Global South can advance sustainability in international finance

New report praises ‘greening’ Chinese and Brazilian banks but says transparency must improve

The Global South is currently generating more new ideas about ensuring sustainable development through environmentally responsible finance than traditional sources of lending, according to a new report series by Friends of the Earth (FoE).

Big national development banks from China and Brazil are now important players in development finance and can lead lenders from the West on innovative investment rules.

“As major finance institutions, China Development Bank (CDB) and the Export-Import Bank of China (China Exim) will play a powerful role in promoting sustainability and environmental protection domestically and internationally,” according to the first in a series of three reports entitled Emerging Sustainability Frameworks. The series examines the environmental policies of Brazil’s national development bank BNDES and two major Chinese banks – CDB and China Exim.

CDB can downgrade a borrower’s assets or even cancel their loans if they breach environmental regulations. BNDES can fine its clients and schedules the disbursement of funds to encourage adherence to its rules. Western-based multilateral development banks such as the World have long incorporated social and environmental policies into their lending but emerging national banks have built on them, the report says.

But despite these rules BNDES, CDB and China Exim still encounter considerable obstacles implementing their policies.  The absence of any effective mechanism to report violations within CDB and China Exim means they often go unpunished.

Green history

In Brazil, ‘sustainable development consistent with environmental consciousness’ was enshrined in the National Environment Policy of 1981. In 1987, BNDES incorporated environmental considerations into loan packages with two resolutions that allowed the bank to levy fines on borrowers guilty of breaching environmental rules.

In addition to strong top-down edicts, the world’s second largest national development bank has also been responsive to pressure from civil society, which has frequently lobbied for tougher rules.

“The greening of Brazil’s financial sector has evolved in response to not only top-down government policy, but from other drivers such as court cases, voluntary industry commitments, and civil society concern,” the report says.

China’s central government has released a succession of policies aimed at safeguarding sustainability in recent years that reflect the growing clout of its banks in international development financing.

The People’s Bank of China and the State Environmental Protection Administration (SEPA) – the body responsible for environmental affairs before the establishment of China’s Ministry of Environmental Protection (MEP) – have pushed for more sustainable lending practices since 1995.

In 2005 and 2006 the State Council introduced the ‘two-highs’ policies, which encourage limited lending to high polluting and high energy-consuming industries.

But the 2007 Green Credit Directive marked a ‘major underpinning’ of China’s turn towards green finance. The policy requires banks to proactively evaluate loans based on environmental risks and monitor them throughout the loan cycle. In 2012 the policy was extended to apply to investments overseas. However, serious breaches of the rules appear to have gone unpunished, raising questions about their effectiveness.

Whereas BNDES counts on internal units that carry out environmental impact assessments (EIA) and monitor environmental performance, CDB and China Exim do not appear to have in-house staff with environmental expertise to help vet and review the qualities of submitted EIAs.

China Exim has come under fire in Latin America for not being up front about the risks of huge hydropower projects at which fatal accidents have occurred. A 2014 report by Peruvian NGO DAR ranked China Exim unfavourably next to Latin American regional development banks in terms of disclosing the risks implied by their projects.

The FoE report argues that transparency is an ‘important prerequisite’ in monitoring a project’s impacts and exacting punishments consistent with policy.  Although CDB and China Exim have begun to ‘green’ their practices; “more work must be done to expand, standardize, and operationalize sustainable finance principles into practice,” the report concludes.

The G20 stage

China is currently chair of the G20, which offers a platform to showcase their green finance policies and gives impetus to existing national policies.

“The G20 needs to explore ways to encourage greener financial institutions worldwide, and improve the capacity of capital markets in channeling resources to green industries, thus developing the environment-friendly economy,” Xi declared on assuming the chair in December last year.

The group held its first ever green finance study group in Beijing last week.

However, the ability of the G20 meetings to provide a platform may be limited since it involves only government representatives with no space for civil society participation.

According to FoE, the Brazilian experience shows that a combination of stakeholders including industry, government and civil society is needed in order to “accelerate a more robust and successful shift towards a green economy”.