What’s the Risk? ESG Lessons from Chinese Projects in Africa

By Keyi Tang

Africa has major infrastructure needs if the continent hopes to meet the United Nations 2030 Sustainable Development Goals (SDGs). The African Development Bank estimates that the continent faces an annual financing gap of $68 billion to $108 billion for necessary infrastructure projects like roads, railways and power plants.

Over the past two decades, China has stepped up as a major financier and builder of African infrastructure. However, what risks do Chinese-funded infrastructure projects pose to environmental, social and governance (ESG) aspects of local communities?

A new report published by the Boston University Global Development Policy Center (GDP Center), the Fudan University Green Finance and Development Center, South African Institute of International Affairs (SAIIA) and LSE IDEAS used a consistent ESG framework to analyze the ESG risks and impacts of five China-funded infrastructure projects in Egypt, Nigeria and Ethiopia. The analysis focuses on two key sectors – energy and industrial parks – that are major destinations for China’s infrastructure finance in Africa. The report digs into the projects’ compliance with ESG standards, including factors like environmental impacts, labor practices and community engagement. Table 1 displays the project case studies by country and sector.

Table 1: Projects Selected as Case Studies

Source: Authors’ elaboration.

*Note: Chinese-financed transmission and distribution projects in Egypt or Nigeria that had reached the construction or implementation stage could not be verified.

The report finds mixed outcomes from an ESG perspective. On the upside, Chinese investment has stimulated economic growth and improved livelihoods in many areas. However, projects often fall short of China’s own recommended ESG guidelines, the Green Development Guidance for Belt and Road Initiative (BRI) projects, signaling significant room for improvement in ESG practices.

Main findings

While the TEDA-Suez Special Economic Zone and Attaqa Hydroelectric Power Plant met Egypt’s minimum ESG standards, the projects fell short of international best practices, especially with regards to labor and governance. Specifically, Egypt’s weak labor laws enabled poor working conditions in TEDA-Suez including low wages, long hours and lack of insurance. There were also accusations of inadequate tax contributions by firms operating in TEDA-Suez and other free trade zones.

In terms of community compensation and relocation risks, Nigeria’s Lekki Free Trade Zone created some benefits like job creation but also led to relocation of residents from ancestral lands. Many in affected communities felt they were inadequately compensated, a common occurrence with community resettlement for major projects globally. Additionally, the Zone’s master plan was designed in China without local consultation. Thus, compensation and resettlement of displaced Nigerian communities were uneven, delayed and sparked protests.

Regarding environmental and social risks, analysis of Ethiopia’s Renaissance-Addis Transmission Line and Eastern Industrial Zone revealed risks of pollution, deforestation and harm to Indigenous lands from rapid development. Crucially, comprehensive environmental and social impact assessments were lacking from the projects, echoing about habitat destruction and sustainability impacts of Chinese projects abroad. Moreover, waste management and pollution risks in the Ethiopian projects required additional oversight and mitigation.

Policy recommendations

The report put forth recommendations targeting Chinese firms, African governments and international development partners to address the ESG issues uncovered in its analysis.

For China, key recommendations focused on strengthening ESG regulations and oversight across multiple actors. Specifically, the report advised that the Chinese government maintain high-level commitment to ensuring Chinese projects abroad comply with ESG standards. It suggested the government engage in triangular cooperation on infrastructure projects with Western partners to jointly uphold ESG implementation. Chinese financiers and regulators should take steps to guarantee awareness of and compliance with ESG rules by small- and medium-sized Chinese companies operating in Africa. This includes establishing accessible grievance redress mechanisms for violations to be reported throughout all project phases. Additionally, Chinese developers working abroad need to comprehensively consider ESG factors during each project phase from initiation through evaluation, financing, construction, operation, reporting and transfer/closure. Developing detailed mitigation plans and providing publicly available monitoring, evaluation and reporting conducted by independent third parties can also boost accountability.

For African host country governments, the report stressed enhancing domestic capacity and coordination on ESG standards. Recommendations included building internal legal frameworks and institutions to implement ESG guidelines. Governments need to improve coordination across different ministries, agencies and other actors to achieve unified ESG outcomes. Local stakeholders should be consulted and included in infrastructure planning processes through public forums. Assisting communities in accessing grievance mechanisms is also important. Finally, African governments should create public awareness programs educating citizens on ESG benefits and pursue multilateral coordination to develop shared regional ESG standards.

Regarding international partners, the report advised third party countries and multilateral institutions to play a role by financing and utilizing relationships. Specifically, international partners can provide funding directly to African host countries to improve domestic ESG legal frameworks and institutional capacity. Multilateral African platforms should be mobilized to call for heightened ESG standards in Chinese projects, increasing bargaining power. Individual partner countries can also leverage bilateral relationships with China and African nations to promote sustainable infrastructure policy.

Ultimately, the report finds that boosting ESG oversight comes down to partnerships between Chinese developers, African governments and the international community. Progress on ESG outcomes will require coordination between countries and different stakeholders to raise the bar. Stronger protections can ensure that African communities benefit from new infrastructure without bearing the heaviest burdens of displacement, pollution and poor labor conditions.

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