Dam Shame


What will you do when you learn your Discover Card is indirectly bankrolling an environmental disaster?

The people at the International Rivers Network, a California group, hope you will cut it up and mail it back to its owners at Morgan Stanley Dean Witter, along with a statement expressing your concern about Morgan’s financial role in China’s Three Gorges Dam. Scheduled for completion in 2009, the dam is a behemoth to rival the Great Wall: It is by far the largest hydroelectric dam any country has ever built. According to activists, it is also one of the most socially and ecologically devastating projects humans have ever undertaken.

IRN’s Discover Card boycott, the culmination of years of protest against the dam, marks a significant shift in environmentalist strategy. After years of focus on the builders of exploitative industries and infrastructure in developing nations, activists have a new target: the projects’ financiers, many of them huge U.S. investment banks that have never before been called to account for the damaging enterprises they help to underwrite. Thanks to sweeping changes in world financial markets, those banks are unprecedentedly vulnerable to such attacks. Not only have they been swept up in vast conglomerates—whose consumer operations, like Discover Card, provide a ready focus for boycotts—but most are publicly held, which means they can be challenged internally, through shareholder actions.

“This is the beginning of a movement, ” says Ricardo Bayon, a Washington, D.C.-based consultant who helps demystify global economics for environmental groups.

IRN is timing its boycott to coincide with Morgan Stanley Dean Witter’s April 6 annual meeting in Jersey City. The action will lend muscle to a two-year-old shareholder campaign led by Trillium Asset Management, a Boston firm that specializes in socially responsible investments. Using Three Gorges as its rationale, Trillium asked the bank to review its underwriting policies, “with the view to incorporating and fully disclosing” any transaction’s impact on the environment and human rights.

Morgan’s board of directors says such candor would limit the company’s flexibility and damage its business, particularly since “competitors do not disclose this information.” But one large firm, Bank of America, has already held talks with Trillium and agreed not to invest in Three Gorges directly. A resolution similar to the one at Morgan is pending at Chase Manhattan, and resolutions at Merrill Lynch (filed by Domini Social Investments) and Citigroup have been provisionally withdrawn, since the companies have agreed to discuss their stance on Three Gorges.

“This is the first time an environmental and social issue has hit the Wall Street investment banks,” says Doris Shen, IRN’s China campaigner. “Usually investment banks stay amorphous and out of the picture.”

The two-pronged attack is a clear sign of the environmental movement’s growing sophistication about global finance. Much of that awareness has developed during a decade of struggle against the Three Gorges Dam. This massive public works project—575 feet tall and running roughly a mile across the Yangtze River—is intended to provide flood control and to generate electricity for people and industry. It has been a dream of Chinese leaders since 1919, when it was first proposed by Sun Yat-sen. But construction did not actually begin until 1994, under Chinese premier Li Peng, the man behind the brutal 1989 crackdown on students at Tiananmen Square.

Six years later, the river is still flowing. But when Three Gorges is finally finished, it will create a reservoir the size of Lake Superior—about 400 miles long. It will force the relocation of up to 1.9 million people. It will swamp ancient archaeological sites. It could eliminate the Chinese river dolphin from the face of the earth. According to The Lancet, a British medical journal, an array of public health risks associated with the dam and its construction could make it the “Chernobyl of hydropower.” Some engineers fear the dam itself could one day collapse from the buildup of silt behind its walls. And there are 10 million people in its path.

Chinese activists tried to raise these issues, but Li Peng banned all criticism of the project. A journalist who wrote a book of protest was jailed for 10 months. As a result, dam opponents were forced to mobilize in new areas. “They got nowhere in China, so they had to move upstream, to the financiers,” says Bayon.

China originally hoped to build the dam entirely on its own—”to show how great socialism is,” says Shen. But it needed Western technical expertise. Moreover, the dam was incredibly expensive. Estimates vary widely, but Shen says it was originally supposed to cost $9 billion, has already hit $18 billion, and could eventually top out at a mind-boggling $75 billion, including resettlement costs.

Such astronomical figures forced China to reach far and wide for money. Wherever the government has turned, dam opponents have followed. China’s only major remaining funding hope is private investment banks, which issue stocks and bonds that are sold to investors around the world. The banks are staggering in size and power; but their involvement also gives environmentalists new avenues of protest—whether or not they know it yet, thousands of impressionable investors have forked over some tiny portion of their retirement savings portfolios for China-related bonds. Dozens of financial institutions around the world have participated in issuing those bonds, and each has a public image to protect. If capitalism is global, activism can be global, too.

In the past, funding for a giant enterprise like Three Gorges would almost certainly have come from the World Bank. In the 1990s, the bank pumped $1.8 billion into what is now China’s largest hydroelectric dam, the Ertan Hydropower Station. (Last October London’s Financial Times reported that project was running at half capacity and had lost more than $100 million in its first year.)

By its 1994 gold anniversary, however, the bank was under enormous pressure to reform. It had been founded after World War II as a financial consortium through which wealthy countries would make cheap loans to poor ones, thus alleviating poverty. But critics said it often funded projects that ultimately diminished the standard of living for millions of people. Indeed, in a 1994 internal review, the bank found that between 1986 and 1993, 15 percent of its lending went to projects forcibly displacing 2 million people. Given that the bank then closed or canceled 22 of these projects, there was little chance it would smile on Three Gorges.

“The Chinese government didn’t even approach the World Bank for funding,” says Simon Billenness, a senior analyst with Trillium.

Another likely source of aid was the U.S. Export-Import Bank—an agency that, among other things, provides low-interest loans to help foreign industries buy heavy equipment from U.S. manufacturers. But that bank also declined; the U.S. National Security Council had advised against the dam, raising concerns in a 1995 memo about environmental and human rights issues, as well as the project’s overall financial strength.

Other countries, including Canada, France, Germany, Great Britain, Sweden, and Switzerland, did provide export-import credits. Still, “there were some really big snubs,” says Michelle Chan-Fishel, coordinator of the green-investments project for Friends of the Earth. “The Chinese knew that they would have to turn to private finance.”

They were in luck: Banks that had once disdained so-called emerging markets as too risky now saw a potential gold mine. As a result, over the last decade, international development has essentially been privatized. Since 1990, public development assistance to developing countries has remained steady at around $60 billion a year. Meanwhile, money from private capital sources shot from $30 billion in 1990 to $212 billion in 1996. Unlike the World Bank, which has an obligation to include even the most destitute countries in its portfolio, private financiers focus on the regions whose hopes for prosperity are best.

China is certainly one of those hot markets, but Three Gorges apparently carries a stigma. According to FOE’s Chan-Fishel, the Chinese tried to issue Three Gorges bonds several times over the years, but no one in the international markets would buy them.

So the Chinese government tried a new tack—issuing bonds for a state bank, which in turn could loan money to the Three Gorges Dam. They offered investors guarantees and they hid the fact that Three Gorges might be a beneficiary deep in the prospectuses. One environmentalist calls these “stealth bonds.” In 1997, Lehman Brothers and J.P. Morgan were the lead managers on a $330 million bond offering for the State Development Bank of China—the main source of government funding for Three Gorges. (Lehman Brothers, Credit Suisse First Boston, Morgan Stanley, and J.P. Morgan contributed $66 million each. Smith Barney underwrote $46.2 million, and Bank of America underwrote $19.8 million.)

That offering came to the attention of Trillium, which had been monitoring Three Gorges since Human Rights Watch issued a dire report on relocation in 1995. Trillium considers itself an early-warning system for corporations. “Smart companies will try to address our concerns,” Billenness says. So far, only one large corporation has risen to the challenge on Three Gorges. In December 1997, Bank of America promised not to commit any direct lending to the Three Gorges project and to carefully weigh any transactions that might indirectly benefit the dam.

No other bank was as cooperative. As usual, Trillium was forced to pursue its mission through shareholder resolutions—it drafts statements expressing desired company policies and then asks all other shareholders to vote on them. These resolutions rarely pass, but they do provide a useful means of raising investor consciousness, both because they must be mailed to all stock owners and because the authors of the resolutions can question executives at the annual meeting.

Trillium launched its campaign at Morgan Stanley Dean Witter in 1998. Its resolution, which asked for guidelines to stop such destructive projects as Three Gorges, found one major ally: New York City’s pension fund. Comptroller Alan Hevesi’s support was one reason Trillium’s resolution scored a solid 5.7 percent “yes” vote—enough to allow it to be reintroduced in 1999. That caught Morgan’s eye, and the firm agreed to sit down for talks.

Three high-level Morgan executives met with environmentalists last May, but the session didn’t go well. “They mentioned they didn’t want to poke their client in the eye,” says Shen. “They want to enter China’s emerging markets, with good favor from the government—that’s where they are coming from.”

Three Gorges “is a litmus test,” Shen adds. “If they are involved in Three Gorges and claim they are following any social or environmental guidelines, they are really hypocritical.”

Only days later, there was news of a $500 million bond issue for the China Development Bank, formerly the State Development Bank of China. Merrill Lynch and Salomon Smith Barney (part of Citigroup) underwrote $225 million each. Morgan Stanley Dean Witter, J.P. Morgan, and Chase Securities contributed $6.25 million apiece, and another 12 banks from overseas contributed as well. That was certainly a poke in the eye for the environmentalists, but Morgan didn’t apologize. “They never called us back after that,” says Julie Tanner, a specialist in environment and finance for the National Wildlife Federation.

Merrill Lynch and Citigroup say they received assurances that none of that $500 million would go to Three Gorges. Even if that were true, says IRN’s Shen, the fresh cash would certainly free up other China Development Bank resources for the dam. When it comes to Morgan Stanley Dean Witter, she’s ready to declare war. IRN has launched a slick, comprehensive Web site,, and begun organizing its boycott. It’s not clear how effective that action will be—IRN has canceled a planned demonstration outside the Morgan Stanley Dean Witter annual meeting because it’s too busy working with other groups on a massive April 16 protest of the International Monetary Fund in Washington, D.C. But IRN’s campaign against Discover is endorsed by more than 40 other groups, whose combined mailing list numbers in the millions.

Meanwhile, the political mood in China may be shifting. The current premier, Zhu Rongji, “has never said a kind word about the dam,” says Shen. He has launched a campaign to root out massive dam-related corruption. (China has said that around $600 million has been embezzled, and one official who stole $1.4 million and used it in gambling parties was recently sentenced to death.)

“The political will is waning,” says FOE’s Chan-Fishel. “We are optimistic the dam can be stopped.” As the Chinese struggle to build a dam, the fate of a river, millions of people, and several species may depend on activists’ abilities to stanch a flow of money. “The Three Gorges Dam needs capital from Western capital markets,” says Billenness. “And if the project doesn’t get that capital, then it is not going to go forward.”