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Advisors propose new system to regulate China’s overseas investments

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A government-backed coalition of international advisors to the Belt and Road Initiative (BRI) has recommended that China apply more stringent environmental controls over its outbound investments. If adopted, this would be a major departure from China’s usual approach of deferring to host country rules, many of them inadequate, for regulating its overseas investments. 

High-level advisors, including former UNEP chief Erik Solheim and green finance heavyweight Ma Jun, propose a system to categorise Chinese overseas investments based on their polluting, climate and biodiversity impacts.

The classification methodology was published on 1 December at a press conference organised by the BRI International Green Development Coalition (BRIGC) in Beijing. It would see coal-fired power plants given a firm red light, while other types of Chinese overseas investments, such as hydropower and railways would need to implement internationally recognised mitigation measures to earn “green” status. On the other hand, solar and wind power are considered green projects that advance the climate goals of the Paris Agreement.

How would the ratings system work?

The proposal states that BRI investments would be classified as follows:

Red projects require stricter supervision and regulation. These are regarded as creating “significant and irreversible environmental harm” in at least one of the areas of climate change, pollution and biodiversity, or the risk of such harm. Examples include coal-fired power, hydropower, petrochemical, and mining and metal smelting projects.

Yellow projects are environmental neutral with moderate impacts. These cause no significant harm, and remaining harms can be mitigated by affordable and practical measures, on a reasonable scale, within the project itself. Examples include waste-to-energy projects and urban freight transportation with emission standards above Euro IV/national IV standards.

Green projects are encouraged. These have no significant negative impact on pollution, climate change or biodiversity, and contribute positively to at least one of these, particularly if they benefit the aims of international environmental treaties and conventions. Examples include the development and use of renewable energy (wind, solar, etc).

Higher standards

Christoph Nedopil Wang, founding director of the Green BRI Center at the Central University of Finance and Economics and one of the lead authors of the classification methodology, told China Dialogue that the system combines multiple international approaches to green finance.

The categorisation system and an ensuing taxonomy of green, yellow and red projects take inspiration from international standards such as the EU Sustainable Finance Taxonomy, the Equator Principles and performance standards issued by the International Finance Corporation (IFC) of the World Bank Group. It also uses China’s own guidelines for green credit and green bond issuance as references.

For years Chinese companies and financial institutions working abroad have primarily adhered to the “host country principle” which emphasises compliance with host countries’ environmental and social regulations. The inadequacy of the safeguards in many Global South countries, which make up the majority of BRI participant countries, means that the principle is often used as an excuse to lower standards for China’s outbound investments. This creates a stark contrast between China’s domestic green transition and its footprints across the rest of the world. While clean energy is growing at a breathtaking speed inside China, a large portion of the energy infrastructure Chinese companies are building overseas is coal-based. Many such projects are of the low-efficiency type that China itself has gradually phased out. Biodiversity threats are also a main concern of many of the BRI’s linear infrastructure projects such as railways and roads that intersect with key protection areas. Domestically, China has implemented an ecological redlining system hailed as a model for reconciling development with the conservation of nature.

There are calls on Chinese actors to follow higher standards in their overseas investments, but so far the response has been limited. None of the major Chinese financial institutions involved in overseas lending, for example, has signed on to the Equator Principles, which requires international standards (such as the IFC’s performance standards) to be applied in low-income countries with underdeveloped safeguards. In 2019, major Chinese banks such as China Development Bank and ICBC signed on to the Green Investment Principles (GIP) which call for “acute awareness of potential impacts of investments and operations on climate, environment and society in the Belt and Road region”. But mechanisms to translate such awareness into action are yet to be developed.

“The GIP is more market driven”, comments Nedopil Wang, “while our [proposed system] is much more targeted at the regulators.”  

The system considers three dimensions of a project’s potential environmental footprint: pollution, climate change and biodiversity. Projects that are contrary to the Paris Agreement objectives, such as those which increase emissions or undermine climate mitigation measures, are considered to cause “significant harm”. Similarly, projects that encroach on key biodiversity areas are given a red rating.

The system has some flexibility built in to allow contextual considerations of a project’s environmental merits. Some projects types, such as railways, may initially raise a red flag for their potential high risks to biodiversity. But if developers can credibly demonstrate that mitigation measures are taken to prevent or reduce environmental harms, following international standards, they may get a green classification. However, the original red rating will remain as a reminder of the project’s intrinsic high risk.

The creators believe the two-step classification will better equip the system to respond to complex situations on the ground in most countries along the Belt and Road. “The idea is to make the system adaptive,” says Nedopil Wang, who believes that a black-and-white taxonomy may be too rigid in some circumstances. Therefore, “process standards” which detail how a risk should be managed, are also included.

Risky projects

According to the system, the construction and operation of coal-fired power plants will be given a red rating with no mitigation or compensation measures available to upgrade it. The same applies to the retrofit of coal-fired power plants designed to extend their operating life.

On the other hand, a hydropower station will be given an initial red rating but could earn a green rating if it applies “internationally relevant” hydropower standards for mitigating environmental damage, such as the IFC’s 2015 Hydroelectric Power Standard.

The research team provided an initial classification of 38 project types under 20 sectors, ranging from renewable energy to passenger transport and livestock farming. The grouping of the project types into positive (green), neutral (yellow) and negative (red) lists for the first time creates a simple taxonomy for BRI projects based on their environmental impacts.

“I can see the value of a taxonomy [for BRI projects] which raises environmental awareness for investors,” a Chinese expert familiar with international green finance safeguards, who is not authorised to take interviews, told China Dialogue. “At the very early stage of a project, when you have a project concept note in front of you, a taxonomy may help you make a snap judgment about whether a sector is in line with your strategy or should be excluded in the first place.”

But she cautioned that Chinese overseas projects are often large-scale and such a taxonomy may be too simplistic to capture their complex impacts, particularly social impacts.

Architects of the new system respond that the taxonomy is for demonstration purposes at this stage, created to illustrate how the classification system can be run. They are planning to refine the list with more technical details and application guidelines as a next step. One key recommendation from the advisors is to link the system with more comprehensive environmental impact assessments for red and yellow projects.

Adoption is key

The international team proposing the system also recommends it be embedded into China’s decision-making processes on Belt and Road projects. According to their analysis, central government agencies such as the National Development and Reform Commission (NDRC) and Ministry of Commerce (MOFCOM) all have power to regulate overseas investment, but currently environmental considerations are not reflected in their approval processes.

“The positive and negative list will provide a foundation for governmental bodies to make sure overseas investment is in line with climate and environmental goals,” says Wang Ye, a green finance analyst with the World Resources Institute (WRI), who co-created the system. One key recommendation from the team is to develop an “exclusion list” of projects irreversibly harming the environment.

Yuan Feng, deputy director general of the NDRC’s Department for Regional Openness, which oversees the development of the BRI, offered his blessing at the press conference where the system was presented.

But Nedopil Wang admits that the appetite of regulators to adopt such a system is hard to gauge. It is noteworthy that the Ministry of Ecology and Environment (MEE) which hosts the BRIGC, does not have formal regulatory power over project development outside China’s borders.

Experts have also opined that green catalogues, which encourage certain types of investments, are easier for regulators to consider than exclusion lists, which often go beyond their legal authority. China’s own environmental laws have yet to regulate greenhouse gas emissions with binding force, they noted. Positive lists such as the green bond catalogue have so far been the mainstay of domestic actions to steer finance toward greener projects.

There are signs that some regulators might be more receptive of the recommendations. On 25 October, five central government agencies, including the central bank, the MEE and the banking regulator, issued a joint guidance for the country’s financing system to better serve China’s 2060 carbon neutrality goal. It specifically encourages financial institutions to support low-carbon development along the Belt and Road.

There is hope that China’s financial sector may adopt the classification system and apply differential treatment to overseas projects: favourable financing conditions for “good practice” projects and stringent conditions for risky ones.

“The China Banking and Insurance Regulatory Commission (CBIRC) has been involved in designing the system, so that’s a good sign,” Nedopil Wang told China Dialogue. “The de facto application [of the system] really depends on the specific champions within the different regulators.”

“Incorporating environmental risks into policy and finance practices requires these champions to push it relentlessly inside the system, like woodpeckers that always hit the same spot without getting a headache,” he said. “[Adopting the classification system] makes reputational sense and environmental sense for China today. But it requires a really different approach to some of the decision making.”

From our partner chinadialogue

Ma Tianjie is China Dialogue managing editor in Beijing. Before joining China Dialogue, he was Greenpeace's Program Director for Mainland China where he was a regular commentator on China's environmental challenges contributing to a range of media organisations. He holds a master’s degree in environmental policy from American University, Washington D.C.

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Economy

Digital Futures: Driving Systemic Change for Women

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Authors: Erin Watson-Lynn and Tengfei Wang*

As digital technology continues to unlock new financial opportunities for people across Asia and the Pacific, it is critical that women are central to strategies aimed at harnessing the digital financial future. Women are generally poorer than men – their work is less formal, they receive lower pay, and their money is less likely to be banked. Even when controlling for class, rural residency, age, income, and education level, women are overrepresented among the world’s poorest people in developing countries. Successfully harnessing digital technology can play a key role in creating new opportunities for women to utilise formal financial products and services in ways that empower them. 

Accelerating women’s access to the formal economy through digital innovations in finance increases their opportunity to generate an income and builds resilience to economic shocks. The recently issued ESCAP guidebook titled, Harnessing Digital Technology for Financial Inclusion in the Asia Pacific, highlights the fact that mechanisms to bring women into the digital economy are different from those for other groups, and that tailored policy responses are important for women to fully realise their potential in the Asia-Pacific region.

Overwhelmingly, the evidence tells us that how women utilise their finances can have a beneficial impact on the broader community. When women have bank accounts, they are more likely to save money, buy healthier foods for their family, and invest in education. For women who receive Government-to-Person (G2P) payments, there is significant improvement in their lives across a range of social and economic outcomes. Access to safe, secure, and affordable digital financial services thus has the potential to significantly improve the lives of women.

Despite the enormous opportunity, there are numerous constraints which affect women’s access to financial services. This includes the gender gap in mobile phone ownership across Asia and the Pacific, lower levels of education (including lower levels of basic numeracy and literacy), and lower levels of financial literacy. This complex web of constraints means that country and provincial level diagnostics are required and demands agile and flexible policy responses that meet the unique needs of women across the region.

Already, across Asia and the Pacific, governments are implementing innovative policy solutions to capture the opportunities that come with digital finance, while trying to manage the constraints women often face. The policy guidebook provides a framework to examine the role of governments as market facilitators, market participants and market regulators. Through this framework, specific policy innovations drawn from examples across the region are identified which other governments can adapt and implement in their local markets.  

A good example of how strategies can be implemented at either the central government or local government levels can be found in Pakistan. While central government leadership is important, embedding tailored interventions into locally appropriate strategies plays a crucial role for implementation and effectiveness. The localisation of broader strategies needs to include women in their development and ongoing evaluation. In the Khyber Pakhtunkhwa province, 50,000 beneficiary committees comprising local women at the district level regularly provide feedback into the government’s G2P payment system. The feedback from these committees led to a biometric system linked to the national ID card that has enabled the government to identify women who weren’t receiving their payments, or if payments were fraudulently obtained by others.

In Cambodia and the Philippines, governments have implemented new and innovative solutions to support remittance payments through public-private-partnerships and policies that enable access to non-traditional banks. In Cambodia, Wing Money has specialised programs for women, who are overwhelmingly the beneficiaries of remittance payments. Creating an enabling environment for a business such as Wing Money to develop and thrive with these low-cost solutions is an example of a positive market intervention. In the Philippines, adjusting banking policies to enable access to non-traditional banking enables women, especially those with micro-enterprises in rural areas, to access digital products.

While facilitating participation in the market can yield benefits for women, so can regulating in a way that drives systemic change. For example, in Lao People’s Democratic Republic and India, different mechanisms for targets are used to improve access to digital financial products. In Lao People’s Democratic Republic, the central government through its national strategy, introduced a target of a 9 per cent increase in women’s access to financial services by 2025. In India, their targets are set within the bureaucracy to incentivise policy makers to implement the Digital India strategy and promotions and job security are rewarded based on performance.

These examples of innovative policy solutions are only foundational. The options for governments and policy makers at the nexus of market facilitation, participation and regulation demands creativity and agility. Underpinning this is the need for a baseline of country and regional level diagnostics to capture the diverse needs of women – those who are set to benefit the most of from harnessing the future of digital financial inclusion.

*Tengfei Wang, Economic Affairs Officer

This article is the second of a two-part series based on the findings of the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) Policy Guidebook: Harnessing Digital Technology for Financial Inclusion in Asia and the Pacific, and is jointly prepared by ESCAP and the Griffith Asia Institute.source: UNESCAP

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Empowering women-led small businesses in Nepal to go digital

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People walk down a street of shops in Kathmandu, Nepal. (file) photo World Bank/Peter Kapuscinski

Authors: Louise Anne Sophie Lavaud and Mitch Hsieh*
Throughout the years, Laxmi Shrestha and her husband saw the opportunities that opening an online shop could bring to her family business.

“Looking at the trend of TikTok and other sites, we thought selling online could help us but we weren’t technically sound,” said Laxmi, the owner ofLaxmi Hastakala Store, in Banepa, Nepal, and part of a family of artisans.

As she learned about selling online, she picked up on how to market her shop digitally and, according to Laxmi: “It has surely given our business a push we always wanted. Recently we started selling our products online and we also receive payments online.”

Laxmi Hastakala Store is among the 1,800 women-led micro, small and medium enterprises (MSMEs) in Nepal being trained on digital and financial literacy by Sparrow Pay – one of the winners of the Women Fintech MSME Innovation Fund launched in 2019 by the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) and the United Nations Capital Development Fund (UNCDF).

Sparrow Pay has created a local digital marketplace where women-led MSMEs can offer products and services to its existing 800,000+ digital payment service users. Additionally, Sparrow Pay is supporting these women entrepreneurs in adopting digital payments and creating a payment history to support access to additional financial services.

MSMEs are a vital source of employment and a significant contributor to a country’s GDP. However, more than 45 per cent of MSMEs in Asia and the Pacific are constrained from accessing finance and other support for their businesses. Socio-cultural norms mean women-led enterprises have to overcome gender-specific barriers to access institutional credit and other financial services.

ESCAP and UNCDF aim to encourage easy access to digital finance for MSMEs in Asia and the Pacific, break the financial barriers surrounding women-led enterprises and support entrepreneur-centric growth and inclusiveness throughout the region. Initiatives by the 10 winning fintech companies are currently supporting more than 9,000 women-led MSMEs in Bangladesh, Cambodia, Fiji, Myanmar, Nepal, Samoa and Viet Nam.

Just like Laxmi, these women business owners plan on successfully growing their companies in the digital area.

The Women Fintech MSME Innovation Fund is part of a regional programme “Catalyzing Women’s Entrepreneurship: Creating a Gender-Responsive Entrepreneurial Ecosystem,” which seeks to support the growth of women entrepreneurs in Asia and the Pacific by enabling a policy environment for such business owners, providing them with access to finance and expanding the use of ICT for entrepreneurship.

*Mitch Hsieh Chief, Communications and Knowledge Management Section

UNESCAP

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Is It Possible to Lift Sanctions Against Russia? — No

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Every conflict sooner or later ends in peace. Such is the conventional wisdom that can often be heard from those who, amid the current situation of the sanctions tsunami and confrontation with the West, are trying to find hope for a return to “normality”. The logic of such wisdom is simple. At some point, the parties will cease fire and sit down at the negotiating table. The end of hostilities will lead to a gradual reduction in sanctions pressure on Russia, and our businesses will be able to return to work with Western partners.

We have to disappoint those who believe in such a prospect. Sanctions against Russia, for the most part, will not be lifted even in the event of a ceasefire in Ukraine and a peace agreement. There will be no return to “pre-February normality”. Instead of remembering a lost past, we will have to focus on creating a new future in which Western sanctions remain a constant variable.

Why is the lifting of Western sanctions on Russia extremely unlikely? There are several reasons.

The first reason is the complexity of the conflict between Ukraine and Russia. It has every chance of being prolonged for a long time. There may be pauses in active hostilities. The parties may conclude temporary truces. However, such truces are unlikely to remove the political contradictions that gave rise to the conflict. Currently, there are no parameters for a political compromise that would suit all parties. Even if an agreement between Moscow and Kiev is reached, its sustainability and feasibility are not guaranteed. The experience of Minsk-2 shows that the mere appearance of agreements does not automatically resolve political problems and does not lead to the lifting or easing of sanctions. The Ukrainian problem can smoulder and flare up again for decades, partly because both sides are limited in the possibilities of a decisive military victory and complete surrender of the enemy. Relations between Russia and Ukraine are at risk of entering the ranks of long-term conflicts, similar to relations between India and Pakistan, or North and South Korea. The complexity and longevity of the conflict guarantee Western sanctions for the long term.

The second reason is the stable nature of the contradictions between Russia and the West. The conflict in Ukraine is part of a larger Euro-Atlantic security palette. An unstable system of asymmetric bipolarity has formed in Europe, in which the security of Russia and NATO can hardly be indivisible. Russia has no way to crush the West without doing unacceptable damage to itself. However, the West, despite its colossal superiority, cannot crush Russia without incurring unacceptable losses. Containing Russia is the best strategy for the West. Ukraine is doomed to remain one of the areas of containment. For Russia, the strategy of asymmetric balancing of Western superiority remains optimal. It is possible that part of such a strategy will be a course towards a radical territorial redistribution of Ukraine, tearing away from it the eastern and southern parts. But in itself, such a redistribution will not remove the problems of Western sanctions.

The third reason is the institutional features of the sanctions policy of the initiating countries. Experience shows that sanctions are relatively easy to impose but very difficult to lift. Thus, with regard to Iran, a whole “web of laws” has formed in the United States, which significantly limits the administration’s ability to lift sanctions. Even if the sanctions are not enshrined in law, their cancellation or mitigation still requires political capital, which not every politician is ready to spend. In the US, such steps will cause criticism or even opposition in Congress, and in the EU – disagreements among member states. Of course, individual restrictions are lifted or relaxed in the interests of the initiating countries themselves. The experience of sanctions pressure on the Republic of Belarus shows the existence of the “sanction remissions” when restrictions are eased. However, the legal mechanisms of sanctions themselves remain and can be used at any time.

The fourth reason is the quick reversibility of the sanctions. Often, their abolition is accompanied by political demands, the implementation of which is a complicated process. For example, the Iranian nuclear deal required several years of complex negotiations and significant technological decisions. However, the return of sanctions can be carried out overnight. There is an asymmetry in the fulfilment of obligations. Fulfilling the requirements of the initiators requires significant changes, while the return of sanctions requires only a political decision. Rapid reversibility breeds distrust among target countries. It is easier for them to continue to live under sanctions than to make extensive concessions and risk receiving new sanctions. Historical experience shows that the initiators of sanctions tend to play the game of “finishing” the opponent. After the concessions come new, more radical political demands and the threat of new sanctions. The “Pompeo 13 Points” – a list of US demands on Iran beyond the limits of fulfilling the terms of the nuclear deal – have already become a textbook example. The Iranian lesson, apparently, was well learned in Moscow. Iran itself is actively working to achieve its goals in the field of nuclear arms. Ultimately, this shows the ineffectiveness of sanctions in terms of influencing the political course of the target country. But questionable effectiveness does not negate the fact that sanctions continue to be applied and enforced.

The fifth reason is the ability to adapt. Without a doubt, Russia will suffer enormous damage from the restrictive measures which have been introduced. However, the possibility of it adapting to the sanctions regime remains high. Russia has the chance, first, to partially make up for the shortfall in supplies from abroad with the help of its own industry, although this will require political will and the concentration of resources. Second, it has access to non-Western markets, as well as alternative sources of goods, services and technology. The key conditions for solving this problem will be the creation of reliable channels for financial transactions that are not related to the US dollar, the Euro, or Western financial institutions. Such a task is feasible both technically and politically, although it will also require time and political will. Iran’s experience shows that sanctions have seriously hit the country’s development opportunities. However, they did not interfere with the development of agriculture, industry and technology. The modernisation of the Soviet Union also proceeded under severe Western sanctions. The ability to adapt reduces the motivation for concessions to the demands of the initiating countries, especially given the risk of playing for “finishing”.

These reasons make the prospect of lifting or significantly reducing sanctions pressure on Russia extremely unlikely. The US, EU and other initiators have already introduced the most severe restrictions on Moscow. But the upward wave of sanctions escalation has not yet been exhausted. In addition, the achievement of the ceiling of the applied measures is unlikely to mean the abolition of those already introduced. However, the sanctions also do not mean the “end of history” of the Russian economy. It found itself in new conditions that will require adaptation and the search for new opportunities for development and growth.

From our partner RIAC

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