On January 6, 2022, China’s Ministry of Environment and Ecology (MEE) together with the Ministry of Commerce (MOFCOM) issued the new “Guidelines for Ecological Environmental Protection of Foreign Investment Cooperation and Construction Projects”. The Guidelines were published just 6 months after the July 2021 “Green Development Guidelines for Foreign Investment and Cooperation”, also published by MOFCOM and MEE (see our interpretation here).
The Guidelines come after important new political announcements, particularly China’s announcement in September 2021 to not build new coal-fired power plants abroad and the emphasize on supporting green development in developing countries, as well as the announcement by China’s President Xi at the third Belt and Road construction symposium to explore the establishment of an early warning and assessment system for overseas project risk.
Within 25 articles, the 2022 Guidelines (re-)emphasize how Chinese companies operating abroad are encouraged to follow international or Chinese best practices for environmental protection and sustainable development.
It is – to our knowledge – the most comprehensive document by any country regulator to guide non-domestic environmental management of enterprises. This difference is possibly explained as China’s economy is more driven by policy signals, compared to, e.g., financial, shareholder, or civil society signals.
This article describes the Guidelines are and evaluates thjem against the previous “Green Development Guidelines” from 2021, as well as the Green Development Guidance issued by the Belt and Road Development Coalition with its 9 recommendations and 1 traffic light system to accelerate green finance and sustainable development in China’s overseas finance and engagement in the Belt and Road Initiative.
Highlights of the 2022 Guidelines
The 2022 Guidelines address both private and state-owned enterprises engaging in overseas new projects, reconstruction projects, and expansion projects, as well as and mergers “to implement the concept of ecological civilization” and to “promote the green and high-quality development of projects”.
The Guidelines describe how companies should integrate environmental considerations along the whole project lifecycle – from project planning to construction, management and de-construction, as well as information disclosure.
In particular, Chinese companies should or are encouraged to
- adopt international standards or China’s stricter standards for environmental protection if they operate in host countries with weak environmental governance;
- improve their internal environmental management systems with reference to international practices and appoint special personnel to be responsible for ecological protection；
- engage consulting services with familiarity with domestic and foreign environmental laws as well as international environmental capability to support environmental evaluations；
- focus on reducing environmental risks in three major environmental dimensions；
- pollution, to control for example waste, water, noise, dust vibration and solid waste, as well as other pollutant discharge should be controlled and minimized;
- climate, where companies should “make a positive contribution to addressing climate change”, for example by preferring low-carbon projects (e.g., for energy projects) and in “green supply chain management and green procurement”;
- biodiversity, where, for example a company should conduct biodiversity survey before the construction of a project and – if the results are showing high biodiversity risks, companies should consider re-selecting the site;
Furthermore, the Guidelines provide some guidance for four sectors:
- energy projects, where enterprises should focus on clean and renewable energy projects, while particularly hydropower projects should reduce adverse impacts on acquatic biodiversity;
- Petrochemical projects, where particularly pollution control and greenhouse gas emissions control are highlighted, as well as environmental risk prevention；
- Mining projects, where enterprises should focus particularly on pollution control measures and waste disposal;
- Transportation projects, where infrastructure should avoid nature reserves and important wildlife habitats；
Significance of the Guidelines
Compared to the 2021 Guidelines issued by the same ministries MEE and MOFCOM, the 2022 Guidelines provide more details for the responsibilities of the enterprise for the whole project lifecycle approach, which is in line with the first recommendation of the Green Development Guidance of the BRIGC. The 2022 Guidelines also provide more specific sector guidances for the energy, transport, mining and petro-chemical industry.
Otherwise, the 2022 Guidelines consolidate the development seen already in the 2021 Guidelines: They expand the previously standard application of “host country rule” and encourage application of international environmental rules and standards for overseas projects and investments. They also provide guidance for environmental protection that not only includes the bare minimum of pollution and climate, but also address biodiversity protection even more prominently than the 2021 Guidelines by including restoration of ecosystems. Finally, similarly to the 2021 Guidelines, the 2022 Guidelines seem to have integrated recommendations from policy studies and guidances (such as the BRIGC Green Development Guidance) developed through international collaboration.
Guidelines encourage green project lifecycle
The Guidelines provide specific information for the whole project lifecycle by specifying activities and responsibilities for Chinese enterprises engaging in projects overseas.
- Project planning and evaluation phase: Enterprises should conduct environmental impact assessments (EIA) based on either local laws or – if the host country’s environmental governance is low – adapt international or Chinese higher standards. The goal of the EIA is to find reasonable measures to reduce and possibly adverse impacts. Within the EIA, companies should conduct biodiversity surveys, the results of which need to be archived for future references. If the surveys find relevant risks, the project must clearly demonstrate the rationality of the site selection and consider a different site. To properly conduct environmental assessments, enterprises are encouraged to choose competent consulting services with international environmental experience.
- Project construction: Enterprises should reduce the adverse impact of construction on the environment by controlling pollution (e.g., air, water noise, vibration) and reducing greenhouse gas emissions. Adverse impacts of construction on ecosystems should be restored “in a timely manner”. Within the project construction (and operation), enterprises should prioritize purchasing environmentally friendly products. Finally, enterprises are encouraged to engage with local communities and listen to suggestions on environmental impact through forums, hearings etc.
- Project operation: Enterprises should implement an environmental monitoring and management system. This management system should, for example monitor and record pollutant discharge. Within the system, enterprises should have plans for environmental emergencies, prevention tools, including early warning system and emergency support, as well as emergency reconstruction. Accordingly, enterprises should not only apply for environmental management system certification, but also appoint special personnel to be responsible for ecological and environmental protection work.
- Project reporting: Enterprises shall report ecological and environmental protection compliance information both in accordance with relevant regulations, but also strengthen communication with potentially affected communities and relevant social groups, as well as the public. Enterprises should strengthen information sharing and regularly release the project implementation of environmental laws and regulations, as well as share the project’s environmental protection concepts.
- Decommissioning: Enterprises shall either in accordance with local laws or based on international best practices ensure environmental protection during decommissioning, demolition and closure of overseas projects and investments.
Throughout all project phases, enterprises should fulfill their responsibilities for ecological and environmental protection and adhere to host country environmental standards, and in case of low standards in the host country, to “international common rules or China’s stricter standards”.
Beyond “Host Country Rules”
Over the past decades of China’s overseas engagement, Chinese enterprises were required to comply with host country laws and regulations in order to obtain relevant local and Chinese permits and licenses, as well as financing (see Figure 1).
However, as the environmental governance system of host countries’ varies, some countries only have lax environmental regulations or environmental enforcement. Accordingly, the environmental risk management and environmental safeguard requirements on enterprises engaging in these countries were lacking, causing high environmental and thus also social risks. The lack of environmental standard application has also created financial risks for Chinese financial institutions and tended to limit access to international financing sources, which usually come with higher E&S standards.
As an alternative, international rules (or in some cases, Chinese standards) serve as more stringent benchmarks. In previous policy documents, for example, in the 2013 “Guidelines for Environmental Protection in Foreign Investment and Cooperation” issued also by MOFCOM and MEE, Chinese enterprises were encouraged to “research and learn” from international organizations and multilateral financial institutions. In 2020, a deviation from “host country rules” started to emerge (see Figure 1) through the 2020 “Guidance on Promoting Investment and Financing to Address Climate Change” issued in October 2020 by MEE.
The 2021 Guidelines stress that “If the host country lacks relevant laws and regulations, or the environmental standards are deemed lax and insufficient, Chinese enterprises are encouraged to adhere to international organizations/multilateral agencies’ common standards or Chinese standards for their overseas investments and cooperation”. Specifically, enterprises are encouraged to follow international common practices for their ESIA and E&S due diligence, for example, IFC’s Environmental and Social Performance Standards.
The 2022 Guidelines again – in Article 3 – stress that enterprises shall abide by the local environmental laws, unless the standards in the host country (region) are relatively low. In this case, the enterprises are encouraged to adopt international or China’s rules and standards.
Figure 1: Evolution of the green guidelines relevant for Chinese overseas investment and financing: from “host country rules” to “international/Chinese standards”
Note: NDRC = National Development and Reform Commission of the People’s Republic of China; MOFCOM = Ministry of Commerce of the People’s Republic of China; MEE = Ministry of Ecology and Environment of the People’s Republic of China; MOFA = Ministry of Foreign Affairs of the People’s Republic of China; PBOC = People’s Bank of China; CBIRC = China Banking and Insurance Regulatory Commission; not all issuance government bodies are indicated due to space constraints, for example, the 2020 “Guidance on Promoting Investment and Financing to Address Climate Change” were published also together with NDRC, CBIRC, and China Securities Regulatory Commission.
Internationally consolidated standards
The 2022 Green Guidelines are congruent with many recommendations of internationally supported documents addressed at China’s overseas investment. A particularly relevant document is the the Green Development Guidance published by the BRICG and backed by various ministries, particularly the MEE in December 2020. In October 2021, the BRIGC backed by the MEE published a more detailed implementation guide for the Green Development Guidance for financial institutions and enterprises. The implementation guide specifies how to apply the 9 recommendations and 1 traffic light system (transparency note: Christoph Nedopil, Director of the Green Finance & Development Center, was one of the lead researchers and authors of the Guidance and the Implementation Guide).
The 9 recommendations of the Guidance are:
- Green overseas investment practices address all project phases, from project initiation through project evaluation, financing, construction, operation, reporting and transfer/closure;
- Provide exclusion list of projects not available for funding (e.g. similar to many developing finance institutions);
- Environmental (and Social) Impact Assessment (ESIA) depending on the project’s perceived risks, where “red”, “red-yellow”, “red-green”, and high-risk “yellow” projects should obtain an independent EIA assessment based on international best practices;
- Differentiated conditions, for example to reduce financing cost and approval times for “red-green” and “green” projects;
- Environmental and Social Management System for project company required to ensure mitigation measures are implemented and reported;
- Grievance redress mechanism provided by financial institutions for people and NGOs with easy-to-access to share violations of environmental agreements or laws with the financial sponsors throughout all project phases;
- Integration of covenants related to breach of environmental and social agreements between the financial institution and the project company to exercise remedies to rectify environmental management;
- Public reporting of environmental performance of project;
- International cooperation about environmental performance reporting.
Besides the Green Development Guidance, the CCICED with its special policy studies on BRI and green finance, and the Green Investment Principles (GIP) have strong similarities with the new Guidelines, such as an inclusion of green supply chain management (which is not part of the Green Development Guidance, but of the GIP).
Yet, contrary to the 2021 Guidelines, the 2022 Guidelines do not specifically mention international conventions, such as the UN SDGs, the Paris Accord or the Convention on Biological Diversity, and neither the GIP to comply with. Rather, the new Guidelines stipulate that enterprises should pay attention to global and local laws, regulations and policies on addressing climate change, while only local or regional laws and standards for biodiversity are explicitly mentioned as a framework.
Towards Positive Contributions for pollution, climate, and biodiversity
The 2022 Guidelines are an upgrade from the 2013 Guidelines and a further support of the 2021 Guidelines. The 2022 Guidelines asks Chinese enterprises to “make a positive contribution to addressing climate change” and “promote the realization of biodiversity conservation and sustainability” – and even stipulates ecological restoration of project sites and project impacts. This is an important evolution from the 2013 and the 2021 Guidelines that focused on either host country standards or reducing biological impacts.
Finally, the guidance also promotes controlling the discharge of waste gas, water, noise and solid waste, enhance the integrated reuse of waste etc., and thus clearly focus on broader aspects of pollution control. Table 2 compares the two guidelines across climate, pollution, and biodiversity, highlighting the positive measures.
Table 2 Comparison between 2013, 2021 and 2022 Guidelines across climate, pollution and biodiversity
|2013 “Guidelines for Environmental Protection in Foreign Investment and Cooperation”||Enterprises shall develop low-carbon and green economy, and implement sustainable development strategies||Construct and operate pollution prevent installations, ensure the emission of exhaust gas, waste water, solid wastes or other pollutants meet the host country standards; Reduce generation and emission of pollutants in the course of production, service and product use …||Consider the ecological function of the area…. reduce adverse impacts on local biodiversity; Encouraged to carry out ecological restoration in accordance with requirements of laws and regulations of the host country or common practices in the industry|
|2021 “Green Development Guidelines for Foreign Investment and Cooperation”||Promote effective control of carbon emissions; Support foreign investment in solar energy, wind energy, nuclear energy, biomass and other clean energy; Follow international green rules and standards – UNFCCC, SDGs, GIP||Reduce emission of pollutants, ensure a green and sustainable production cycle; Control gas emission, sewage, noise and solid waste pollution. Follow international green rules and standards||Conduct ecological and environmental protection and restoration in accordance with the host country law or international practices to prevent adverse impacts on biodiversity; Follow international green rules and standards – CBD, SDGs, GIP|
|2022 “Guidelines for Ecological Environmental Protection of Foreign Investment Cooperation and Construction Projects”||Make a positive contribution to addressing climate change; give priority to clean and green renewable energy projects;||Control air, dust, water, noise, vibration, radiation and solid waste pollution||Conduct biodiversity surveys, monitoring and evaluation and actively avoid key biodiversity areas; “do a good job in ecological restoration” in a timely manner. If biodiversity impacts are unavoidable, introduce off-site transplanting, rescue and habitat restoration (both for land and water).|
Recommendations for next steps to green China’s overseas investment and projects
To advance the momentum for greening China’s overseas investment and projects, this document is another important milestone to support green development. Several future developments can further strengthen environmental and green development:
- Chinese enterprises (project developers) should use this guidelines as the baseline to push green development and reduce environmental risks. They can further strengthen their environmental management by hiring an independent ESIA consultants, and conduct rigorous environmental impact assessments (EIA) based on international standards for all high risk projects (“red projects” in the Green Development Guidance), no matter the host country standards (e.g. using IFC’s Performance Standards). The assessment process has to include meaningful consultation with local stakeholders early on, especially Indigenous communities. To address issues flagged in the EIA, the project developers should develop and/or maintain an Environmental and Social Management System.
- Chinese financial institutions (commercial banks, CDB, EXIM Bank and Sinosure) should develop or apply environmental and social policies in accordance with local, Chinese and international standards, such as the Equator Principles (for commercial banks), or the OECD “Common Approaches” (for Export Credit Agencies or Developing Finance Institutions), both based on IFC’s Performance Standards in addition to the Green Investment Principles (GIP). To better guide financial institutions in supporting green development in China’s overseas markets, financial institutions can follow the Green Development Guidance with the Traffic Light System, a two-tiered system that classifies BRI projects into three categories based on their environmental impacts. Accordingly, financial institutions should require transparent grievances mechanisms, offer preferential terms for green projects and require relevant covenants in financial agreements.
- Regulators and financial institutions should formulate more sector-guidances (e.g., for manufacturing, climate adaptation investments) and provide an exclusion list of projects based on environmental criteria (e.g., high polluting industries, high GHG emitting industries, high biodiversity impact sectors). This could also lead to an official green/yellow/red taxonomy based on the Traffic Light System of the Green Development Guidance.
- To accelerate new opportunities through green overseas development, Chinese enterprises should support knowledge sharing and capacity building, as well as supporting international research networks. These networks should include relevant host countries to build sustainable roadmaps, through collaboration with multilateral development banks and other international organizations.
- To incentivize implementation of the 2022 Guidelines, Chinese government institutions and financial institutions (including the insurance companies) should provide financial and administrative incentives for green projects and enforceable dis-incentives for non-green projects according to Recommendation 4 of the Green Development Guidance (“differentiated treatment”).
- Policy-makers could provide specific guidance for investors and financiers on climate- and nature-positive measures (the current Guidelines is targeted at enterprises).