Advisors Propose New System of Regulating Foreign Investment in China – Global Problems

A China-backed solar plant in Cafayate, Northern Argentina. Such projects would get the green light from regulators as part of new proposals for Chinese foreign investment. Credit: Alamy / ChineseDialogueBEIJING, Jan. 15 (IPS) – A government-backed coalition of international advisors to the Belt and Road Initiative (BRI) has recommended that China apply stricter environmental controls to its foreign investments. If adopted, it would be a major departure from China’s usual approach of shifting host country rules, many of which are insufficient to regulate its foreign investment.
Senior advisors, including former UNEP chief Erik Solheim and green finance heavyweight Ma Jun, propose a system for categorizing Chinese foreign investment based on its impact on pollution, climate and biodiversity.
The classification method was made public on December 1st at a press conference organized by the BRI International Green Development Coalition (BRIGC) in Beijing. Coal-fired power plants would be given a solid red light, while other types of Chinese foreign investment, such as hydropower and railroads, would need to implement internationally recognized mitigation measures to achieve green status. On the other hand, solar and wind power are seen as environmentally friendly projects that advance the climate goals of the Paris Agreement.
Higher standards in China’s foreign investment
Christoph Nedopil Wang, founding director of the Green BRI Center at the Central University of Finance and Economics and one of the main authors of the classification method, told China Dialogue that the system combines several international approaches to green finance.
The categorization system and the resulting taxonomy of green, yellow and red projects are inspired by international standards such as the EU taxonomy for sustainable finance, the equator principles and performance standards of the International Finance Corporation (IFC) of the World Bank Group. It also uses China’s own guidelines for issuing green credit and green bonds as a reference.
For years, Chinese companies and financial institutions working abroad have primarily adhered to the “host country principle”, which emphasizes compliance with the host countries’ environmental and social regulations. The inadequacy of security in many of the global South’s countries, which make up the majority of BRI participating countries, means that the principle is often used as an excuse for lowering standards for China’s foreign investment.
This creates a stark contrast between China’s green transition domestically and its mark on the rest of the world. While clean energy is growing at breakneck speed in China, much of the energy infrastructure that Chinese companies are building overseas is based on coal. Many such projects are of low efficiency, which China itself has gradually phased out.
Biodiversity threats are also a key concern of many of the BRI’s linear infrastructure projects, such as: B. Railways and roads that intersect with important protected areas. At home, China has introduced an ecological redlining system, which is seen as a model for the compatibility of development and nature conservation.
Chinese actors are urged to maintain higher standards in their overseas investment, but so far the response has been limited. None of the major Chinese financial institutions involved in overseas lending, for example, have signed the Equator Principles, which require international standards (such as the IFC’s performance standards) to be applied in low-income countries and underdeveloped safeguards.
In 2019, major Chinese banks such as the China Development Bank and ICBC signed the Green Investment Principles (GIP), which call for “acute awareness of the potential climate, environmental and social impact of investments and operations in the Belt and Road region” . Mechanisms to translate this awareness into action have yet to be developed.
“The GIP is more market-driven,” comments Nedopil Wang, “while our GIP is much more focused on regulators.”
The system takes into account three dimensions of a project’s potential ecological footprint: pollution, climate change and biodiversity. Projects that run counter to the objectives of the Paris Agreement, e.g. B. those that increase emissions or undermine climate protection measures are classified as “significantly harmful”. Similarly, projects that intervene in key areas of biodiversity are given a red rating.
The system has some flexibility to allow contextual considerations about the environmental benefits of a project. Some project types, such as B. Railways, may initially set a red flag for their potentially high risks to biodiversity.
However, if developers can credibly demonstrate that mitigation measures are being taken to prevent or reduce environmental damage in accordance with international standards, they may be given an environmentally friendly rating. However, the original red rating remains as a reminder of the high risk of the project.
The developers believe the two-tier classification will enable the system to better respond to complex on-site situations in most of the countries along the Belt and Road. “The idea is to make the system adaptable,” says Nedopil Wang, who believes that a black and white taxonomy can be too rigid under certain circumstances. This is why “process standards” are also included, which describe in detail how a risk should be controlled.
Risky Projects
According to the system, the construction and operation of coal-fired power plants is given a red rating, with no mitigation measures or compensation for modernization available. The same applies to the retrofitting of coal-fired power plants to extend their service life.
On the other hand, a hydropower plant receives an initial red rating, but could receive a green rating if it applies “internationally relevant” hydropower standards to mitigate environmental damage, such as the IFC 2015 hydropower standard.
The research team presented an initial classification of 38 project types in 20 sectors, ranging from renewable energies to passenger transport to animal husbandry. By grouping the project types into positive (green), neutral (yellow) and negative (red) lists for the first time, a simple taxonomy for BRI projects based on their environmental impact is created.
“I can see the value of a taxonomy that increases environmental awareness for investors,” a Chinese expert who is familiar with international green finance safeguards and is not authorized to conduct interviews told China Dialogue. “In the very early stages of a project, when you have a project concept note in front of you, a taxonomy can help you quickly assess whether a sector is in line with your strategy or should be excluded at all. ”
However, she warned that Chinese overseas projects are often large-scale projects and that such a taxonomy may be too simple to capture its complex impact, especially its social impact.
The architects of the new system respond that the taxonomy at this point is for demonstration purposes to illustrate how the classification system can be carried out. You plan to refine the list with more technical details and application guidelines as the next step. An important recommendation from the consultants is to link the system with more comprehensive environmental impact assessments for red and yellow projects.
Adoption is the key
The international team proposing the system also recommends embedding it in China’s decision-making process for belt and road projects. According to their analysis, China’s central government agencies such as the National Development and Reform Commission (NDRC) and the Ministry of Commerce (MOFCOM) all have the power to regulate overseas investments. However, environmental aspects are currently not reflected in their approval procedures.
“The positive and negative list provides a basis for government agencies to ensure that overseas investments are in line with climate and environmental goals,” said Wang Ye, a green finance analyst with the World Resources Institute (WRI), who said the System has helped to shape the company. An important recommendation of the team is to draw up an “exclusion list” of projects that irreversibly damage the environment.
Yuan Feng, deputy director general of the NDRC’s Regional Openness Division, which oversees the development of the BRI, offered his blessing at the press conference that unveiled the system.
However, Nedopil Wang admits that regulators’ appetite for such a system is difficult to gauge. It is noteworthy that the Ministry of Ecology and Environment (MEE), which houses the BRIGC, has no formal regulatory powers over project development outside of China’s borders.
Experts also believe that green catalogs promoting certain types of investments are easier for regulators to consider than exclusion lists, which are often beyond their legal authority. China’s own environmental laws have not yet made mandatory greenhouse gas emissions. Positive lists like the Green Bond catalog have so far been the mainstay of domestic measures to steer funding towards greener projects.
There is evidence that some regulators are more receptive to the recommendations. On October 25, five central government agencies, including the Central Bank, the MEE and the Banking Authority, issued joint guidelines on the country’s funding system to better meet China’s goal of carbon neutrality by 2060. It strongly encourages financial institutions to support low carbon development along the Belt and the Road.
It is hoped that China’s financial sector will implement the classification system and treat foreign projects differently: favorable financing conditions for “good practice” projects and strict conditions for risky projects.
“The Chinese Banking and Insurance Commissioner (CBIRC) was involved in developing the system. That is a good sign,” Nedopil Wang told China Dialogue. “The de facto application really depends on the specific champions within the various regulators.”
“To incorporate environmental risks into policies and financial practices, these champions must relentlessly build them into the system, like woodpeckers who always end up in the same spot without getting a headache,” he said. “Makes a sense of reputation and the environment for China today. But it requires a very different approach to some decisions. ”
This article was originally published by ChinaDialogue
(2021) – All rights reserved

Source link