Webinar Summary: Assessing the ESG Risks of Chinese-financed Development Projects in Africa

By Ishana Ratan

On Tuesday, February 20, 2024, the South African Institute of International Affairs (SAIIA) and the Boston University Global Development Policy Center (GDP Center) cohosted a webinar to discuss findings from the recent report on environmental, social and governance (ESG) implementation of Chinese projects in Africa. The report is the result of a collaboration between SAIIA, the GDP Center, the Fudan University Green Finance & Development Center and LSE IDEAS. Steven Gruzd, Head of the African Governance Program at SAIIA moderated the discussion alongside panelists and report co-authors Cobus van Staden, Senior Research Affiliate with SAIIA, Keyi Tang, Global China Post-Doctoral Research Fellow with the GDP Center. Report coauthor Christoph Nedopil, Director of the Griffith Asia Institute at Griffith University Business School, provided comments via recorded video, while Dr. NwaJesus Anthony Onyekuru, Professor of Resource and Environmental Economics with the Department of Agricultural Economics at University of Nigeria, Nsukka, joined to provide comments on the report’s findings.

Van Staden began with an overview of the report, which examined Special Economic Zones (SEZs) and power projects across Egypt, Nigeria and Ethiopia, to understand the role of the private sector in addressing ESG risks. He reviewed the various projects included in the report, before handing it over to Tang to discuss project specific challenges.

Within Egypt, the report examines the TEDA-Suez Special Economic Zone and Sinohydro’s Attaqa hydroelectric dam, while in Nigeria, several transmission projects are investigated, in the context of the Lekki Free Zone, located in Lagos. In Ethiopia, the report surveys the prominent Eastern Industrial Zone, as well as transmission lines between Grand Ethiopian Renaissance Dam and Addis Ababa. Across SEZs, van Staden stressed that China complied with local laws, but that there were challenges due to local regulatory quality around taxation and local labor utilization. In Africa, there is a strong drive from both communities and regulators to improve and create jobs. While projects often create many local jobs, host countries do not always have the regulatory tools to manage social rights and land protection. A lack of clarity around actors’ responsibilities and involvement of multiple government agencies during project implementation was a common challenge.

For example, at the Attaqa hydropower project, as well as various transmission lines, local communities levied complaints about the consultation process. This was exacerbated by the presence of many government agencies, and lack of clarity over project responsibilities. In Nigeria, corruption was a challenge for community compensation, with lack of coordination over payments to locals. In terms of regulatory reform, greater clarity over the delegation of responsibilities would strengthen project implementation. Notably, countries may improve ESG standards as they implement projects; in Egypt, there were incremental gains in the strengthening of local regulation throughout project development.

Tang provided an in-depth presentation focused on stakeholder engagement across project site identification, implementation and evaluation. She noted that decision-making was biased towards actors with financial and political power and stressed the tradeoff between attracting foreign direct investment (FDI) and maintaining strong ESG standards. Furthermore, she argued that political cycles may lead to short term incentives; leaders with four-to-five-year terms focus on job creation and hard infrastructure more so than long term regulatory reform that benefits local communities. For Chinese investors, the Chinese government lacks both the incentive and bureaucratic capacity to manage every project. The report’s primary policy recommendations were to engage stakeholders across the whole project life cycle, and balance short versus long term goals. In terms of Chinese lenders, it may be helpful to link ESG risk to economic and political risks of projects, with mechanisms such as credit incentives to encourage responsible investment among firms. Finally, local communities could coordinate to directly advocate for their interests with the central government. In the case of Nigeria’s Lekki Free Zone, for example, local collective action was effective in protecting Indigenous lands.

In his remarks, Nedopil focused on the role of financial institutions in identifying and managing economic and social risks along the Belt and Road Initiative (BRI). He made the case that there are several policy tools that financial institutions could use to ensure ESG due diligence. For example, financier-led grievance mechanisms allow institutions to directly interact with local communities, which typically only engage with project developers. He stressed that international standards like Equator Principles and IFC Performance Standards are also well positioned to tie community engagement to finance access. In the past, Chinese financiers focused on compliance with local standards, but local standards are often not sufficient to manage these environmental and social risks. In recent years, Chinese financiers have focused greater attention on international standards that go beyond local regulations, like the voluntary Green Investment Principles of the Belt and Road Initiatives. He proposed a two-stage evaluation system of projects that focuses both on the emissions and the social impacts of each project. For example, a hydroelectric project generates clean energy but has significant biodiversity impacts. This system allows for a more holistic categorization of project risks.

Onyekuru provided remarks that noted the importance of ESG standards, but lack of compliance to-date with best practices for Indigenous and other rural communities. As much as projects must be profitable, he stressed that it is necessary to consider the effects on society and the environment. Community engagement with local stakeholders, not just the government, is necessary for project implementation, especially Indigenous communities who are stewards of the land.

Moving to the Q&A session with the audience, Tang responded to questions regarding the different actors in the Chinese government and the role of African government in identifying ESG risks. She stressed the large number of different agencies, including the National Development and Reform Commission (NDRC), Ministry of Commerce (MOFCOM), Ministry of Foreign Affairs (MFA), Ministry of Environment and Ecology (MEE), China International Development Cooperation Agency (CIDCA), State-owned Assets Supervision and Commission (SASAC) and China’s two major development finance institutions, China Development Bank (CDB) and the Export-Import Bank of China (CHEXIM). This large number of actors may complicate coordination for ESG implementation. She also highlighted that locals derive high value from job creation; at an SEZ, even $1 a day in wages is seen as better than unemployment. Finally, Tang noted that ESG standards could improve the investment rate of return in the long run, and that a long-term view of project management suggests a strong case for ESG.

Van Staden responded to questions regarding public disclosure and transparency. He noted that large publicly listed companies face regulatory pressure and scrutiny for project management. However, smaller companies may fly under the regulatory radar. These small companies may both have less capacity and face less scrutiny over project management. This gap in transparency could be resolved with an increase in ESG standards on the African side, as Chinese firms are very responsive to local regulation. Recent regulation from the African Union is a promising step, suggesting that recipient countries are moving towards higher standards.

In closing, both Tang and van Staden stressed the role of local government reform around key challenges, for example, management of compensation for land use, which could prompt Chinese investors to increase their investment in ESG practices going forward.

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