Emerging Actors in Development Finance
The landscape of development finance is rapidly changing.
In the last decade, major emerging economies such as China and Brazil have been fueling a growing trend of South-South flows by increasingly channeling their overseas investments to other developing countries. In line with these new trends, China and Brazil are surfacing as major international investors.
Some of these investments constitute large-scale, high impact projects requiring access to and management of natural resources. Others comprise small and medium size projects developed by private small-medium enterprises (SMEs). The projects are reshaping the relationship between investors and recipient countries, as well as posing new challenges and opportunities for environmental and social sustainability initiatives.
The Emerging Actors in Development Finance project explores questions on how Chinese and Brazilian investments impact development finance, the environment and society; unique characteristics that China and Brazil display in their approach to environmental and social sustainability; sustainable development opportunities that can be created for both investor and host countries; and how the environmental and social risks of increasing outward foreign direct investment (OFDI) can be managed
A Changing Global Landscape
China is surfacing as a major international investor through large corporations, SMEs, and nationally owned financial institutions such as the Export-Import Bank of China and the China Development Bank. These Chinese “emerging actors” are financing major initiatives to acquire natural resources, open markets, and forge strategic political ties. They are increasingly financing large-scale, high impact projects beyond their borders — such as hydropower plants, mining, oil and gas pipelines — which may pose new challenges for environmental and social sustainability.
At the same time, from 2001 to 2011, Brazil’s per capita GDP more than tripled. At the heart of this domestic economic boom is the Brazilian National Development Bank (BNDES). How do we ensure that China’s and Brazil’s investments align with sustainability objectives by observing high social and environmental standards?
Chinese overseas investments are rapidly increasing (see our comparison graph). As of 2011, China’s outward foreign direct investments (OFDI) spread across 132 countries and regions and topped $60 billion USD annually, ranking ninth globally according to U.N. Conference on Trade and Development statistics. A significant amount of this increasing OFDI goes to the energy and resources sectors—much of it in Asia, Africa, and Latin America. In both 2009 and 2010, the Export-Import Bank of China and the China Development Bank together lent more than the World Bank did to developing countries.
There are five key challenges in directing China’s overseas investments to more sustainable pathways:
- Limited data and transparency on Chinese overseas investments flows
- Poor governance systems in host countries, for example in some least-developed countries in Africa. Weak governance systems fail to protect communities and the environment from potential harm
- Limited sustainability standards and guidelines in Chinese institutions, whether government, state-owned enterprises, or small- and medium-sized companies
- Where sustainability standards are present, enforcement is often weak
- Lack of coherence between international investment/trade treaties and environmental agreements. From an international legal perspective, this subject is a grey area
We are currently trusted by a wide range of stakeholders including government, industry, financial institutions, and civil society organizations (CSOs) in China for our independence and evidence-based research. In the future, we will leverage our track record of impartial data analysis and recommendations to create further impact on creating more robust regulation of Chinese overseas investments.
This goal will be accomplished by working with government, regulators, and industry to identify need areas and offering our knowledge and expertise to make stronger policies. We will work with these stakeholders through both direct engagement strategies as well as “outsider strategies” to create incentives and pressure for change. We will convene government, industry (companies and financial institutions), and CSOs at annual meetings of the China Council for International Cooperation on Environment and Development, the annual Global Environmental Governance conference, and other conferences/workshops.
Our strategy in China revolves around addressing these challenges by working closely with the Ministry of Environmental Protection (MEP) through our partner, the China Council for International Cooperation on Environment and Development, engaging with state-owned enterprises like CNOOC (a Chinese oil and gas state owned enterprise) to understand, evaluate, and improve sustainability standards, and tracking overseas investment flows into unsustainable sectors. We will apply our past experiences in working with both public and private financing institutions on evaluating environmental and social risk to inform key legislation and introduce standards. Our current strategy in China is an “insider” and “partner” approach, but in 1-2 years as our work with the GCF phases out, we will scale-up our China work by expanding our engagement to include private financing institutions, civil society, and other actors who play a key role in influencing Chinese overseas investments.