Why China must strengthen environmental standards for its overseas investments

Chinese banking regulators must implement a green finance policy that requires Chinese lenders to incorporate environmental safeguards into their lending process

In 2012, a Chinese-owned mining company, Ecuacorriente, signed a deal with the Ecuadorean government to develop a copper mine in one of the most biodiverse and beautiful places on Earth.  Located in Ecuador’s misty Condor Highlands, the Mirador mine has since been the target of protests,lawsuits, and resistance from communities and organisations concerned about the mine’s impacts on water, biodiversity and indigenous peoples.

El Mirador is just one example of a foreign direct investment that has attracted intense controversy – an unwelcome side effect of a Chinese foreign policy that encouraged Chinese companies to “go global.”  Rolled out in 2001, the “Going Out” policy largely is geared towards ensuring that China secures access to the natural resources needed to fuel its continued economic growth. As a result, over the last decade, China has poured investment into nearly all corners of the Earth, from EuropeSoutheast AsiaNorth AmericaLatin America, to even Antarctica. Today, Chinaexceeds the World Bank as a provider of finance for development projects around the world.

But while the Going Out policy may have spurred a boom in Chinese overseas investment, another Chinese policy — the Green Credit Directive — may have the power to make sure those investments are environmentally responsible. Released by Chinese banking regulators in 2012, the Green Credit Directive requires Chinese banks to consider environmental and social risks when lending to companies and projects, and to halt or suspend financing when major environmental hazards (such as pollution, health, safety, resettlement, and even climate change) go unmitigated. In particular, the Directive requires Chinese banks, in their overseas lending, to ensure that borrowers abide by international norms.

As such, the Green Credit Directive is one of the world’s most progressive environmental banking regulations.  In comparison, governments in the United States and Europe have done virtually nothing to hold banks responsible for the environmental impacts of their lending. Nor have these governments done much to address the overseas social and environmental impacts of their multinational corporations.

But as the second anniversary of the Green Credit Directive approaches (on February 24), controversies such as the ones surrounding the Mirador project continue unabated – a disappointing sign that the Directive is not being implemented. In Ecuador, civil society groups actually informed potential Chinese lenders about the severe environmental and social problems the mine would cause. They detailed how the mine would devastate the region’s water quality, trigger widespread water and soil pollution, and lead to the extinction of at least three amphibious and reptilian species.

Such impacts are clearly out of line with international norms, and therefore violate the Green Credit Directive. In addition, the groups pointed out how the mine has already violated Ecuadorean local and national laws, another breach of the Green Credit Directive. Unfortunately, there has been no indication that Chinese banks or regulators have acted.

Ensuring compliance with the Green Credit Directive is certainly no easy task. Chinese borrowers, such as resource extraction companies, are “late to the game” when it comes to developing international assets, and are loading up on environmentally, socially and politically risky projects. Chinese banks still have a long way to go in developing robust environmental and social risk management systems. And the China Banking Regulatory Commission, China’s banking regulator, does not have a department charged with overseeing compliance with the Directive, particularly overseas. However, if China is to improve its reputation as a global actor, and fulfill its potential as a leader in sustainable finance, it will need to take the Green Credit Directive seriously.

The Green Credit Directive requires Chinese banks to ensure that their overseas projects follow international environmental norms (Image of mine in Ecuador: wurglitsch)