Banks Must Take Belt and Road Environmental Risks Seriously | Reviews | Eco-Enterprise


China’s Belt and Road Initiative (BRI) aims to catalyze the economies of countries around the world.

Yet the BRI’s projects straddle some of the most environmentally sensitive places on the planet. The multibillion-dollar initiative – to build transcontinental networks of roads, railways and ports, dotted with dams, mines, power plants, and solar and wind farms – is having its environmental impacts. These include air and water pollution, soil contamination and erosion, loss of habitat and wildlife.

For project developers and funders, the inability to manage these impacts can translate into regulatory and reputational risks. They must therefore take mitigation seriously.

Risks faced by developers can include sanctions, lawsuits, and backlash from communities causing project delays and even closures. According to a 2018 study, 14% of BRI projects in 66 countries faced some kind of local pushback.

Problematic projects

At the Myitsone Dam in Myanmar, Chinese developers and investors faced a worst-case scenario, locking in funds indefinitely after the dam was suspended mid-construction for environmental reasons. Fishing communities feared that the project would jeopardize their livelihoods and hamper upstream fish migration to spawning grounds.

The dam was dropped after sustained local and international opposition, leaving China Power Investment Corporation (CPI) and investor China EXIM Bank in limbo.

A dam in Indonesia’s Batang Toru rainforest funded by the Bank of China (BOC) has also been the subject of significant local and international opposition and litigation because it threatened the only habitat of rare species and Critically Endangered Tapanuli Orangutan. Cambodia proposed Sambor Dam, dubbed an impending environmental disaster for the Mekong River, faces similar problems.

Pressures on state banks

Environmental risks can spill over and affect project funders. They may face payment defaults or be forced to withdraw funding when they have failed to preemptively control projects or ensure risk management during implementation. For example, relentless opposition from environmentalists forced BOC to reassess its funding at the Batang Toru Dam last year.

Six Chinese public banks (CDB, CHEXIM, BOC, ICBC, ABC, CCB) have would have provides over 90 percent of the BRI’s funding, exposing them to disproportionate financial risk related to the BRI’s environmental impacts.

According to a 2018 study, 14% of BRI projects in 66 countries faced some sort of local pushback.

How green are the Belt and Road?

  • 91 percent of energy sector loans to BIS countries went to the fossil fuel industry in 2014-2017.
  • China has committed or offered to finance A quarter of the world’s coal-fired power plants being developed outside the country.
  • BIS countries, excluding China, represent 26 percent of global CO2 emissions. This could reach 50% by 2050 in the worst case.

Another problem is that many BRI projects have a weak business case and are implemented in some of the world’s most difficult governance regimes. China continues to sponsor state projects that have failed to attract private investors.

The underlying hope, according to Minyuan Zhao, associate professor of management at Wharton, University of Pennsylvania, is that the global connectivity and business boost provided by the BRI will make it commercially. profitable overall. This strategy could backfire since China’s state-owned banks are already grappling with non-performing loans. Bad debt problem likely to worsen, with many BIS flagship projects hitting roadblocks, many of them through poor environmental management.

It is clear that BIS donors are putting in place strong risk management frameworks incorporating environmental safeguards – something that multilateral development banks (MDBs) such as the World Bank have developed in response to similar risks. .

Decades of experience in implementing these safeguards have helped MDBs develop good practices in environmental impact assessment and mitigation. For example, the International finance corporation Performance standards require clients to have mitigation plans that ensure net gains in biodiversity where critical habitat is affected by a project.

Positive signs

Chinese regulators and policymakers are now paying more attention to the environmental aspects of risk management. For example, in article 21 of its Green Credit Guidelines The China Banking Regulatory Commission (CBRC) has called on Chinese banks to ensure that their customers align with international best practices when operating overseas.

Hopefully these guidelines will give more impetus to BIS funders to take environmental impacts seriously as part of their risk management policies.

Chinese banks are also increasingly co-financing projects alongside MDBs with the apparent aim of mitigating reputational risks. However, such partnerships need to be deepened with more rigorous application of MDB risk management frameworks.

While most MDBs have the highest credit ratings from international rating agencies, indicating a high capacity to meet their financial commitments, most Chinese banks have a high degree of credit rating. lower notes. Strong risk management frameworks can go a long way in strengthening the credit profiles of Chinese banks.

In addition, explicit and binding environmental guarantees will ensure greater debt sustainability for BRI projects. This will help mobilize private and international funding for the BRI, which has so far stayed weak.

Divya Narain is a doctoral candidate at the University of Queensland, studying biodiversity conservation as part of China’s Belt and Road Initiative (BRI). This article was originally published on chinedialogue.

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