Does the Asian Development Bank Respond to Past Environmental Performance when Allocating Environmentally Risky Financing?

This paper provides an empirical test of whether the Asian Development Bank (ADB) adjusts allocation decisions about environmentally risky projects to reflect borrower environmental performance in previous projects. This type of performance-based decision-making has been repeatedly highlighted as key to achieving favorable development assistance outcomes in a variety of programming areas. I collect recipient environmental performance information from all available post-project evaluations since 1990 and create an indicator of environmental reputation using a Bayesian updating model. I use this environmental reputation indicator to demonstrate that the ADB responds to previous borrower environmental performance when approving environmentally risky projects, but that past environmental performance does not positively influence the allocation of projects with no environmental risks. These results demonstrate that performance-based allocation decisions are possible for development organizations within specific programmatic areas when low performance is a significant risk to the core functions of the organization, which in this case is the ability to approve and disburse lending projects.