Assessing China’s commitment to greening its overseas finance, one year later

How green can China be? Can China hold true to its commitment to sustainably financing overseas investments by requiring banks to consider international environmental standards when making loans? These are the tough questions China needs to ask in assessing its one year old pledge to green investments abroad. Rey Edward, Friends of the Earth’s campaigner on China sustainable finance, reflects on the opportunities and challenges of this landmark policy.

When I first visited Beijing in the early 90s, bikes outnumbered cars, people shopped in outdoor markets, and the golden arches of McDonalds stood as a lone beacon of Western familiarity for homesick foreigners. Today, visiting Beijing is to witness the transformation of an ancient city into a concrete jungle — new buildings sprouting every week, locals snatching up luxury bags and shoes, the ill-famed “fog” coating the skyline in a viscous haze.

China was once one of the largest recipients for foreign investment, but those days now seem long gone. With a powerhouse economy, China has transformed itself into a major global player of overseas investments. And as China’s enthusiasm for developing overseas investments has grown, so has its awareness of the financial costs — and risks — of environmental and social problems.

The key driver behind China’s overseas expansion is tied to its remarkably swift economic boom. Decades of resource extraction, over-population, and a national plan to achieve GDP growth at any cost has left China’s landscape a bleak portrait of unchecked development. Although the economic boom pulled thousands out of poverty, it has also left thousands of children sick or dying from heavy metal poisoning, spawned clusters of “cancer villages”, and polluted over 70 percent of its lakes and rivers.

However, it isn’t just local residents who are directly affected by Chinese polluters, but in fact scores of communities all across the world from South America, Southeast Asia, to Central Asia.

In February of last year, China’s banking regulatory commission issued the Green Credit Directive, a landmark precedent in sustainable finance. It is an improved version of its 2007 Green Credit Policy, which advised Chinese banks to use environmental and social standards as an important measure in evaluating candidates for loans. The policy was upgraded in February 2012 to a directive and is notable for its explicit language on adhering to international standards of environmental and social safeguards.

Although the 2007 version was a significant victory in establishing the importance of environmental and social accountability in bank loan applications for domestic Chinese projects, the 2012 iteration showed a renewed sign of commitment from the Chinese government to extend its green policies to its rising number of overseas projects. 

The Green Credit Directive marks a unique opportunity for China to lead by example, but the record of its implementation over the last year remains a lackluster show of effort on China’s part. Despite a fairly comprehensive articulation of how banks should implement the Green Credit Directive, Chinese banks have failed to use the Green Credit Directive as an important means of uncovering critical environmental and social problems caused or exacerbated by overseas Chinese financing. 

In Burma, for example, the Chinese financed Letpadaung copper mine instigated a wave of land grabs and heavy metal pollution concerns. In another copper mine project, a Chinese state owned mining company is on the verge of destroying a thousand year old Buddhist temple in its search for copper and other minerals in Afghanistan, and the Rio Blanco mine located in Peru exemplifies another case of Chinese investment spurring illegal land concessions and environmental degradation. 

China deserves credit for greening its financial policies. But as it continues to expand overseas development projects, the Chinese banking regulatory commission will need to get tougher on banks to guarantee the success of its own under-utilized policy. 

Check out an op-ed I recently wrote on the Green Credit Directive.