The road to sustainability for Chinese investors

Trade and investment flows between developing countries are rapidly increasing. Peter Bosshard introduces a new report, which explains how Chinese financiers can incorporate environmental best practices.

The world has entered a new era of cooperation between countries in the developing world. Trade and investment have grown substantially between Asia, Africa and Latin America in recent years. Companies from China, South Korea, Brazil and South Africa have taken a lead role in building textile plants, mobile phone networks, roads and power plants in the developing world. According to the UN’s 2006 World Investment Report, investments flows between developing countries increased from US$2 billion to US$60 billion between 1985 and 2004. 

Trade in sectors ranging from oil to textiles, turbines and timber has grown just as fast as investments flows between developing countries. State-owned export credit agencies play a key role in underwriting these trade and investment flows. China Exim Bank is now the world’s largest export credit agency; it approved US$36 billion in loans in 2007 and has even outgrown the World Bank.

This expanding cooperation has many positive aspects. Developing countries are in great need of infrastructure investment. Companies from the developing world offer consumer goods that are more affordable and often better suited to the needs of poor societies than the products of their rich-world competitors. Loans from developing-world governments have also reined in the power of international financial institutions to meddle in the economic policies of their borrowers.

Yet decades of experience demonstrate that overseas investments can create serious problems if they are not part of a sound economic, social and environmental development strategy. Projects which are motivated by political prestige rather than long-term development can create unsustainable debt burdens. Investments that concentrate revenues in a few hands are likely to exacerbate corruption, social tension and conflict. Projects which do not respect the interests of local communities and the environment can turn into social, environmental and economic disasters.

The Chinese government has developed a host of domestic environmental laws since the 1980s. More recently, it has recognised that Chinese investors and financiers also need environmental policies to guide their overseas operations. China Exim Bank adopted environmental guidelines in 2004 and strengthened them in September 2007. In October 2006, the State Council issued principles urging Chinese investors to “pay attention to environmental resource protection” and “support the local community and people’s livelihood” abroad.

Transnational corporations like Asia Pulp & Paper, Michelin and PepsiCo have been criticised for cutting down forests, polluting the air and poisoning the water in China. Likewise, some Chinese mining, oil and hydropower companies have been criticised for disregarding the interests of workers, host communities and the environment in their overseas operations. In order to avoid further conflicts in the host countries, the Ministry of Commerce, China Exim Bank and other institutions will need to strengthen the policies guiding the environmental performance of Chinese companies abroad.

Chinese government agencies, financiers and investors can benefit from a large body of experience with international environmental standards. In a new report published by International Rivers, experts from civil society, academia and financial institutions discuss this experience and how it can be useful for emerging financiers from China and other countries.

Based on the policies of financial institutions around the world, Aaron Goldzimer (see “Financing development: a civil society perspective) summarises the strengths and weaknesses of current best practice for environmental policies from a civil-society perspective. He argues that new financiers could leapfrog some of the less effective current policies and move toward new, more effective institutional structures.

As the Association of Development Financing Institutions in Asia & the Pacific (see “Why development banks in Asia are going green”) demonstrates, developing-world financial institutions have taken innovative steps to “green” their business activities. In a separate paper, Guo Peiyuan (see “Socially responsible investment emerges in China”) introduces measures that Chinese banks and other institutions have taken to promote the concept of socially responsible investment. He argues that in the early stages, financiers focus on implementing the concept at home, but that this may change as more and more investors venture abroad.

The proof of the pudding will be in the eating, and the best environmental standards are only as good as their implementation. Goldzimer, Guo and others stress that an open dialogue between financial institutions and civil society is an essential element of environmentally sound lending and investment decisions. The Chinese government recently strengthened citizens’ access to information at home. We hope Chinese investors and financiers will also strengthen transparency in their overseas operations as an important step towards environmental sustainability.

Peter Bosshard is the policy director of International Rivers. Based in Berkeley, California, International Rivers aims to protect rivers and the communities which depend on them.

NEXT WEEK: Reports from Peiyuan Guo, Aaron Goldzimer and the Association of Development Financing Institutions in Asia & the

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