It is difficult to overstate the relevance of China’s Belt and Road Initiative (BRI) for the fight against global warming. This large-scale initiative is aimed at improving international economic integration mainly through investment in energy and other infrastructure projects. These sectors often are the backbone of economic activity and – if based on fossil energy – the main source of greenhouse gas emissions causing climate change. However, since 2017, China’s central government has promoted a reorientation of BRI activities towards environmentally sustainable infrastructure. This commitment was under discussion again during the EU-China Summit on 22 June 2020. Is a ‘greener’ BRI through sustainable investments merely an empty promise, or is it put to practice on the ground? And what is the impact of COVID-19 on the sustainability of China’s foreign infrastructure investments under the BRI?
The Belt and Road is Paved with Green Intentions: The BRI’s Green Investment Goals
2017 saw a recalibration of the BRI into a ‘greener’ and ‘high quality’ initiative. The Chinese central government’s support for sustainable development along the BRI is driven by both domestic and international factors. Domestically, China experienced the negative consequences of climate change first-hand, suffering from devastating environmental disasters and pollution endangering public health. Reducing global warming is therefore directly within the government’s interests. Internationally, the BRI’s contribution to global warming through the financing of unsustainable projects tarnished China’s reputation. The government faced mounting criticism that it was ‘exporting pollution abroad’ through unsustainable BRI projects.
Chinese environmental regulations indeed proved to be stricter for domestic investments than for outward investments. Between 2014 and 2017, most Chinese foreign loans and outward investments in the energy and transportation sector were still linked to fossil fuel projects. However, China’s leaders recognised that an environmentally sustainable BRI would create more stable relations abroad and underline its commitment to the Paris Agreement on Climate Change. In response to the pushback from the international community, and in line with its intentions to increase cooperation with the EU on climate change, the Chinese central government started pursuing a greener BRI.
It stated its intentions loud and clear, signalling the importance of sustainability for the BRI through several actions. While Chinese leaders had referred to the need for a green BRI in previous years, 2017 was a key moment in the greening and recalibration of the BRI. That year, several Chinese governmental departments published a number of key documents regarding the greening of the BRI, such as the Guidance on Promoting Green Belt and Road. Furthermore, the first Belt and Road Forum for International Cooperation in 2017 was an important vehicle for China to promote BRI greening to the rest of the world. In his opening speech during the 2017 Forum, President Xi Jinping announced the formation of the Belt and Road Initiative International Green Development Coalition (BRIGC) to streamline international cooperation towards green development along the BRI.
Two years later, the second Belt and Road Forum was used to officially launch the BRIGC. The 2019 Forum also oversaw the signing of the Green Investment Principles (GIP) for BRI by 27 financial institutions from Asia and Europe, as the signees proclaimed their support for a set of voluntary green finance guidelines towards low-carbon, sustainable BRI projects. Finally, the Chinese organisers also broadcast the Everbright ‘Belt & Road’ Green Investment Fund as one of the Forum’s deliverables. This fund is aimed at investment in “green environment, green energy, green manufacturing and green living” in countries and regions along the Belt and Road.
Greenwashing BRI? Green Finance in Practice
China has become one of the largest green bond issuers worldwide, and there have been positive developments in sustainable BRI investment. For example, BRI investment in renewable energy projects increased with 12.6 gigawatts from 2014 to 2019. Consequently, the ratio of coal to solar investment by Chinese actors improved, as the outbound Chinese investment ratio of 6-to-1 has come to approximate the domestic Chinese investment ratio. This convergence of China’s green efforts at home and abroad is a step in the right direction. However, the ratio still heavily favours coal, as Chinese investment continues to flow to coal-based projects despite the aforementioned green finance commitments and initiatives. This will not stop unless there is stricter enforcement of the commitments, and unified green finance standards among BRI countries that are consistent with international norms to prevent greenwashing.
After all, although the central government has set the direction towards a greener BRI, this does not necessarily mean that all Chinese actors involved in BRI activities will follow this lead. The BRI, a top-down initiative that involves numerous actors, has faced coordination issues since its beginnings, and the post-2017 push for green finance is no different. The officially announced recalibration is resisted on the ground by powerful vested interests that benefit from continued involvement in unsustainable (high-carbon) projects, such as Chinese state-owned coal, oil and gas companies. Greenwashing is made easier by the lack of rigid unified green finance standards, as green finance in the BRI still only has to adhere to recipient countries’ less strict environmental standards. Additionally, there are few compliance mechanisms with binding environmental standards for Chinese activities under the BRI to hold investors to their commitments. The voluntary nature of green finance in the BRI undermines the effectiveness of the initiative’s recalibration, as it is still all too easy to finance unsustainable projects. This point is underlined by the recently announced Chinese involvement in the building of a coal plant in northern Zimbabwe.
COVID-19 and BRI Greening: Tightening the Belt
The BRI recalibration is further affected by the COVID-19 pandemic and the related global economic downturn. Global green bond issuance has decreased as market volatility spiked.
Green finance compliance and the creation of unified standards is likely to slide down the list of priorities of policymakers and investors both in China and BRI countries, as containing the pandemic takes precedent. Although China’s financial institutions have the capacity to continue BRI financing, the existing trend of decreasing overseas investments will be strengthened by COVID-19. Ongoing BRI projects are also struggling with the economic fallout of COVID-19. However, demonstrating that the pandemic can be used as an opportunity to promote greening, last April a coalition of 260 environmental organisations across the globe joined together to lobby the Chinese Ministry of Finance to stop funding unsustainable BRI projects, creating a list of polluting BRI projects that they argue should not be bailed out. Thus, COVID-19 endangers green finance as a priority for the BRI, but could also be used as a chance to reset the initiative.
Towards a Green Future
Overall, while there have been positive steps towards the greening of the BRI through investment in sustainable infrastructure, there is still a long way to go. Improved compliance mechanisms and unified green finance standards are required to fully realise the BRI’s potential as a vehicle of a coordinated and collaborative green finance push in developing countries. Though there is a real interest from the central Chinese government in recalibrating the BRI towards sustainable investment, which has triggered several related policies and commitments, the reality on the ground is that most Chinese investments in energy infrastructure still flow to environmentally unsustainable projects. COVID-19 has an additional negative effect on China’s capacity to promote and prioritise green finance. However, the pandemic may also prove to be a blessing in disguise, if it leads to a reset to truly focus BRI investment on sustainable development. It is time for the Belt and Road Initiative to move on to greener pastures.