China’s new financial regulator must show it means business on ESG risk management
China’s groundbreaking Green Finance Guidelines require both policy and commercial banks to establish grievance mechanisms for affected communities
Opinion
Yaqian (Zelda) Liang and Margaux Day
China’s new financial regulator must show it means business on ESG risk management
The newly formed National Financial Regulatory Administration should see to it that Chinese banks implement this requirement
Yaqian (Zelda) Liang and Margaux Day
Published: 4:00am, 19 Jun, 2023
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It has been a year since the China Banking and Insurance Regulatory Commission (CBIRC) issued the Green Finance Guidelines, which stepped up requirements for Chinese banks and insurers to manage environmental, social and governance (ESG) risks, including by establishing complaint channels for affected communities.
As we wrote at the time, this was a critical and, indeed, progressive step that would enable Chinese investors to better identify and address environmental and social risks that might otherwise remain hidden. However, to date, no Chinese bank has launched a bank-level complaint mechanism or announced a plan for developing one.
This should raise alarm bells with the newly-established National Financial Regulatory Administration, which replaces the CBIRC and has vowed to eliminate regulatory “blind spots” and resolve risks earlier. Complaints channels where communities can raise environmental and social issues directly with financiers are critical for identifying and addressing risks that could otherwise remain hidden.
As advocates for communities impacted by overseas investments, we know that investments of all types, even those labelled as “green”, can result in unintended negative environmental and social impacts – whether it is a conservation project in Myanmar that has been paused because its inadequate design risked displacing indigenous communities and exacerbating environmental harms, a hydroelectric project in Mexico that didn’t go forward after risks to a fresh water source and peoples’ livelihoods were exposed, or a biomass plant in Liberia that was shut down after its negative impacts came to light.
When environmental or social harm occurs, two things are true: first, people living near or working at investment sites who suffer the most from the harm deserve channels to seek redress; and second, investments are less sustainable when that harm goes unaddressed.
Communities affected by Chinese overseas development were therefore hopeful when a year ago, the Chinese banking sector regulator issued the Green Finance Guidelines, which required, among other things, that banks and insurers establish complaints mechanisms. When Chinese banks’ financing causes negative impacts, it is difficult for impacted communities to identify and engage with the relevant banks.
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Communities, including environmental defenders, have the burden of researching which banks are invested in a given project and finding out how to contact them. Often, when communities email Chinese banks or insurers to raise serious concerns, nobody responds. In some cases, emails simply bounce back.
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For financiers, this represents a crucial missed opportunity to mitigate the risks of reputational harm, stranded assets, and missed investment objectives that arise when they remain in the dark about affected communities’ experiences.
No investor can be truly confident that its investments are “green” if it doesn’t have a channel in place to hear from these communities, who often know best whether an investment is meeting its mark and who are most impacted when it does not. In the absence of such channels, conflicts over the environmental and social impact of Chinese-financed projects continue to arise, leading to production-halting protests, clashes and even death.
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Having effective complaints channels to ensure “green” investments are truly sustainable and rights-respecting would boost Chinese investors’ competitiveness going forward. Financial institutions are beginning to differentiate themselves by how well they manage and measure their environmental and social impacts. It is standard practice for multilateral banks, such as the World Bank and the Asian Infrastructure Investment Bank (AIIB), to have environmental and social frameworks and grievance mechanisms in place, policies which are published and publicly accessible.
Likewise, it is increasingly the norm for bilateral financial institutions to adopt such mechanisms, with national development banks in the Netherlands, France, Germany, Japan, the United States and Canada all having mechanisms in place. Chinese development banks lag behind.
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The Export-Import Bank of China, one of China’s policy banks, has adopted policies and grievance mechanisms applying to specific projects that have received multilateral bank funding, but no Chinese bank has adopted an institution-wide complaint mechanism.
A goods train runs on the Mombasa-Nairobi Railway in Mombasa, Kenya, in 2022. The project was financed by the Export-Import Bank of China. Photo: Xinhua
China broke new ground in issuing the Green Finance Guidelines, as no other state has required both policy and commercial banks to establish grievance mechanisms. If Chinese banks were to implement this requirement expeditiously, it would put them ahead of the field – Australia’s ANZ bank remains the only commercial bank with a grievance channel for communities.
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The newly formed National Financial Regulatory Administration holds new potential for the implementation of the Green Finance Guidelines, as the head of the new regulator has pledged to take a more proactive attitude to resolving risks through “early identification, early warning, early detection, and early disposal”.
Bank-level grievance mechanisms consistent with good international practice are indispensable in achieving this goal. Assurance standards should also be published that detail the minimum requirements for a complaints channel to be deemed compliant with the Green Finance Guidelines and which help make sure that the new complaints channels are legitimate and effective.
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It is a critical time for China’s new financial regulator to demonstrate that it is serious about China’s green finance commitments. A way to judge its success will be whether Chinese banks finally establish effective channels to hear from the people they impact.
Yaqian (Zelda) Liang is an independent consultant on sustainable finance currently working for Inclusive Development International
Margaux Day is the policy director of Accountability Counsel, a global non-profit organisation