One Year After a Landmark Green Finance Policy, Can Chinese Banks Go Green? – The Diplomat
The Debate | Opinion
Chinese banks have been the last resort of projects too toxic for other lenders to touch. Can the Green Finance Guidelines force a change?
Located deep in the heart of the Sumatran rainforest in Indonesia, the proposed Batang Toru dam is a good example of an ill-conceived and irreparably harmful development project. If built, it would devastate local communities, destroy a biodiversity hotspot, and doom the critically endangered Tapanuli orangutan species to extinction. This proposed project is so destructive that no international bank was willing to touch it – except the Bank of China. After years of local and international protests, the Bank of China quietly withdrew in 2019, only for the China Export-Import Bank to step in later.
Chinese banks are associated with some of the world’s most environmentally risky and socially irresponsible projects. Local communities in Serbia are fighting a mining project, financed by the Bank of China, that has polluted rivers a lurid red. In Uganda and Tanzania, activists and communities are calling on five Chinese banks to rule out financing for the East African Crude Oil Pipeline, which if built, would devastate the livelihoods of thousands of people and destroy multiple biodiversity hotspots. The list goes on.
But there may be hope. This month, Chinese banks are required to implement the Green Finance Guidelines, a landmark environmental policy from Chinese bank regulators that applies to banks’ overseas lending. The updated guidelines require banks and insurers to terminate funds for projects with significant risks and hazards, and comply with international norms and standards. They even tie a bank’s green finance performance to staff reviews and compensation. These requirements make China’s Green Finance Guidelines the strongest in the world – better than international environmental benchmarks like the Equator Principles.
But can Chinese banks actually implement the groundbreaking new policy? Unfortunately, the evidence does not bode well.
Over the past decade, China has been at the forefront of issuing innovative environmental finance regulations. But year after year, regulators have not done enough to make sure they are followed. As a result, Chinese banks are financing activities that harm local communities and environments, worsen global crises such as climate change and biodiversity loss, and damage China’s reputation while triggering local conflicts.
Chinese regulators need to do more, not only to ensure compliance, but to save Chinese banks from themselves and their bad habits. This means ensuring banks restrict financing to activities with significant hazards and risks, and stop bankrolling clients with poor environmental and social records. And they must ensure that banks develop proper incentives for their staff and boards to effectively implement environmental and social risk management systems.
Importantly, both Chinese banks and regulators should realize that it makes sense to partner with civil society in the name of sustainable finance.
Chinese banks have the bad habit of not listening to local organizations and communities, who often have direct knowledge about potential transactions and can help banks identify and manage environmental problems early on. Likewise, Chinese bank regulators can better work with civil society to ensure the implementation of the guidelines, since international and local NGOs often track and document banks that flout regulations.
Regulators and NGOs also can collaborate to develop innovative policies informed by on the ground lessons. Although the Green Finance Guidelines are exemplary, they still fall short in critical areas like requiring clients to meaningfully consult with local communities and prohibiting harmful financing to at-risk, critical ecosystems and areas where free, prior, informed consent has not occurred.
Chinese banks need help, and they need help fast. The twin climate and biodiversity crises demand action today from all of society, including the banking sector.
If not, there could be no tomorrow – for the Tapanuli orangutan, or for us.