Environmental and Social Impacts of Chinese Investment Overseas

June 1, 2016

By Huang Zhen

On June 5, China marks its second national “Environment Day,” first established as part of the revised Environmental Protection Law in 2014. Along with the increased focus on environmental issues at home, more and more attention is being paid to the social and environmental impacts of China’s investments abroad.

Outward foreign direct investment (OFDI) from China has exploded in the past 15 years, going from less than $3 billion in 2002 to $101 billion by 2013. According to a recent UNDP report, Chinese enterprises’ OFDI in 2014 totaled $123.1 billion across all industries, an increase of 14.2 percent compared with the previous year. Sector-wise, China’s FDI flowed mainly toward leasing and commercial services, wholesale and retail, financial sectors, construction, agricultural, and mining sectors. The latter three, by their very nature, can cause social and environmental concerns.

Marine sand is pumped by a ship at the commencement of “Colombo Port City” backed by China in Sri Lanka. Increasing attention is being paid to the social and environmental impacts of China’s investments abroad.

For example, in 2011, the Myanmar government suspended the huge Myitsone dam and hydroelectric power project, an investment by the China Power Investment Corporation which had been under construction for more than a year. The suspension was the result of significant social and environmental concerns raised by local communities, including biodiversity conservation and migrant resettlement. This was not a rare case for Chinese investment – there have been other examples in Latin America and Asia, such as the Zijin Mining Group’s development of the Río Blanco Copper mine in Peru, which have been suspended or aborted due to local protests. With expansion of investment overseas, Chinese enterprises face greater challenges in social and environmental responsibilities. Host countries are now paying attention not only to the economic benefits of such investment, like economic growth, employment opportunities, and better infrastructure, but also to the impact on their environment and society. According to a survey among business managers from 15 African countries that have business ties with China, the majority say that Chinese companies are not environmentally responsible. However, there is still an awareness gap among Chinese outbound enterprises in terms of the challenges and risks of overseas investment. According to the UNDP report, Chinese companies investing overseas consider political and regulatory environments and labor issues as their highest operational risks, while most of them expressed fewer concerns about the social and environmental aspects of doing business.

In addition, in most developing regions, Chinese enterprises are used to communicating with governments directly, instead of consulting with a broader range of stakeholders. Correspondingly, the UNDP report revealed that only 26 percent of the surveyed Chinese companies have conducted third-party social and environmental impact assessments for their investment. Also, since many developing countries have lagged behind in environmental regulations, if Chinese investors only followed those regulations, local communities were unlikely to be satisfied.

In general, host countries are the key to environmental and social impacts of OFDI, since investors are expected to follow regulations and norms in their host countries. But when environmental and social governance in host countries is weak, the role of investor countries and international groups becomes critical. Therefore, Chinese outbound enterprises should familiarize themselves with and actively follow China’s own policies and international standards on social and environmental responsibilities, instead of relying exclusively on host countries’ own regulations.

In response to broad domestic and international concerns, the Chinese government, financial institutions, and business associations have issued policies and initiatives to guide and encourage better behavior by Chinese outbound enterprises. To date, the Chinese government has adopted 33 key policies and guidelines to promote sustainable development of Chinese enterprises overseas, which touch upon corporate governance as well as economic, environmental, and social performances. In 2013, the Ministry of Commerce and the Ministry of Environmental Protection jointly issued the “Guidelines on Environmental Protection in Overseas Investment and Cooperation,” which specifically focuses on environmental impacts. In addition, several Chinese financial institutions have developed guidelines on environmental impact assessments for overseas investments, as seen in the 2008 “Environmental Protection Policies of the Export and Import Bank of China” and the 2011 “Framework for Environmental Impact Assessments.”

Industry associations have also formulated trade-wide standards supplementing government policies to help with the sustainable development of member companies. In 2014, for example, the China Chamber of Commerce of Metals, Minerals & Chemicals Importers & Exporters released its “Social Responsibility Guidelines for China’s Overseas Mining Investment.” This was the first set of guidelines in China compiled by an industry association, and it received extensive attention from the international community. However, due to China’s relatively short history of “going out,” Chinese enterprises usually face hefty challenges to effectively complying with these guidelines, even if they may be eager to build a “good reputation.”

Relevant stakeholders inside and outside China, including international NGOs, domestic civil society organizations (CSOs), and inter-governmental organizations are working to better understand the environmental and social risks faced by China and recipient countries over Chinese investment. Chinese CSOs can play an especially important role in promoting responsible investment from China because they have a comparative advantage in understanding international standards, hands-on knowledge in working with local communities, and advocacy experience in advancing environmental policies. In this context, The Asia Foundation, among others, is currently working with various Chinese CSOs on programs aimed at strengthening Chinese outbound enterprises’ compliance with social and environmental standards, inspiring Chinese NGOs to advocate for responsible investment of Chinese OFDI, and enhancing communication and mutual understanding between Chinese investors and local communities. For example, in September 2015, The Asia Foundation facilitated an observation tour for Cambodian CSO representatives to Beijing where they met with governmental institutes, Chinese enterprises, and CSOs. It was the first time they had met directly with relevant Chinese stakeholders and shared their concerns over Chinese investment in Cambodia. The Foundation is currently working with a Chinese partner on a communication toolkit to help Chinese investor companies better communicate and engage with local communities in host countries.

Of course, the solution won’t be simple, but the involvement of Chinese CSOs and the broader community will be critical in supporting China’s sustainable and responsible investment overseas.

Huang Zhen is The Asia Foundation’s environment program officer in Beijing. She can be reached at [email protected]. The views and opinions expressed here are those of the individual author and not those of The Asia Foundation or its funders.

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