Author: Sarah Tang, Deputy Director of the Green BRI Research Center at IIGF
Article was originally published on January 19th, 2022 in Chinese.
On January 6, 2022, China’s Ministry of Ecology and Environment (MEE) together with the Ministry of Commerce (MOFCOM) issued the new “Guidelines for Ecological and Environmental Protection in Overseas Investment and Cooperation Construction Projects” (hereinafter as the 2022 Guidelines). The 2022 Guidelines aim to help promote the green and sustainable development through the Belt and Road Initiative (BRI), improve the environmental safeguard standards of overseas investment and construction projects, and establish a “dual circulation” development model where domestic development as the mainstay is complemented by the international development.
1.The Background and Significance of the 2022 Guidelines
Green development has increasingly become integral to the BRI. From Kunming to Glasgow, with the first phase of the fifteenth meeting of the Conference of the Parties (COP15) to the Convention on Biological Diversity and the twenty-sixth session of the Conference of the Parties (COP26) of the UN Framework Convention on Climate Change coming to an end in 2021, China continues to actively fulfill its international responsibilities in the face of global challenges such as biodiversity protection and climate change. China is committed to promoting the concept of green development in its overseas investment cooperation, especially through the Belt and Road Initiative International Green Development Coalition (BRIGC), which was jointly established by more than 150 Chinese and international organizations from more than 40 countries, as well as the Initiative for Belt and Road Partnership on Green Development launched with 28 countries and the Green Investment Principles (GIP) co-initiated with the UK.
On biodiversity conservation, as the host country and the President of COP15, China has pledged to carry out extensive bilateral and multilateral cooperation in the field of biodiversity, help developing countries advance their biodiversity governance progress, and bridge the gaps between some developing countries in the compliance with the Convention on Biological Diversity (CBD) and the achievement of the Sustainable Development Goals (SDGs).
In addressing climate change, China has deployed and implemented its carbon peak and carbon neutrality strategies domestically, and at the same time is committed to “building a shared future” to address climate change together with the BRI countries under the principle of “common but differentiated responsibilities”. Chinese enterprises are encouraged to carry out overseas investment cooperation under the guidance of the Paris Agreement, GIP, and other international conventions and initiatives. In September 2021, Chinese President Xi Jinping announced at the 76th session of the UN General Assembly that China would no longer build new coal-fired power projects and will strongly support the development of green and low-carbon energy in developing countries. China’s overseas “coal withdrawal” has played an instrumental role in the accelerated pace of the global energy transition.
At the project level of overseas investment and construction projects, green development is encouraged in the 2022 Guidelines to be integrated into the whole life cycle of investment decisions and project development. In view of the environmental impacts that may arise during the project cycle, MOFCOM, MEE, and other ministries are making efforts to strengthen the policy design to further green the BRI and encourage enterprises to carry out environmental impact assessment and relevant due diligence of overseas projects following international standards or Chinese standards (whichever is more stringent). Relevant policy documents include the “Guiding Opinions on Promoting Green Construction of ‘One Belt One Road’” jointly issued by four ministries and commissions in May 2017, and the ” Green Development Guidelines for Overseas Investment and Cooperation ” jointly issued by MOFCOM and MEE in July 2021 (hereinafter as the 2021 Guidelines). The two ministries have significantly upgraded and refined the 2013 “Guidelines for Environmental Protection in Foreign Investment and Cooperation” (hereinafter as the 2013 Guidelines) in the 2022 Guidelines, which were also based on green international practices and rules embodied in the 2021 Guidelines. The 2022 Guidelines enhance the requirements on biodiversity protection and climate change, cover the whole lifecycle of overseas investment and construction projects, and list the key points of environmental management for key industries in dedicated articles. In the new age for China’s international cooperation in biodiversity and climate, the release of the 2022 Guidelines mark China’s determination to further guide enterprises to actively fulfill their environmental protection responsibilities in the process of “going out” and to promote the high-quality development of foreign investment and construction projects. The 2022 Guidelines not only help improve the quality of “dual circulation”, but also demonstrate China’s leadership in the process of building a greener BRI.
2.Four Highlights of the 2022 Guidelines
Compared with the 2013 Guidelines and the 2021 Guidelines, the 2022 version has four highlights:
1）Promotion of international standards
Compared with the 2013 Guidelines, the 2022 Guidelines encourage companies to adopt the common standards of international organizations and multilateral institutions or China’s standards (if more stringent) for overseas investment activities, especially in the absence of relevant standards or lax requirements from the host country (region). This has been already reflected in the 2021 Guidelines. which encourage enterprises to “study and learn from” international standards and practices, the 2021 and 2022 Guidelines both use phrases alluding to international best practices, such as “adhere to green international rules” and “encourage enterprises to refer to international practices”. The 2022 Guidelines specifies the application of international standards and practices in the environmental impact assessment (EIA), the improvement of the enterprise’s environmental management system, and the ecological and environmental protection work during the project decommissioning period.
The strengthening of the recognition of international standards is in line with the requirements of building a green BRI. Since China started its “going out” policy in 1999, enterprises have been encouraged to comply with host country laws and regulations to obtain relevant local and Chinese permits and licenses, known as the “host country rules”. However, the laws and regulations, regulatory environment, and soundness of governance structures of host countries vary greatly. Some countries with lax environmental regulations have little or no mandatory environmental safeguards for project developers and investors, or they only demand the bare minimum of environmental safeguards. In the absence of stringent local environmental laws and regulations, a few Chinese overseas projects have been criticized by NGOs and the Western media for failing to disclose the potential environmental and social impacts on local ecosystems and communities. In addition to reputational risks, the lack of environmental standards to rely on also poses financial risks for Chinese companies and financial institutions. Since international investment and financing channels (including some large international institutional investors, multilateral financial institutions, and international banks, especially those that have signed the Equator Principles, colloquially referred as “Equator banks”) usually adopt stricter screening and management standards for environmental and social risks and impacts, the lack of interests from some Chinese companies to reference international standards will limit their chances to crowd in other financing and investment channels.[1]
In summary, the 2022 Guidelines embrace international standards to provide a more practical reference for Chinese enterprises to improve and enhance their environmental risk management in overseas investment and construction projects.
2) Scope of ecological and environmental protection is much wider
The 2022 Guidelines have greatly enriched the scope of ecological and environmental protection. In the 2013 Guidelines, the main focus was on pollution prevention and pollution control. In the 2022 Guidelines, more requirements related to climate change and biodiversity conservation are added. At the same time, compared to the 2021 Guidelines, which already covered these two global issues, the 2022 Guidelines have further increased its focus on biodiversity conservation, and elaborated on each phase of the project cycle and each key industry.
In terms of addressing climate change, the 2022 Guidelines specify that enterprises should “pay attention to the international laws, regulations and policies and those of the host countries (regions) on addressing climate change and actively participate in low-carbon and carbon sink projects based on their own conditions, so as to support the green and low-carbon energy development of developing countries, and make positive contribution to the climate change response of these places” (Article 17). This requires Chinese companies to be cautious about their overseas carbon footprints when choosing and carrying out overseas projects, and to fully consider the Nationally-Determined Contributions (NDCs) of host countries under the Paris Agreement, and align to their best with the 1.5°C target. In terms of specific industry sectors, the 2022 Guidelines require companies to ” give priority to clean and green renewable energy projects” (Article 10) in the implementation of energy projects, reaffirming China’s commitment at the UN General Assembly in September 2021 to no longer build new coal-fired power projects and strongly support the development of green and low-carbon energy in developing countries. For transportation projects, the 2022 Guidelines also put forward the guiding principle of “green, low-carbon and sustainable development to select reasonable routes and sites” (Article 13).
As the host country and president of COP15, China has made substantial upgrades to the requirements for biodiversity conservation. The 2022 Guidelines emphasize that enterprises should “follow the biodiversity conservation strategies and action plans of host countries (regions) and fully consider the ecological functions of the area where the project is located, to reduce adverse impacts on local biodiversity and promote biodiversity conservation and sustainable use” (Article 18). The 2013 Guidelines only mentioned the consideration of site selection, reducing adverse impacts on local biodiversity, and carrying out ecological restoration in Article 15. Instead, the 2022 Guidelines propose comprehensive requirements in the project planning and evaluation phase—enterprises are encouraged to “collect relevant information, conduct biodiversity investigation, environmental monitoring and evaluation for the proposed construction area to obtain understanding of the environmental background of the place where the project is located and its surrounding areas, and put the results of environmental investigation, monitoring and evaluation on record” (Article 6). Moreover, the 2022 Guidelines also include a combination of “avoidance” and “mitigation” measures to address the characteristics of different sectors. For example, when implementing water conservancy and hydropower projects, enterprises should “avoid nature reserves and important habitats, and make reasonable layout within watershed. The project design and engineering arrangement need to be optimized and reasonable measures to be taken, including protecting aquatic habitats, developing corridors for aquatic organisms, and stock enhancement and releasing” (Article 10); when implementing mining projects, enterprises should ” reduce ecological damage and land occupation, and to step up ecological restoration and biodiversity conservation” (Article 12); when implementing transportation infrastructure projects, enterprises shall “follow the principle of green, low-carbon and sustainable development to select reasonable routes and sites, and endeavor to avoid occupying or crossing nature reserves and important wildlife habitats. If unavoidable, mitigation or compensation measures such as harmless crossing of transportation infrastructure and constructing of wildlife passageways shall be taken. Enterprises shall strengthen environmental management during the construction period by arranging construction work reasonably. The excavation of soil and rock and the temporary occupation of sites will be reduced to mitigate the impacts such as noise and dust on wildlife and neighboring residents. Ecological and environmental restoration shall be carried out in time after construction” (Article 13). To our knowledge[2], The BRI Big Data Service Platform on Ecological and Environmental Protection has included biodiversity-related data from more than 100 countries. In the future, enterprises will be able to incorporate biodiversity conservation into the management of the whole project life cycle with the support of more data.
3) Focus on the whole project lifecycle
Compared with the 2013 Guidelines, the 2022 Guidelines encompass the “full life cycle” management, briefly mentioned in the 2021 Guidelines. The 2022 Guidelines outline specific requirements for each phase of the entire project life cycle, including the pre-construction, construction, operation, and decommissioning periods (see Figure 3). Among them, the guidelines for each phase not only cover pollution prevention and control, climate change, biodiversity conservation, but also align with international practices or China’s standards (whichever is more stringent).
In addition, the 2022 Guidelines also lay out detailed environmental management requirements in each phase for key sectors. For example, for transportation infrastructure projects, according to the 2022 Guidelines, enterprises should select sites carefully in the early phases of the project to avoid damages to the biodiversity; during the construction period, implement appropriate mitigation or compensation measures and strengthen environmental management; after construction, ecological restoration should be carried out in a timely manner.
4） Highlighting the key industry requirements
Green infrastructure, green energy, and green transportation are the key areas of cooperation under the BRI. Another major feature of the 2022 Guidelines compared with the 2013 Guidelines and the 2021 Guidelines is the elaborated requirements for the four industries energy projects (including hydropower), petrochemical, mining, and transportation infrastructure.
For the energy industry, the 2022 Guidelines begin with a clear statement that priority should be given to renewable energy projects. For water conservancy and hydropower projects which are classified as renewable energy projects with great ecological and environmental hazards, the new Guidelines propose that enterprises should avoid occupying nature reserves and important biological habitats and encourage the adoption of appropriate compensation or mitigation measures.
For petrochemical and mining projects, the 2022 Guidelines set out instructions on strengthening pollution control, controlling greenhouse gas emissions, reducing ecological damage, and carrying out ecological restoration.
For transportation infrastructure projects, according to the 2022 Guidelines, enterprises should incorporate the requirements of “green, low-carbon, and sustainable development” into the entire project life cycle, including site selection, environmental management during construction and ecological restoration at a later stage.
In the baseline study report of “Green Development Guidelines for BRI Projects” released by BRIGC in 2020, it has been emphasized that specific guidance requirements should be put forward according to the characteristics of different industries, with positive and negative lists, and a set of graded project classification systems. The 2022 Guidelines covering the four key industries provide the basis for the construction of this system.
3. Recommendations for the next steps to implementing the 2022 Guidelines
The 2022 Guidelines are impressive in four major aspects, including the recognition of international guidelines, the enrichment of ecological and environmental protection, the clarification of the requirements for the whole project life cycle and the coverage of key industries. However, the launch of the 2022 Guidelines for enterprises going abroad is only the first step in promoting high-quality development of overseas investment and construction projects.
This article puts forward the following three recommendations on how government can guide the enterprises to ensure more effective implementation of the 2022 Guidelines and the future upgrading.
First, strengthen the complementary regulatory mechanism and establish a differentiated management process. Being a departmental regulation, although the 2022 Guidelines puts forward clear requirements for enterprises to further improve their environmental management, the implementation still needs cooperation with other departments. Whether the relevant ministries and commissions, such as NDRC, MOFCOM, and SASAC, can incorporate the existing approval and reporting processes in the corresponding index requirements based on the 2022 Guidelines is crucial to ensure the implementation at the enterprise level. This article also suggests that a “green channel” be implemented for the approval of green and low-carbon projects, such as wind power and photovoltaic projects; at the same time, projects that may pose potential risks to the environment, such as gas-fired power generation, large hydropower, and mining projects, should be included in a key regulatory list, and the relevant parties should be mandated to disclose the specific data and pollution management and control practices, carbon emissions, biodiversity protection, etc.
Second, bridge the knowledge and expertise gaps in ecological and environmental protection and strengthen the capacity building. Chinese enterprises still lack sufficient capacities in environmental impact assessment, environmental risk identification, prevention, and control. Therefore, to help Chinese enterprises implement and enforce the 2022 Guidelines, it is recommended that relevant government agencies or industry associations take the lead in organizing capacity-building efforts on common standards of multilateral institutions (e.g. World Bank’s Environmental and Social Standards, IFC’s Environmental and Social Performance Standards, etc.) as well as relevant standards and best practices in China. In particular, multiple rounds of training on relevant environmental and climate risk evaluation standards and assessment tools should be conducted for key industries in the Belt and Road such as infrastructure, energy, and transportation. This will not only help Chinese enterprises to better implement the 2022 Guidelines in the process of “going out”, but also help them to solve the financing problem and more comprehensively align with international standards and match the relevant requirements of multilateral banks and some international commercial banks.
Third, improve the guidelines for enterprises and financial institutions to expand the influence from both the industry and financial institutions sides. This guide focuses on new construction (including upgrading and expansion) projects, mergers and acquisitions, and contracted engineering projects undertaken by Chinese enterprises abroad. The categories involved serve as great reference to China’s policy financial institutions (including China Exim Bank, China Development Bank, and China Export & Credit Insurance Corporation, etc.) and several major commercial banks involved in overseas business. However, the processes (including project establishment, project evaluation, implementation and construction, project management and reporting, decommissioning/sale/transfer, etc.) and concerns of financial institutions in providing financing or guarantee are different from those of enterprises. There is also a certain information gap with the enterprises that implement the projects. Therefore, it is recommended that the China Banking and Insurance Regulatory Commission (CBIRC), the People’s Bank of China, and other regulatory authorities, together with the MEE, should develop guidelines and supporting systems that are more relevant to the needs of financial institutions. This is to further improve the ability of China’s financial institutions to control the environmental, social, and governance risks related to “going out” projects, so that they can implement appropriate management approaches for different risks. Some reference materials include GIP, the “Green Development Guidelines for BRI Projects ” Phase-II-I: application manual for enterprises and financial institutions, and the relevant standards of international agencies and multilateral financial institutions mentioned in the manual.
From a risk perspective, in addition to environmental risks, risks related to the social dimension in overseas projects are also gradually revealed. In terms of investment and financing channels, both international financial institutions (including some domestic financial institutions) and some institutional investors have become more concerned about both environmental and social aspects in recent years. The potential impacts of the project at the social level are addressed in the 2013 Guidelines as well as in the 2022 Guidelines. On how enterprises can improve their environmental and social risk management to help meet the requirements of relevant financial institutions (multilateral financial institutions, Equator banks, etc.) and solve the financing problems, this article proposes the following three recommendations.
First, strengthen Environmental and Social Impact Assessments (ESIA). Enterprises should hire a consultant team with experts in areas such as climate change, biodiversity, and social risk assessment. The consultant team needs to be independent from stakeholders to ensure the impartiality of their assessments. Enterprises can refer to the WORLD BANK GROUP Environmental, Health, and Safety General Guidelines and the IFC Performance Standards on Environmental and Social Sustainability to develop their environmental and social assessments and supporting management systems.
Second, build and strictly implement an Environmental and Social Management System (ESMS), which is a dynamic system consisting of policies, plans, management tools, and supporting mechanisms for companies to manage environmental and social risks and potential impacts. Based on the “Plan-Do-Check-Act” cycle of management, enterprises should integrate the improvement and implementation of ESMS into the entire project life cycle. The best international practice reference materials include the IFC ESMS Implementation Handbook.
Third, report regularly and transparently on the environmental and social performance of the project. Enterprises should regularly report on the environmental and social performance related to the project in a format and frequency (at least once a year) to be determined in advance with the investor and financier. Specifically, enterprises should make publicly available a summary of ESIA and greenhouse gas emissions data. Enterprises can also share biodiversity-related data for specific projects, where commercial confidentiality is not involved.
References：
[1] https://chinadialogue.net/en/business/what-chinas-new-guidelines-on-green-development-mean-for-the-belt-and-road/
[2] http://www.gov.cn/zhengce/2021-10/08/content_5641289.htm