A government-backed coalition of international advisors to the Belt and Road Initiative (BRI) has recommended that China apply more stringent environmental controls over its outbound investments. If adopted, this would be a major departure from China\u2019s usual approach of deferring to host country rules, many of them inadequate, for regulating its overseas investments. <\/p>\n\n\n\n
High-level advisors, including former UNEP chief Erik Solheim and green finance heavyweight Ma Jun, propose a system to categorise Chinese overseas investments based on their polluting, climate and biodiversity impacts.<\/p>\n\n\n\n
The classification methodology<\/a> was published on 1 December at a press conference<\/a> organised by the BRI International Green Development Coalition (BRIGC)<\/a> in Beijing. It would see coal-fired power plants given a firm red light, while other types of Chinese overseas investments, such as hydropower and railways would need to implement internationally recognised mitigation measures to earn \u201cgreen\u201d status. On the other hand, solar and wind power are considered green projects that advance the climate goals of the Paris Agreement.<\/p>\n\n\n\n The proposal states that BRI investments would be classified as follows:<\/p> \ud83d\udd34 Red projects require stricter supervision and regulation. <\/strong>These are regarded as creating \u201csignificant and irreversible environmental harm\u201d in at least one of the areas of climate change, pollution and biodiversity, or the risk of such harm. Examples include coal-fired power, hydropower, petrochemical, and mining and metal smelting projects.<\/p> \ud83d\udfe1 Yellow projects are environmental neutral with moderate impacts. <\/strong>These cause no significant harm, and remaining harms can be mitigated by affordable and practical measures, on a reasonable scale, within the project itself. Examples include waste-to-energy projects and urban freight transportation with emission standards above Euro IV\/national IV standards.<\/p> \ud83d\udfe2 Green projects are encouraged.<\/strong> These have no significant negative impact on pollution, climate change or biodiversity, and contribute positively to at least one of these, particularly if they benefit the aims of international environmental treaties and conventions. Examples include the development and use of renewable energy (wind, solar, etc).<\/p><\/div><\/div><\/div>\n\n\n\n <\/p>\n\n\n\n Christoph Nedopil Wang, founding director of the Green BRI Center at the Central University of Finance and Economics and one of the lead authors of the classification methodology, told China Dialogue that the system combines multiple international approaches to green finance.<\/p>\n\n\n\n The categorisation system and an ensuing taxonomy of green, yellow and red projects take inspiration from international standards such as the EU Sustainable Finance Taxonomy<\/a>, the Equator Principles<\/a> and performance standards<\/a> issued by the International Finance Corporation (IFC) of the World Bank Group. It also uses China\u2019s own guidelines for green credit and green bond issuance<\/a> as references.<\/p>\n\n\n\n For years Chinese companies and financial institutions working abroad have primarily adhered to the \u201chost country principle\u201d which emphasises compliance with host countries\u2019 environmental and social regulations. The inadequacy of the safeguards in many Global South countries, which make up the majority of BRI participant countries, means that the principle is often used as an excuse to lower standards for China\u2019s outbound investments. This creates a stark contrast between China\u2019s domestic green transition and its footprints across the rest of the world. While clean energy is growing at a breathtaking speed inside China, a large portion<\/a> of the energy infrastructure Chinese companies are building overseas is coal-based. Many such projects are of the low-efficiency type<\/a> that China itself has gradually phased out. Biodiversity threats are also a main concern of many of the BRI\u2019s linear infrastructure projects<\/a> such as railways and roads that intersect with key protection areas. Domestically, China has implemented an ecological redlining system hailed as a model<\/a> for reconciling development with the conservation of nature.<\/p>\n\n\n\n There are calls on Chinese actors to follow higher standards in their overseas investments, but so far the response has been limited. None of the major Chinese financial institutions involved in overseas lending, for example, has signed on to the Equator Principles<\/a>, which requires international standards (such as the IFC\u2019s performance standards) to be applied in low-income countries with underdeveloped safeguards. In 2019, major Chinese banks<\/a> such as China Development Bank and ICBC signed on to the Green Investment Principles (GIP)<\/a> which call for \u201cacute awareness of potential impacts of investments and operations on climate, environment and society in the Belt and Road region\u201d. But mechanisms to translate such awareness into action are yet to be developed.<\/p>\n\n\n\n \u201cThe GIP is more market driven\u201d, comments Nedopil Wang, \u201cwhile our [proposed system] is much more targeted at the regulators.\u201d <\/p>\n\n\n\n The system considers three dimensions of a project\u2019s potential environmental footprint: pollution, climate change and biodiversity. Projects that are contrary to the Paris Agreement objectives, such as those which increase emissions or undermine climate mitigation measures, are considered to cause \u201csignificant harm\u201d. Similarly, projects that encroach on key biodiversity areas are given a red rating.<\/p>\n\n\n\n The system has some flexibility built in to allow contextual considerations of a project\u2019s environmental merits. Some projects types, such as railways, may initially raise a red flag for their potential high risks to biodiversity. But if developers can credibly demonstrate that mitigation measures are taken to prevent or reduce environmental harms, following international standards, they may get a green classification. However, the original red rating will remain as a reminder of the project\u2019s intrinsic high risk.<\/p>\n\n\n\n The creators believe the two-step classification will better equip the system to respond to complex situations on the ground in most countries along the Belt and Road. \u201cThe idea is to make the system adaptive,\u201d says Nedopil Wang, who believes that a black-and-white taxonomy may be too rigid in some circumstances. Therefore, \u201cprocess standards\u201d which detail how a risk should be managed, are also included.<\/p>\n\n\n\n According to the system, the construction and operation of coal-fired power plants will be given a red rating with no mitigation or compensation measures available to upgrade it. The same applies to the retrofit of coal-fired power plants designed to extend their operating life.<\/p>\n\n\n\n On the other hand, a hydropower station will be given an initial red rating but could earn a green rating if it applies \u201cinternationally relevant\u201d hydropower standards for mitigating environmental damage, such as the IFC\u2019s 2015 Hydroelectric Power Standard.<\/p>\n\n\n\n The research team provided an initial classification of 38 project types under 20 sectors, ranging from renewable energy to passenger transport and livestock farming. The grouping of the project types into positive (green), neutral (yellow) and negative (red) lists for the first time creates a simple taxonomy for BRI projects based on their environmental impacts.<\/p>\n\n\n\n \u201cI can see the value of a taxonomy [for BRI projects] which raises environmental awareness for investors,\u201d a Chinese expert familiar with international green finance safeguards, who is not authorised to take interviews, told China Dialogue. \u201cAt the very early stage of a project, when you have a project concept note in front of you, a taxonomy may help you make a snap judgment about whether a sector is in line with your strategy or should be excluded in the first place.\u201d<\/p>\n\n\n\n But she cautioned that Chinese overseas projects are often large-scale and such a taxonomy may be too simplistic to capture their complex impacts, particularly social impacts.<\/p>\n\n\n\n Architects of the new system respond that the taxonomy is for demonstration purposes at this stage, created to illustrate how the classification system can be run. They are planning to refine the list with more technical details and application guidelines as a next step. One key recommendation from the advisors is to link the system with more comprehensive environmental impact assessments for red and yellow projects.<\/p>\n\n\n\n The international team proposing the system also recommends it be embedded into China\u2019s decision-making processes on Belt and Road projects. According to their analysis, central government agencies such as the National Development and Reform Commission (NDRC) and Ministry of Commerce (MOFCOM) all have power to regulate overseas investment, but currently environmental considerations are not reflected in their approval processes.<\/p>\n\n\n\nHigher standards<\/h2>\n\n\n\n
The de facto application [of the system] really depends on the specific champions within the different regulators.<\/blockquote>Christoph Nedopil Wang, founding director of the Green BRI Center at the Central University of Finance and Economics<\/cite><\/div><\/div>\n\n\n\n
Risky projects<\/h2>\n\n\n\n
Adoption is key<\/h2>\n\n\n\n