A sustainable Belt and Road – in good times and bad

As sustainability comes to the forefront, learn about the progress being made to ‘green’ Belt and Road.

As this article was written, the COVID-19 pandemic was continuing to spread around the world, and most economies were expected to shrink in 20201. Not only had the virus brought the global economy to a grinding halt, but it had also exposed its vulnerability to systemic shocks.

Among global economic and social concerns, the pandemic has raised questions around the future of the Belt and Road initiative (BRI), including investments in sustainability. China’s ongoing commitment to BRI – with deals being sealed since the outbreak for a business park in Myanmar and a large solar energy farm in Laos2 – seems evident. With this commitment and given that BRI projects underpin major infractructure plans for many participating economies, the initiative must remain on track in the long term.

As part of COVID-19 recovery efforts, in the short term, individual governments are expected to prioritise addressing medical needs and looking after the most vulnerable sections of the economy. But a longer-term recovery needs a combined effort by governments and businesses to ensure job creation, definitive climate change, an end to the poverty cycle and to build more inclusive societies. These sustainable recovery efforts would also apply to BRI, including the embedding of sustainable practices across the financing and development of BRI projects3 and protecting the health of workers involved in these projects and the wider local populations.

A sustainable recovery

Notwithstanding the COVID-19 pandemic, China had already been making progress in greening the BRI.

In April 2019, China’s President Xi Jinping had formally committed to sustainable environment and financial practices for BRI projects. In a speech at the second Belt and Road Forum in Beijing, President Xi pledged to build “high-quality, sustainable, risk-resistant, reasonably priced, and inclusive infrastructure.”

The need to improve the green credentials of Belt and Road – by investing in renewable energy, green construction practices and implementing stricter project environmental-impact assessments – has been acknowledged for some time. The Chinese government had issued guidance on “Promoting the Green Belt and Road” back in 2017 and made sustainability a core part of the official Guiding Principles of Belt and Road Financing in the same year.

Yet as the initiative becomes increasingly international, China alone cannot be responsible for ‘greening’ it. The 131 participating countries account for almost 30 per cent of global emissions, but on their current trajectory, that could rise to 66 per cent by 2050 – particularly if many of the countries involved continue to follow carbon-intensive growth patterns.

“Infrastructure is a key driver of growth and job creation, but it can come at a cost, with World-Bank estimates suggesting that infrastructure construction and operations account for 70 per cent of global greenhouse emissions,” said Daniel Hanna, Head of Sustainable Finance at Standard Chartered. “The USD26 trillion in infrastructure investment that is required within developing Asia alone is both a risk and an opportunity.”

Clearly more work needs to be done, especially considering the COVID-19 effect. However, there are already signs that Belt and Road is taking firm steps in a more sustainable direction. And this doesn’t just mean addressing environmental challenges. A truly sustainable Belt and Road will encompass multiple aspects – from financing to water management to education and training to improving public health systems.

Changing landscape

While China’s headways in green policy and finance are expected to be reflected across BRI projects, it’s important to remember that the initiative’s financing landscape is diversifying, with increasing involvement from multilateral and private-sector lenders. Many of these financiers already adhere to strict environmental, social and corporate governance (ESG) principles – so as they become even more involved, the environmental governance throughout the Belt and Road will naturally strengthen.

On the environmental side, global banks are steadily greening their finance and many, including Standard Chartered, have committed to stop financing coal. And both banks and multilateral bodies are increasingly applying green principles to their lending activities on the Belt and Road.

The Asia Infrastructure Investment Bank (AIIB) – one of Belt and Road’s major multilateral financing institutions – has been leading the charge in many respects. For example, it has set up a USD75 million lending facility in India to finance renewable energy and water projects, and another USD100 million green infrastructure loan vehicle for solar and wind projects in the country.

As well as multilateral lenders like the AIIB, private financiers are also giving cause for optimism, with increasing formalisation of B&R green investment principles. For example, at the second Belt and Road Forum, 27 financial institutions – including Standard Chartered – signed the Green Investment Principles for Belt and Road. This set of voluntary guidelines was developed by the Green Finance Committee of China Society for Finance & Banking and the City of London Corporation’s Green Finance Initiative.

The formalisation of such principles marks an important step towards a sustainable Belt and Road. Yet for the Belt and Road to become truly sustainable (economically, environmentally and socially), the widening adoption of green investment principles needs to be integrated into a holistic approach to development. Such an approach must marry green energy and green finance with better management of water and waste, circular principles of economic growth, and grassroots initiatives to bolster employment and education.

COVID-19 has demonstrated that sustainable development initiatives must build capacity in economies and societies to both endure and recover from external shocks. For Belt and Road, this will require governments and businesses to work together to identify and invest in projects that deliver multiple benefits to society over the long run. Moreover, growing support from international banks and investors could help to reduce the financial and ESG risks of BRI projects and cement a more sustainable future for all BRI stakeholders4.

Produced by Bloomberg Media in partnership with Standard Chartered.

1 Source: Standard Chartered Q2 Economic Outlook 9 April 2020: Assuming if the disruptions to economic activity are mostly contained to the second quarter of this year, Standard Chartered’s predictions for 2020 global GDP growth are set at -0.6 per cent at the beginning of Q2. However, that outlook is likely to be more pessimistic if country-wide lockdowns persist. For emerging markets, where a larger proportion of workers operate in the shadow economy, prospects appear bleaker. Based on Standard Chartered’s monthly survey of 500 China-based SMEs and PMI figures, China, the key driver of global GDP growth in normal times, would be expected follow its recovery precedent. Yet Standard Chartered advises that the sustainability of the country’s current economic and financial steadiness is far from assured. https://www.sc.com/en/feature/economic-outlook-q2-2020-the-global-storm/

2 Source: Nikkei Asian Review, 2 April 2020 https://asia.nikkei.com/Spotlight/Belt-and-Road/China-faces-Belt-and-Road-course-correction-after-coronavirus

3 Source: Belt and Road beyond 2020. Partnership for Progress and Sustainability along Belt and Road. https://www.bakermckenzie.com/-/media/files/insight/publications/2020/01/bribeyond2020_part_2.pdf

4 Source: BRINK: China’s Belt and Road is Opening up to Foreign Companies 3 March 2020. https://www.brinknews.com/the-belt-road-is-opening-up-to-foreign-companies/

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