The original text
South African President Jacob Zuma’s warning to Western corporations to change their neocolonial attitudes toward Africa or risk losing out to China and other developing economies resonated powerfully last month, as South Africa hosted Brazil, Russia, India and China at the fifth BRICS summit. But Zuma’s stance reflects the rise of cross-border “macroinvestment”, a phenomenon that is more remarkable than the developing world’s declining reliance on the West.
Business investment is usually project-based, with the factory to be built or the land to be cultivated forming the investment boundary. A larger deal – for example, a concession to mine iron ore in Mongolia – would include more complex investment boundaries, establishing details like the project’s timing and the anticipated benefits to the host country.
For example, beyond building the mine itself, the deal could include investments in transport systems to market the mined product, energy generation and accommodations and other facilities for workers in the surrounding communities. In some cases, the deal might even include features aimed at boosting domestic added value by localising the mine’s procurement or creating the capacity to process the mine’s output.
The advent of macroinvestment is rendering even such extended deals obsolete. Macroinvestment involves government-to-government agreements that pre-allocate large lines of cross-border public financing. (This should not to be confused with the equity-based private investment strategy of the same name, which attempts to anticipate and profit from global trends.)
Unlike comparable financing that Western governments provide, these pre-designated lines of credit are tied to agreements concerning market or natural-resource access, and provide additional funding for the host government to invest according to its own priorities. Angola’s government, for example, arranged with China’s Exim Bank for several lines of credit totalling several billion dollars, some directly in exchange for oil, and others more broadly linked to enhancing Chinese companies’ ability to secure oil concessions.
Western commentators have largely dismissed such investment as a means for China to build vanity infrastructure, such as public administration buildings, oversized airports and underused highways. But, while such follies exist, the reality is far more interesting – and its impact far more significant.
Developing countries – and, increasingly, advanced countries as well – need massive infrastructure investment to drive their economic development. China is now enabling its developing partners to mirror its own strategy of infrastructure-led development by providing the needed investment at low cost. In these mutually beneficial macroinvestment deals, Chinese contractors deliver the needed infrastructure. Host governments receive financing not only for the agreed projects, but also to pursue other priorities that they have identified for their countries.
Shifting approach to investment governance
Critics argue that China’s macroinvestment strategy encourages rent-seeking by partner governments, providing slush funds that serve the political elite and well-connected businesses. They highlight China’s unwillingness to embrace initiatives such as the Extractive Industries Transparency Initiative, or to establish an equivalent of America’s Foreign Corrupt Practices Act or the OECD’s Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.
To be sure, such concerns are not unwarranted; China and its partners would benefit from robust anti-corruption legislation regulating Chinese companies’ international operations. But the critics ignore China’s promotion of national environmental and social oversight over outward investment, including the “green credit guidelines” that the China Banking Regulatory Commission issued last month, and the just-released Guidelines on Environmental Protection in Foreign Investment and Cooperation. Indeed, China is rewriting the rules for cross-border investment governance, just as it is reshaping public and private investment strategies for the twenty-first century.
Macroinvestment need not be exclusive to China, though competing against China’s unique combination of low-cost operations, abundant cheap finance, and powerful state-owned enterprises will not be easy. But, as major emerging economies like Brazil and India rapidly increase their outward investment, they are in a prime position to establish similarly constructive arrangements with developing countries.
Western countries, too, can meet growing demand for broader long-term investment deals. But they must adopt a new mindset, treating host countries as equals. Lecturing developing-country governments, while limiting investment to resource extraction, is no longer tenable.
Global investment markets are changing fast. And the cost of falling behind – erosion of long-term competitiveness – could not be higher.
The quoted documents:
I. Notice of the CBRC [China Banking Regulatory Commission] on Issuing the Green Credit Guidelines
CBRC local offices, policy banks, state-owned commercial banks, joint-stock commercial banks, financial assets management companies, the PSBC, provincial rural credit unions, as well as all trust firms, enterprise group finance companies and financial leasing firms directly regulated by the CBRC:
To implement the macro adjustment policies provided for in the Integrated Working Plan of the State Council for Energy Conservation and Emission Reduction during the 12th Five-year Period and the Comments of the State Council on Strengthening Environmental Protection Priorities, and to follow the requirements of matching supervisory policies with industrial policies, the CBRC has formulated the Green Credit Guidelines for the purpose of encouraging banking institutions to, by focusing on green credit, actively adjust credit structure, effectively fend off environmental and social risks, better serve the real economy, and boost the transformation of economic growth mode and adjustment of economic structure. The Guidelines are hereby printed and issued for implementation.
Banking supervisory authorities should forward the Notice to local banking institutions and urge them into implementation.
Feb. 24, 2012
The China Banking Regulatory Commission
Green Credit Guidelines
Chapter 1 General Provisions
1. Article 1 For the purpose of encouraging banking institutions to develop green credit, these Guidelines are formulated pursuant to the Law of the People’s Republic of China on Banking Regulation and Supervision and the Law of the People’s Republic of China on Commercial Banks.
2. Article 2 Banking Institutions mentioned herein include policy banks, commercial banks, rural cooperative banks and rural credit cooperatives lawfully incorporated within the territory of the People’s Republic of China.
3. Article 3 Banking institutions shall promote green credit from a strategic height, increase the support to green, low-carbon and recycling economy, fend off environmental and social risks, and improve their own environmental and social performance, thus optimizing their credit structure, improving the quality of services, and facilitating the transformation of development mode. [The environmental concern serves the strategy of overseas investment. When there is a conflict between the strategy in credit activity and environmental concern, it would be interesting to observe how China deals with the dilemma.]
4. Article 4 Banking institutions shall effectively identify, measure, monitor and control environmental and social risks associated with their credit activities, establish environmental and social risk management system, and improve relevant credit policies and process management.
5. The environmental and social risks mentioned herein refer to the hazards and risks on the environment and society that may be brought about by the construction, production and operating activities of banking institutions’ clients and key affiliated parties thereof, including environmental and social issues related to energy consumption, pollution, land, health, safety, resettlement of people, ecological protection, climate change, etc.
6. Article 5 The CBRC is responsible for, in accordance with applicable laws, regulating and supervising banking institutions’ green credit business and their environmental and social risk management.
Chapter 2 Organization and Management
7. Article 6 The board of directors or supervisory board of a banking institution shall build and promote green credit concepts concerning energy saving, environmental protection and sustainable development, be committed to giving play to the functions of facilitating holistic, coordinated and sustainable economic and social development, and establish a sustainable development model that will benefit the society at the same time. [Benefit to the society is a tied with sustainable development, which is included in green credit concepts. ]
8. Article 7 The board of directors or supervisory board of a banking institution is responsible for developing green credit development strategy, approving the green credit objectives developed by and the green credit report submitted by senior management, and monitoring and assessing the implementation of green credit development strategy. [While it is mentioned that CBRC approves institutions pursuant to green credit development strategy, it is not clear whether CBRC also disapproves or regulate institutions which do not follow this strategy, which is more important to set a standard instead of being a rubberstamp.]
9. Article 8 The senior management of a banking institution shall, pursuant to the resolutions of the board of directors or supervisory board, develop the green credit objectives, have in place relevant mechanisms and processes, define clearly the roles and responsibilities, conduct internal checks and appraisal, annually provide report to the board of directors or supervisory board on the development of green credit, and timely submit relevant reports to competent supervisory authorities. [The problem lies in “relevant report” and “internal checks and appraisal”. Relevant report is not necessarily correct and reflects the real situation. What is relevant and what is not is subject to the interpretation of either the banking institutions or the regulatory body. ]
10. Article 9 The senior management of a banking institution shall assign a senior officer and a department and configure them with necessary resources to organize and manage green credit activities. Where necessary, a cross-departmental green credit committee can be set up to coordinate relevant activities. [What needs to be followed up is what interest the senior officer represents. Is he/she more in line with banking interests or with the environmental interest? Green credit policy is par excellence a cross-departmental issue, which engages banking institutions, regulatory committee, foreign office if the business is overseas investment, and environmental protection agency. The wording “where necessary” actually decreases the motivation of cross-departmental cooperation because it creates more space for the departments not to cooperate if they regard it “unnecessary”.
Chapter 3 Policy, System and Capacity Building
11. Article 10 Banking institutions shall, as per national environmental protection laws and regulations, industrial policies, sector entry policies, and other applicable regulations, establish and constantly improve the policies, systems and processes for environmental and social risk management and identify the directions and priority areas for green credit support. As for industries falling within the national “restricted” category and industries associated with major environmental and social risks, they shall customize credit granting guidelines, adopt differentiated and dynamic credit granting policies, and implement the risk exposure management system.
12. Article 11 Banking institutions shall develop client environmental and social risk assessment criteria, dynamically assess and classify client environmental and social risks, and consider the results as important basis for credit rating, access, management and exit. They shall adopt differentiated risks management measures concerning loan investigation, review and inspection, loan pricing, and economic capital allocation. [One question worth asking is whether the differentiated measures are subject to a same set of criteria. Is it the case that countries with weak regulation on environmental protection will be of lower environmental risks, despite of the fact that the ecosystem is fragile in that particular country? What is the criteria of classifying client environmental and social risks?]
Banking institutions shall prepare a list of clients currently faced with major environmental and social risks, and require these clients to take risk mitigation actions, including developing and having in place major risk response plans, establishing sufficient, effective stakeholder communication mechanisms, and finding a third party to share such risks. [The function of this article is to prevent Chinese banking institutions from investing in countries with great environmental risks? The role of Chinese overseas investment is unclear. The agent of clients and a third party is unclear, for example, who is the third party? ]
13. Article 12 Banking institutions shall establish working mechanisms conducive to green credit innovation to boost innovation of green credit processes, products and services while effectively curbing risks and ensuring business continuation.
14. Article 13 Banking institutions shall give priority to their own environmental and social performance, set up appropriate systems, step up the publicity and education on green credit concepts, standardize their operational behaviors, promote green office, and improve the level of intensive management. [the environmental friendly performance is “given priority” only, instead of being regulated and implemented by law. That is to say, environmental and social performance of banking institutions is encouraged, not required. This is a voluntary suggestion. ]
15. Article 14 Banking institutions shall strengthen green credit capacity building, establish and improve green credit labeling and statistics system, improve relevant credit management systems, enhance green credit training, develop and employ related professionals. Where necessary, they can hire an eligible, independent third party to assess environmental and social risks or acquire related professional services by means of outsourcing. [the problem of when necessary is once again visible.]
Chapter 5 Process Management
16. Article 15 Banking institutions shall strengthen due diligence in credit granting. The scope of due diligence on environmental and social risks shall be defined according to the characteristics of the sector and region in which the client and its project is located, so as to ensure the due diligence is complete, thorough and detailed. Where necessary, the banking institutions can seek for support from an eligible, independent third party and competent authorities. [flexibility displayed in the highlighted sentence]
17. Article 16 Banking institutions shall examine the compliance of clients to whom credit will be granted. As for environmental and social performance, compliance checklist and compliance risk checklist shall be developed according to the characteristics of different sectors, so as to ensure compliance, effectiveness and completeness of the documents submitted by the clients, and make sure they have paid enough attention to related risk points, performed effective dynamic control, and satisfied the requirements on substantial compliance. [Differentiation strategy is regarded as a means to “ensure compliance, effectiveness and completeness of the documents submitted by the clients”. This strategy actually creates a space for the particularity of different clients and makes the criteria impossible to track and make the decision subject to the interpretation of banking institutions. ]
18. Article 17 Banking institutions shall strengthen credit approval management, and define reasonable level of credit granting authority and approval process according to the nature and severity of environmental and social risks faced by the clients. Credits may not be granted to clients whose environmental and social performance fails to meet compliance requirements. [usage of “may” in the sentence softens the authority of environmental concern in credit granting. In the Chinese version, the wording is “should not”. It is interesting to know what makes the difference in different language.]
19. Article 18 Banking institutions shall, by improving contract clauses, urge their clients to strengthen environmental and social risk management. As for clients involving major environmental and social risks, the contract shall provide for clauses that require them to submit environmental and social risk report, state and avow that they will strengthen environmental and social risk management, and promise that they are willing to be supervised by the lender; the contract shall also provide for clauses concerning the remedies banking institutions can resort to in the event of default on environmental and social risks made by the clients.
20. Article 19 Banking institutions shall enhance credit funds disbursement management, and consider appropriation management, and regard how well clients have managed environmental and social risks as important basis for credit funds appropriation. As for projects to which credit is granted, all stages, including design, preparation, construction, completion, operation and shutdown shall be subjected to environmental and social risk assessment. Where major risks or hazards are identified, credit funds appropriation can be suspended or even terminated. [This article gives hope to believe the determination of Chinese banking institutions dealing with environmental issues. However, it is still unknown how will define whether a hazard or a risk is a “major” enough one to suspend the credit granting.]
21. Article 20 Banking institutions shall strengthen post-loan management. As for clients involving potential major environmental and social risks, relevant and pertinent post-loan management actions shall be developed and implemented. They shall watch closely the impact of national policies on the clients’ operation, step up dynamic analysis, and make timely adjustment to asset risk classification, reserve provisioning and loss write-off. They shall establish and improve internal reporting system and accountability system concerning major environmental and social risks faced by the clients. Where major environmental or social risk event occurs to the client, the banking institution concerned shall timely take relevant risk responses and report to competent supervisory authorities on potential impact of said event on itself. [whether this internal reporting system can be accessed by the independent third party? ]
22. Article 21 Banking institutions shall strengthen the environmental and social risk management for overseas projects to which credit will be granted and make sure project sponsors abide by applicable laws and regulations on environmental protection, land, health, safety, etc. of the country or jurisdiction where the project is located. The banking institutions shall make promise in public that appropriate international practices or international norms will be followed as far as such overseas projects are concerned, so as to ensure alignment with good international practices.
Chapter 5 Internal Controls and Information Disclosure [overall, there are seven references to “internal”. Is it a sign that this is not open to the public? ]
23. Article 22 Banking institutions shall incorporate green credit implementation into the scope of internal compliance examination, and regularly organize and carry out internal auditing on green credit. Where major deficiencies are identified, investigation shall be conducted to determine whom to be held accountable as per applicable regulations.
24. Article 23 Banking institutions shall establish effective green credit appraisal and evaluation system and reward and penalty system, and have in place incentive and disciplinary measures, so as to ensure sustained and effective offering of green credit.
25. Article 24 Banking institutions shall make public their green credit strategies and policies, and fully disclose developments of their green credit business. As for credit involving major environmental and social risks, the banking institutions shall disclose relevant information according to laws and regulations, and be subjected to the oversight by the market and stakeholders. Where necessary,[five times of appearance] an eligible, independent third party can be hired to assess or audit the activities of banking institutions in performing their environmental and social responsibilities.
Chapter 6 Monitoring and Examination
26. Article 25 Banking supervisory authorities at all levels shall strengthen the coordination with competent authorities, establish and improve information sharing mechanism, improve information services, and remind banking institutions of related environmental and social risks.
27. Article 26 Banking supervisory authorities at all levels shall strengthen off-site surveillance, improve off-site supervisory indicator system, enhance the monitoring and analysis of environmental and social risks faced by banking institutions, timely guide them to strengthen risk management and adjust credit orientation.
28. Banking institutions shall, pursuant to the provisions hereof, perform overall green credit evaluation at least once every two year, and submit the self-evaluation report to competent banking supervisory authorities.
29. Article 27 When organizing and conducting on-site examination, banking supervisory authorities shall take into full account the environmental and social risks faced by banking institutions, and make clear the scope and requirements of examination. As for regions or banking institutions involving prominent environmental and social risks, ad hoc examination shall be conducted and urge said institutions to improve in light of examination results.
30. Article 28 Banking supervisory authorities shall provide more guidance to banking institutions on green credit self-evaluation, and, in conjunction with the results of off-site surveillance and on-site examination, holistically assess the green credit performance of banking institutions, and treat the assessment results, as per applicable laws and regulations, as important basis for supervisory rating, institution licensing, business licensing, and senior officer performance evaluation.
Chapter 7 Supplementary Provisions
31. Article 29 These Guidelines become effective as of the date of promulgation. Village banks, lending firms, rural mutual cooperatives and non-banking financial institutions shall enforce actions in reference to these Guidelines. [I thought this is targeted at policy banks, commercial banks, rural cooperative banks and rural credit cooperatives, where are they now? ]