Profiting from Precaution: How China’s Policy Banks Can Enhance Social and Environmental Standards

Inle Lake, Myanmar. Photo by Edmundas Stundzius via Unsplash.

China’s policy banks, the China Development Bank (CDB) and Export-Import Bank of China (CHEXIM), are new leaders in the world of sovereign finance. Within a decade, they have surpassed annual lending by the World Bank and many other  counterparts. According to the Financial Times, the policy banks provided $10 billion more in financing to developing countries than the World Bank between 2009-2010. While lending by these policy banks has helped to fill the global infrastructure gap, finance tends to concentrate in sectors that generate environmental degradation and conflicts with local communities. 

In a new policy brief published by the Paulson Institute, Kevin P. Gallagher identifies Chinese overseas environmental standards and compares them to those of Western-backed lenders. Gallagher argues China would be making sound business decisions by adopting and enhancing domestic and global environmental and social safeguards.

Main findings:
  • China’s policy banks have already established a series of environmental and social guidelines for their overseas operations. 
    • In contrast, the World Bank and other international financial institutions (IFIs) had not begun to contemplate incorporating such guidelines into their lending until their principal Western contributors were further along in the development process. 
  • CDB currently incorporates four of the social and environmental guidelines commonly accepted by leading IFIs, including environmental impact assessment (EIA), project review, compliance with host country environmental laws and regulations and an ex-post EIA. 
    • CDB is the only leading development bank, even including the IFIs, that requires an ex-post EIA and improves on the current IFI guidelines by creating a formal review process of a given project’s overall effect on both community and environment, thus allowing for future corrective action.
  • CHEXIM has also incorporated EIA, project review, public consultations with communities affected by the project and an ex-post EIA into its social and environmental guidelines.
  • China’s guidelines are running ahead of historical norms, but when viewed from the standpoint of environmental protection and sustainability, still lag behind competitors on the global stage. 
  • To mitigate new political risks as their global footprint grows and better compete in and access global markets, Chinese policy banks should look to expand their environmental guidelines, broaden them and make them more understandable to public stakeholders.
  • Adopting and adhering to stronger, broader and deeper guidelines can help secure long-term relationships with host governments in regions across the world. 
  • As China seeks to expand its presence in international markets, China’s policy banks could secure markets in developed countries by adopting established international norms.
    • Establishing a track record of good practice in emerging markets and developing countries could help Chinese banks to assimilate, adapt and ultimately incorporate such practices into their daily operations, an experience that could prove essential as they also seek to navigate markets for countries in the Organization for Economic Cooperation and Development.
  • Over the long term, incorporating enhanced social and environmental standards could help China’s policy banks obtain reputational benefits and ‘first mover’ advantage in China’s domestic market, potentially defining a new source of long-term comparative advantage over domestic counterparts.

By adopting enhanced practices, China’s policy banks may do more than just run ahead of the historical norm, they could become leaders themselves. Gallagher argues China could become a flagship example of how emerging market policy banks providing much-needed finance globally can also catalyze sustainable economic growth and earn healthy returns. 

Read the Policy Brief