town with a population of 7,000 in the upper reaches of the Bregalnica river. It serves as a local business hub for the surrounding villages and is a popular destination for tourists from Macedonia and abroad. The region’s greatest asset is its natural beauty, with unspoilt woodlands and a picturesque river landscape. To preserve and build on this economic and ecological potential, a wastewater treatment plant is being built for the wastewater needs of Berovo and its surrounding communities. The plant can treat sewage from 12,000 households at a rate of 190 cubic metres per hour. The project also includes a 4 km-long main sewer line, which will enable all homes and businesses in the plant’s catchment area to link up to the wastewater system. Particular importance has been attached to modernizing the company operating the wastewater treatment plant, a local utilities provider in Berovo. A new computer system makes it easier to calculate the volume of water obtained, or the wastewater treated, and to keep track of incoming payments. Staff are being trained in this system, and the authorities are receiving support in cost calculation and budget planning to help them balance their budget. The utilities company has already increased the percentage of water actually invoiced from around 80% to 95%. Meanwhile, the local community is being informed of the importance of the treatment plant and the ecological stakes involved. If the plant is to run sustainably, water prices will have to increase by 20%. The utilities company is also receiving support in the planning and implementation of price changes. At a national level, SECO is assisting the Environment Ministry in implementing its new Water Act and, as the largest donor in water supply, plays a leading role in the strategic dialogue with the government.

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Example: Modernization of the meteorological network of recording stations in Colombia The availability of accurate meteorological data and forecasts is essential for the proper management of water resources and to anticipate major weather events that could threaten economic activities such as the growing of coffee crops. Optimizing the use of water clearly benefits the environment. Moreover, in the medium term, the availability of good weather data through an appropriate network will be a sound basis for reliable modelling, which in turn will enable decision-makers to draw up and implement strategic plans for better environment conservation and an appropriate selection of mitigation and adaptation measures to address climate change. Since 2002 Switzerland has supported Colombia with a mixed credit of CHF 14 million (85% grant contribution by Switzerland) for an upgrading and extension of the national environmental monitoring network. This has enabled Colombia to establish satellite-based, real-time data communication between meteorological data stations throughout the country and Bogotá. The project “Projecto Fortalecimiento de la Red Ambiental Nacional” (FORAC) II, a continuation of a previous project, will support endeavours by the Institute of Hydrology, Meteorology and Environmental Studies (IDEAM (Instituto de Hidrología, Meteorología y Estudios Ambientales)) to produce and disseminate reliable hydro-meteorological data as well as flow and flood forecasts to end-users in the private sector (chiefly from the agricultural sector, hydropower companies and reinsurance companies). It will enable decision-makers to better manage water, the key natural resource, and the impact of their activities on the environment. This information will ultimately have a positive impact on the Colombian economy, population and the environment. The direct beneficiaries are IDEAM and the customer groups that will be selected to develop specific customer products and services through pilot projects. These industrial customers will then be able to make more environmentally friendly use of water, by adapting and fine-tuning their processes on the basis of more accurate hydro-meteorological data and forecasts. The business model will be inspired by the one used in Switzerland. At an organizational level, IDEAM is expected to develop a client-oriented culture and thereby enhance its reputation and visibility on the Colombian market and political sphere, also with respect to environmental issues.

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5 Raising private equity for sustainable financial products and investments There is a general consensus that developing and newly industrialized countries need help to overcome the challenges posed by deteriorating environmental conditions: they cannot do it alone. Given that “the environment” is an international public good, industrialized countries – historically the worst polluters for many contaminants – have not only a moral obligation to provide technical and financial support but also an interest of their own in promoting a more protective attitude to the world’s natural resources. In this context, SECO uses its demonstration projects to try to raise private equity for environment-related funding and investments. At the same time, SECO supports educational and awareness projects through its technical support for financial services providers. Specifically, the areas of intervention are as follows: Financing, risk-sharing and insurance instruments: Green credits: In 2003 SECO launched a pilot programme to promote green credit lines, currently in operation in three countries (Colombia, Peru and Vietnam). Green credit lines, a financial instrument created to help SMEs invest in environmentally friendly technologies, are a combination of a credit guarantee for local banks, which grant SMEs a loan to acquire greener technologies, and a financial incentive for borrowers to meet the criteria for lowering their energy consumption and environmental emissions. The objective is to show SMEs and banks alike that investments in environmentally friendlier technologies can be profitable in the long term. Trade finance: Similar guarantee mechanisms are also supported for financing trade in fair-trade and organic products. Buildings insurance: In addition, SECO supports a World Bank PPP project in southeastern Europe offering home-owners and businesses an opportunity to insure their buildings against the risks of environmental catastrophe, primarily flooding and earthquakes. Investments: Since 2005 SECO has outsourced its economic cooperation investments to SIFEM, the Swiss Investment Fund for Emerging Markets. SIFEM’s investments include certain clean-tech funds, currently in Asia and Africa. Such funds support projects related to clean and/or renewable energy sources, improving energy efficiency, and companies that manufacture and sell ecological products and services. In addition, as a member of European Development Finance Institutions (EDFI), SIFEM is committed to the principles of responsible financing. Its prerequisites for all investments and funding activities thus include the observance of human rights and respect for the environment.

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Example: Solar energy use thanks to the Amadeus Asian Clean Energy Fund

On SECO’s behalf, the Swiss Investment Fund for Emerging Markets (SIFEM) has invested in the EV Amadeus Asian Clean Energy Fund, a private equity fund fostering the growth of SMEs operating in energy efficiency and renewable energy in Asia. One of the ventures promoted by the Amadeus fund, for instance, is an innovative manufacturer of solar heat applications seeking to realise its growth plans in Asia. Through its own R&D, this SME has developed new technologies to improve the conversion rate of the sun’s heat into energy and store this energy for several hours with minimum loss. Based on these new technologies, the company has created a solar power plant module with collectors on a tower, an innovative and flexible design with minimum space requirements. The solar energy is stored in the tower and converted into electricity as needed, stabilized by the local power grid. Supported by the Amadeus Fund, the SME now has sufficient capital to market the new solar heat module throughout Asia. In rural areas of Asia, in particular, this clean and versatile energy source can be used to extend electrification without creating new emissions. The Amadeus Fund also supports the expansion of a company manufacturing hydrogen fuel cells. This SME aims to offer a cheap, reliable and ecological alternative to diesel back-up generators, which are widely used in Asia on account of the frequent power outages. Such portable or stationary fuel cells can be used, as needed, to charge a laptop, operate a mobile phone antenna or supply an entire hospital with electricity. Thanks to the Amadeus Fund’s support, this company now has the required capital to launch new product lines and market their innovative products in Asia.

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Capacity building: Since 2002 SECO has also been supporting IFC sustainability awareness campaigns in the financial services sector. These projects aim to inform financial intermediaries in developing and transition countries of the relevance of environmental and social indicators as an integral component of their risk management and to offer technical assistance in implementation and in adapting their business activities. The Private Sector Development section wants to broaden its environmental commitment and raise the proportion of environmentally relevant projects in the portfolio in the medium term. It currently sees the greatest potential for this in providing funding facilities to improve the energy efficiency of private homes. The approach taken is an integrative one, the goal being to improve private homeowners’ access to loans for renovation work. This entails supporting local banks in developing specific financial products as well as adapting the regulatory framework; however, it also means running broad-based awareness campaigns to show how lowering one’s energy consumption translates into lower heating costs and that reducing carbon emissions helps protect against climate change.

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6 Partner countries’ environmental and economic policies Whereas the microeconomic consequences of deteriorating environmental conditions are easily discernable, their macroeconomic repercussions are often neglected or underestimated. This is due to the extremely complex two-way correlation between environmental problems and macroeconomic stability. On the one hand, sound macroeconomic policies can make a substantial contribution to improving the environmental situation, with some well-placed incentives limiting the adverse environmental impact of certain economic activities. Meanwhile, a non-sustainable environmental policy can pose a serious threat to a country’s economic and social situation, e.g. through the unchecked depletion of its natural resources. The prudent and transparent utilization of resources thus remains a major challenge for all developing countries. SECO’s macroeconomic support seeks to foster a sustainable attitude to the environment by way of both political dialogue and concrete fiscal decisions: a) The environment in policy dialogue: Within the context of general budget support, the debate on macroeconomic framework conditions and fiscal performance in some countries includes certain environmental objectives. In Ghana, for instance, huge environmental problems are being created through rapid deforestation and land overuse with unsuitable agricultural practices. What’s more, managing the recently discovered oil reserves in a way that is transparent and ecological is turning into a major challenge. These issues are thus included in the policy dialogue, with questions raised on the lack of attention given to environmental repercussions. The possibilities of programme-based support in environmental matters will be explored in the future. b) Environmental, fiscal and financial policy: SECO supports various initiatives to better manage the fiscal impacts of planned environmental measures and/or environmental catastrophes. Recent years have seen an increase in the intensity and frequency of environmental catastrophes and natural disasters caused by the deterioration of environmental conditions, often accompanied by serious repercussions on macroeconomic framework conditions. This frequently results in a decline in growth and a deterioration of public finances, particularly in developing and newly industrialized countries lacking the means to protect themselves against such events. The implications of environmental change should thus be better absorbed by improving the efficiency of fiscal and taxation systems, optimizing the costs estimated for coping with environmental issues, or innovating in the financial system.

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Example: Sustainable management of natural resources and innovative financial instruments

Using technical support and administrative capacity building in developing countries rich in raw materials, a multi-donor initiative called the Natural Resource Management Trust Fund is helping to maximize the public benefit of the raw materials in developing countries. It lends its support throughout the entire value chain. Capacity building will concentrate on the main macroeconomic effects of resource depletion: (1) tax treatment, (2) income administration, (3) macroeconomic/fiscal measures and public finance, (4) asset and liability management, and (5) statistics. The Macroeconomic Support section is also working with the World Bank and private-sector partners in some particularly vulnerable partner countries to build capacities specifically in insuring the public budget against environmental risks (cat risk financing), in order to limit the macroeconomic effects of such extreme events. These hedging strategies are formulated and implemented with particular regard for consistency with the regular budgetary and implementation processes, a long-lasting strengthening of risk management and the creation of favourable framework conditions for developing local reinsurance markets.

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7 The environment as an issue for Multilateral Development Banks Given the interdependence between development and environmental issues, it goes without saying that all the Multilateral Development Banks (MDBs) now have an environmental policy and strategy. Investments in development activities must therefore also address environmental aspects, i.e. global environmental issues, such as climate change, as well as more local environmental issues, such as the protection of waterways. The MDBs’ environmental activities can be loosely broken down into three main areas: environmental guidelines (safeguard policies), environmental investments, and capacity building in both their own organization and the recipient countries. Safeguard policies: Protection against environmental damage  Safeguard policies define the criteria that bank-funded projects and programmes must meet to prevent any harmful effects on society or the environment. The policies of the various MDBs are similar though not fully harmonized. They mainly concern the procedures for conducting an environmental assessment of projects and the action plans in place to prevent or offset any adverse impacts. Investments to overcome global and local environmental problems  All MDBs now have portfolios that address specific environmental issues at a global level (such as climate change) or a regional/local level (such as land degradation) (e.g. WB GEF).  The MDBs have also made an effort to mainstream environmental concerns throughout the rest of their portfolio, implementing the environment as a crosscutting theme in all their activities. Capacity building  The MDBs have built up their own capacities in environmental matters in order to implement their environmental strategies and guidelines. These resources deal with the safeguard policies and provide advisory services to the recipient countries, not only in relation to the specific programmes but also, and increasingly, at a sectorbased or national level (economic and sector work, country analytical work, strategic environmental assessment).  The MDBs should also help build up developing countries’ capacities in environmental policy in general. This is necessary to ensure that the aims of the Paris Declaration – to work increasingly with the recipient countries’ own policies – can be met without harming the environment. The role of Switzerland  Switzerland demands and fosters the application of consistent, stringent environmental standards in the MDBs’ projects and programmes. In this respect, MDBs should set standards and act as a role model.

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 Through the use of co-financing and trust funds, Switzerland can actively promote important environmental subject areas together with other partners and participate in multilateral problem solving.  Insofar as the MDBs’ practices are innovative and meet the strict requirements, they should also serve as a standard and a source of inspiration for Switzerland’s bilateral cooperation, e.g. with regard to safeguards, instruments or the analysis of global environmental problems.

8 SECO-WE’s safeguard policy with regard to the environment SECO follows established environmental guidelines in its programme preparations and implementation. Apart from those projects already subject to standardized strict tests (e.g. for the MDBs, UN institutions, SIFEM), all of SECO’s investments must undergo environmental screening. This is based on common international environmental standards (UNO, EU, WHO). If the potential repercussions on the environment are found to be substantial, an environmental impact assessment is carried out. The environmentally relevant aspects are subsequently incorporated into the design and implementation of the investments. Contribution to EU expansion (EU-12): In its cooperation with Eastern Europe, SECO ensures that the projects meet the prevailing EU environmental guidelines. Within the framework of Switzerland’s contribution to EU expansion, the objectives of environmentally relevant infrastructure projects were laid down in the bilateral framework agreements with the EU-12 countries. For some countries, for instance, the focus is on waste management and treatment, whereas for other countries, the focus may be on water, renewable energy sources, energy efficiency or reducing air pollution. The goals set out in the framework agreements must then be actually addressed in the selected project proposals. In the project preparatory phase, WE may request clarification on other environmentally relevant aspects and fund this with a preparatory financing facility. Infrastructure financiering: In all cases, the project preparations include an environmental screening process to test the environmentally relevant aspects. These particular aspects are then pursued in the rest of the project preparations for the project and integrated into the project itself. This may take the form of an environmental impact assessment, for instance, which is conducted in the rest of the project preparations, the results of which are then incorporated into project design and implementation. Another possibility is to insist that the partner in the project agreement should comply with or remove, as the case may be, certain aspects identified in the inspection. For example, this may be the correct disposal of contamination on a building site or the protection of a groundwater source intended for use in the new project. Private sector development: Ensuring environmental sustainability is another crucial element of SECO’s investment activity. Therefore, both SIFEM, which provides venture

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capital, and the SECO Start-Up Fund, which grants investment loans, offer their advice, funding and support only to projects and businesses that share this same conviction and which can prove the environmental sustainability of their plants, processes, products and services or are prepared to make these environmentally sound in the future. Whenever possible, the environmental standards set by SECO with its partners go beyond those laid down in the relevant legislation. WE’s negative list WE does not finance any of the following projects: (1) Trade in wildlife or wildlife products regulated under CITES2 unless for products accompanied by specific certificates compliant to CITES (2) Production or use of or trade in hazardous materials such as radioactive materials3, unbounded asbestos fibers and products containing PCBs4. (3) Cross-border trade in waste and waste products unless compliant with the Basel Convention and the underlying regulations. (4) Fishing activities which fall under international bans (such as fishing in international protection zones; whale fishing; drift net fishing in the marine environment using nets in excess of 2.5 km in length) (5) Production, use of or trade in pharmaceuticals, pesticides/herbicides, chemicals, ozone depleting substances5 and other hazardous substances subject to international phase-outs or bans. (6) Destruction6 of Critical Habitat7

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CITES: Convention on International Trade in Endangered Species or Wild Fauna and Flora. This does not apply to the purchase of medical equipment, quality control (measurement) equipment and any other equipment where EFP considers the radioactive source to be trivial and/or adequately shielded. PCBs: Polychlorinated biphenyls, a group of highly toxic chemicals. PCBs are likely to be found in oil-filled electrical transformers, capacitors and switchgear dating from 1950-1985. Ozone Depleting Substances: Chemical compounds, which react with and delete stratospheric ozone, resulting in “holes in the ozone layer”. The Montreal Protocol lists ODs and their target reduction and phase-out dates. Destruction means the (1) elimination or severe diminution of the integrity of a habitat caused by a major, long-term change in land or water use or (2) modification of a habitat in such a way that the habitat’s ability to maintain its role (see footnote 10) is lost. Critical habitat is a subset of both natural and modified habitat that deserves particular attention. Critical habitat includes areas with high biodiversity value that meet the criteria of the World Conservation Union (IUCN) classification, including habitat required for the survival of critically endangered or endangered species as defined by the IUCN Red List of Threatened Species or as defined in any national legislation; areas having special significance for endemic or restricted-range species; sites that are critical for the survival of migratory species; areas supporting globally significant concentrations or numbers of individuals of congregatory species; areas with unique assemblages of species or which are associated with key evolutionary processes or provide key ecosystem services; and areas having biodiversity of significant social, economic or cultural importance to local communities. Primary Forest or forests of High Conservation Value shall be considered Critical Habitats.

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