Climate change is one of the major challenges facing human society today and an important factor affecting the effectiveness of “Belt and Road” construction. Most of the countries along the “Belt and Road” are located in two major natural disaster zones, namely, Pacific Rim and the Middle Latitudes of Northern Hemisphere, with diverse climate types and fragile ecological environment. Statistics show that the loss from climate disasters in the countries along the “Belt and Road” is more than twice the global average. Between 1995 and 2015, seven¹ of the world’s top 10 countries suffering most from climate disasters were along the “Belt and Road”. At the same time, most of the countries along the “Belt and Road” have not yet completed industrialization, which are the main sources of future growth in global energy consumption and greenhouse gas emissions. Therefore, efforts to address climate change in such countries need to be promoted.

It is significant to promote climate investment and finance in the “Belt and Road”. Finance plays a key role in capital accumulation, resource allocation and risk management in modern economy, and it is also an important support for the construction of the “Belt and Road”². At present, the fight against climate change has been transformed from negotiation and commitment to effective actions. If financial institutions promote climate investment and finance inthe “Belt and Road”, and make use of the guiding role of capital investment and the restrictive role of capital control to support projects addressing climate change, it will be conducive to promoting regions along the “Belt and Road” to combat climate change and improve the ecological environment, establishing the image of China as a responsible major country by fulfilling China’s climate commitment to the international community, and protecting investors from the risks of climate change and helping them avoid the “assets stranding” brought by climate change.

I. Status quo

(i) Policy

China has formulated guiding principles and guidelines to guide financial institutions to focus on environmental protection, including addressing climate change, in overseas investment and finance. In February 2013, the Ministry of Commerce and theMinistry of Ecological Environment(former Ministry of Environmental Protection) jointly issued the Guidelines on the Environmental Protection for Foreign Investment and Cooperation.The China Banking and Insurance Regulatory Commission (former China Banking Regulatory Commission) issued the Green Credit Guidelines in February 2012, and in January 2009, the China Banking Association issued Guidelines on the Corporate Social Responsibility of Banking Institutions of China, all of which encourage financial institutions to develop a low-carbon and green economy, and implement sustainable development strategies.

In November 2018, led by the Green Finance Committee of China Society for Financeand Banking and the City of London, a number of domestic and foreign institutions jointly drafted and published the “Green Investment Principles for the Belt and Road”. Based on the existing responsible investment initiative, the principle incorporates issues such as low-carbon and sustainable development into the “Belt and Road” Initiative, working to strengthen environmental and social risk management of investment projects and promote greening of “Belt and Road” investments.

(ii) Performance of financial institutions

Since the implementation of the “Belt and Road” Initiative, China’s financial institutions have actively engaged in project construction and provided financial support to enterprises. It is estimated that the infrastructure investment gap of regions along the“Belt and Road” will exceeds US$600 billion per year³. If potential climate risks are considered early in the construction process and climate-resilient infrastructure is built, the environmental benefits will be significant and sustainable. The main financial institutions involved in the construction of the “Belt and Road” include policy banks such as the China Development Bank (CDB) and Export-Import Bank of China, commercial banks such as Bank of China,Industrial and Commercial Bank of China (ICBC), China Construction Bank(CCB), Agricultural Bank of China (ABC), as well as funds platforms such as the Silk Road Fund and China Insurance Investment Fund.

The CDB has strictly followed the relevant national policies or guidelines in the “Belt and Road”construction, and besides, CDB is committed to adhering to related international principles such as the United Nations Environment Program - Finance Initiative (UNEP FI). According to the 2018 Sustainability Report of China Development Bank, the construction of “Belt and Road” power projects supported by CDB from 2013 to 2018 involved a total installed capacity of 19,100 megawatts, supporting the upgrading of water conservancy, hydropower, wind power and solar energy systems in the countries along the “Belt and Road”. By the end of 2018, CDB has granted a total of US $6.4 billion loansto support clean energy projects for the “Belt and Road”.

ICBC has actively promoted climate investment and finance in the construction of the “Belt and Road” in accordance with policies on energy conservation and emission reduction, the Green Credit Guidelines and related initiatives. Since 2007, ICBC has integrated the green concept into its credit policiesand systems, management processes, product and service innovation, and capacity-building. Since 2015, ICBC has carried out “Research on the Impact of Environmental Risk on Credit Risk of Commercial Banks Through Pressure Test” to analyze the environmental risks of cement, steel, electrolytic aluminum, thermal power industries, and calculate the drought risk and carbon price risk. In April 2019, ICBC issued the world’s first green “Belt and Road Inter-bank Regular Cooperation” bond (BRBR Bond), with an equivalent amount of US $2.2 billion with maturities of 3 years and 5 years, and the funds raised will be used to support the “Belt and Road” green projects.

In its investment decision-making process, the Silk Road Fund integrates social responsibility such as environmental protection into the feasibility assessment and risk management system, fully demonstrates the impact of projects on the local ecological environment and society, and considers, as a whole, factors such as compliance with the laws and regulations of the host country, protection of the environment, promotion of local employment and implementation of social responsibility. Taking the Karot Hydropower Project in Pakistan as an example, the Project fully complies with the international standards for construction, conforms to the World Bank standards on health, safety and environment (HSE), and is expected to reduce carbon dioxide emissions by 3.5 million tons per year after completion, thus contributing positively to the improvement of clean energy proportion and the optimization of energymixin Pakistan⁴.

II. Problems and Challenges

First, with respect to the countries along the “Belt and Road”, although such countries have joined the Paris Agreement and are committed to promoting the climate governance process, there are differences in technology choice, business model choice and risk prevention due to their different economic development levels and climate challenges, which bring challenges to China’s financial institutions in carryingout climate investment and finance. In addition, some developing countries along the “Belt and Road” do not have sound laws and regulations, and the overall investment risk is relatively high, so there is a certain risk for China’s financial institutions to carry out climate investment and finance.

Second, with respect to projects supported by climate investment and finance, most of which have positive externalities and have not been internalized at the present stage, and are characterized by large scale of up-front investment, low rate of return on investment and long payback period. At the same time, financial institutions need to carry out additional identification or assessment of projects when providing green finance and climate finance, which will bring in additional costs.

Third, with respect to policies and systems, at present, no unified and authoritative standards have been formulated and issued for climate investment and finance in China or countries along the “Belt and Road”, and the conditions for evaluating the quantity and quality of climate-friendly projects are not yet met, restricting financial institutions’ support for climate investment and finance.

Fourth, with respect to financial institutions themselves, some banks have formulated green development mechanisms, processes and evaluation systems for responding to climate change, in line with national policies and relevant principles. However, due to insufficient specialty in dealing with climate change, financial institutions on the one hand lack the talents specializing in climate investment and finance, and cannot quickly and effectively identify the projects dealing with climate change and carry out climate risk prevention and control; on the other hand, due to lack of a sound evaluation mechanism of third-party professional agencies, such institutions cannot organize professional personnel to evaluate and make decisions on climate investment and finance in a timely and effective manner when encountering difficulties.

III. Recommendations

To promote climate investment and finance inthe “Belt and Road”, and to actively respond to climate change, we need to gather all kinds of resources, such as capital, talents and technology, which need the joint participation and efforts of governments, financial institutions and enterprises. The recommendations are set out below.

First, to improve policies and systems on climate investment and finance. At present, China has basically formed a set of policies to promote energy conservation and emission reduction, but the synergyeffects amongenvironmental, energy, fiscal, taxation and financial policies have not been fully utilized.Therefore, it is difficult to support efficient activities related to climate change. It is suggested that the departments concerned further strengthen the synergy of policies, systematize all kinds of climate investment and finance policies, further improve the climate investment and finance policy system, and increase policy support for financial institutions to carry out climate investment and finance inthe “Belt and Road”.

Second, to strengthen the information disclosure of climate investment and finance. It is suggested that the technical standards for climate investment and finance projects in the “Belt and Road” should be issued as soon as possible, and that statistical and disclosure standards for climate investment and finance information should be formulated, so as to address climate change. At the same time, international cooperation in standardizing the disclosure of climate investment and finance information should be carried out actively to upgrade the internationalization level of China’s standards and promote the integration with the international standards system.

Third, to actively participate in the top-level design of countries along the “Belt and Road” in addressing climate change. The main countries along the “Belt and Road” are weak intheir abilityto adapt to climate change, and need to take a holistic approach at the top level, coordinate all kinds of resources and make rational planning and design based on a clear understanding of the foundation for tackling climate change. It is suggested that Chinese side actively support, promote and participate in the top-level design of the countries along the “Belt and Road” in dealing with climate change, form a global view in local areas, and consider the implementation plan of climate investment and finance projects as a whole.

Fourth, to speed up the establishment of management and evaluation mechanism on climate investment and finance. It is suggested that a management and assessment mechanism on climate investment and finance should be set up to pay more attention to the climate risks in the invested countries and regions by training reserve talents or making full use of the third-party specialized organizations in climate field. It is especially necessary to set up a mechanism to estimate and judge the risk of climate change in the stage of project evaluation, and actively mobilizefunds to the field of coping with climate change.

Fifth, to build a statistical system of climate investment and finance inthe “Belt and Road”. At the present stage, China has carried out a number of climate investment and finance projects in regions along the “Belt and Road” to enhance local capacity to cope with climate change and help solve the livelihood problems of the local people such as energy shortage and underdeveloped transportation systems. It is proposed to establish a statistical system for climate investment and finance projects inthe “Belt and Road” to carry out special statistics and management of such projects, so as to provide data support for international negotiations on climate change, and besides, it is also conducive to carrying out more targeted climate investment and finance inthe “Belt and Road”.

Sixth, to accelerate the innovation on cooperation models of climate investment and finance. At present, there are several international cooperation platforms such as the Shanghai Cooperation Organization and the Forum on China-Africa Cooperation, which are conducive for countries to sharingenvironmental governance experience. It is suggested thatChina focus on the innovation of cooperation model for climate investment and finance, make full use of the organizational advantages, professional advantages and talent advantages of specialized think tanks, build a multi-cooperation mechanism involving governments, think tanks, enterprises, social organizations and the public, and build an international cooperation network for climate investment and finance with the help of the CIFA of Chinese Society for Environmental Sciences (The Secretariat is located at CECEP Consulting Co., Ltd.).

Notes:

 1. https://www.thepaper.cn/newsDetail_forward_3375218

 2. http://www.qstheory.cn/dukan/qs/2017-09/15/c_1121647207.htm 

 3. https://baijiahao.baidu.com/s?id=1597522887730681238&wfr=spider&for=pc

 4.  http://www.silkroadfund.com.cn/cnweb/19930/19938/39884/index.html