Intro
On March 23, total number of ADB members reached 70. Previously, the Asian infrastructure Investment Bank (hereinafter referred to as AIIB) ended its second round of public opinion solicitation on its energy investment strategy framework. AIIB has conducted two rounds of public opinion solicitation, which fully embodies AIIB’s role as an open emerging multilateral development of financial institutions. A number of global nonprofit organizations have commented on the proposal, and it is widely hoped that AIIB will set a more aggressive goal for the temperature control objectives set by the Paris Summit.
China’s reinforced comprehensive management on capital outbound is another significant trend in the spring of 2017.
In addition, it is noteworthy that Chinese M&As are rejected in a few occasions, and under an intensifying trend of unbalanced global capital flows, overseas investments become more complicated, overseas investments become more complicated. Compared with a 67% growth in 2014 and a 68% growth in 2015, global mergers and acquisitions amounts grew only by 13% in 2016. While the amount of China's overseas asset related transactions quadrupled compared with that in 2015. China plays more important role in overseas investment, at the same time; it shoulders more responsibility in environment and social aspects. Against the backdrop of decline in global FDI(Foreign direct investment) and sharp decline in manufacturing Greenfield investment, infrastructure investment will take larger proportion in total investment deals, but infrastructure construction has great impacts on energy environment.
Key Point
- AIIB membership further expanded, and discussion on its energy strategy launched
In March, 2017, The AIIB announced that 13 applicants were approved to join the bank, bringing the bank's total approved membership to 70 which exceed the membership of ADB. The approved applicants consist of 5 regional prospective members and 8non-regional prospective members.
In October 2016, AIIB published a preliminary draft of the “Energy Strategy: Sustainable Energy for Asia” on its website and solicited feedbacks thereon. The draft framework shed lights on picture of Asia's energy situation, challenges ,AIIB's overarching Goals, energy investment principles.
Later in December 2016, AIIB published a summary and refinement of the 44 recommendations collected in the first round of discussion , and its investment strategy framework expanded from 12 pages to 25 pages with key refinement in summarizing lessons learned from energy investment of multilateral financial institutions.
From both the first draft and second draft, AIIB adheres to guidance principles it established:
1. Ensure energy security and equality
2. Realize Energy Efficiency (EE) potential
3. Reduce the carbon intensity of energy supply
4. Limit local and regional pollution
5. Catalyze private capital
6. Promote regional cooperation
Besides, second draft is refined based on the first draft. AIIB expressed that it will conditionally support coal-fired power projects with caution and under prerequisites, but it refuses to fund nuclear power projects. AIIB will also conditionally support hydroelectric projects and promote energy efficiency and new energy projects actively. As to coal and hydroelectric related projects, AIIB holds basically the same stance as other multilateral financial institutions do, that is, macro-prudential supervision with specific requirements.
In March 2017, AIIB announced that the second round of public discussion ended.Many global NGOs and environmental institutions provided feedbacks in the discussion, and most of them praised and welcomed AIIB’s open attitude, and they hope AIIB will set a more aggressive target for the “long term temperature goal” set by the COP21Civic organizations are concerned with banks' policies on coal and thermal power projects, and how they can achieve the climate goals set in Paris Agreement through quantifiable energy investment strategies, as well as the development of quantifying methodologies and the establishment of direct linkages between energy investment and temperature goal. Some key recommendations are as follows:
1. This investment strategy should be in the interest of the countries concerned to understand the full costs of energy paths for fossil fuels, nuclear energy and unsustainable hydro power, and full costs include their negative externalities and the risk of becoming stranding assets, as well as the cost of energy transformation.
2. Support AIIB to assist the client country to make the minimum emission reduction commitments as the minimum benchmark, not exceeding the average level of emissions before the project is implemented. These national targets will be further strengthened in the project implementation cycle. AIIB's projects must be benchmarked against the target of 1.5 degrees and met emission goals before 2050.
3. AIIB needs to conduct a cost-benefit analysis to adequately price GHG emissions in cost estimates. Greenhouse gas pricing should be based on negative externalities arising from a 1.5 degree target, 2 degree target, and a higher temperature target.
- China strengthens management on foreign investment to balance financial flows and to stabilize exchange rate
Economic Information Daily of Xinhua News Agency reported that China is expected to issue overseas investment regulations within this year. Ministry of Commerce and National Development and Reform Commission will take lead to formulate the regulation which will be top level design for foreign investment at national strategic level and will clarify designate areas in which foreign investments are encouraged or prohibited. Some important contents include overseas investment approval procedures, personnel entry and exit, financing facilitation, profit distribution and profit reinvestment as well as tax policy and so on. This initiative is widely understood as China's active pursuit of new financial balance and exchange rate balance.
In the past two years, exchange rate, interest rate and other financial factors and financial considerations play decisive roles in foreign investment acquisition projects while real economy and competitiveness considerations are neglected, therefore, such investment decisions could be “irrational". Zhong Zhan, Minister of MOFCOM said that: "Some companies have paid the price, and some even brought negative impact on national image." Zhou Liujun, Chief of Cooperation Department, MOFCOM expressed that reviews on the authenticity of foreign investment will be carried out in accordance with laws and regulations, and he emphasized that "this review is not another approval, but ‘physical checks on enterprises’."
In order to prevent overseas risks, in January 2017, China Banking Regulatory Commission promulgated “Guidance Opinions on Regulating Banking Industry in Supporting Enterprises in Overseas Investment and Strengthening Risk Prevention and Control”. The Guidance opinions set requirements towards financial institutions on strengthening national risk, credit risk, compliance risk and social and environmental risks management respectively. With regards to environmental and social risk management, CBRC requires all types of financial institutions to pay attention to environmental and social risk management of overseas business in “going out” and implement life cycle environmental and social risk management, maintain local public rights , enhance interactions with stakeholders, and strengthen information disclosure.
Besides, China releases positive signals to protect the global investors’ confidence in China. Wang Zhaowen, Vice Minister of MOFCOM said that China’s capital outflow control measures were temporary which were directed at short-term speculative capital flows with no influence on foreign-funded enterprises that legally operated and legally remitted income. Echoing this policy logic, China's financial regulatory authorities will make open steps further after opening the interbank market. The New York Times International edition suggests that Chinese officials tend not to admit administrative restrictions on large-scale capital outflows. These restrictions will affect confidence of foreign investors investing in China, and Chinese leadership is trying to encourage foreign investors to buy more bonds and invest more to offset the impacts arising from capital outflows. "
Alert
In March 2017, the New Development Bank signed a loan agreement with the Government of the Republic of India to provide USD350 million sovereign project financing for major road upgrades in the main area of India. The project will rebuild and repair about 1,500 kilometers of roads, focusing on availability of all-weather roads and improved road maintenance and asset management.
In 2016, the Board of Directors of New Development Bank approved seven investment projects in all member states, totaling more than USD1.5 billion. All projects are consistent with the Bank's environmental energy-friendly, sustainable development and infrastructure concerns. Approved projects are expected to reduce greenhouse gas emissions by more than 41,000 tonnes.
- The Extractive Industries Transparency Initiative (EITI) implements more stringent disclosure requirements
In early March 2017, the Extractive Industries Transparency Initiative (EITI) Global Board of Directors decided that all EITI annual financial reports ending on 31 December 2018 and after would add a more stringent "project-level report", that is, companies should disclose their payments to governments for each oil, gas and mining project including taxes and royalties; Correspondingly, governments need to disclose receipt information. EITI is a global standard aimed at combating corruption in oil, natural gas and mining. This requirement applies to the 51 Member States of the organization. Lack of transparency in oil, gas and mining sectors has led to hundreds billions dollars in government revenue each year, often falling into the pockets of corrupt politicians and business giants.
Statistics
Data from US Institute of Energy Economics and Financial Analysis showed that 2016 China's overseas investment in new energy hit a record up to 32 billion US dollars with an increase of 60% YOY. According to data from Institute of Energy Economics and Financial Analysis (IEEFA), China completed 11 overseas transactions in 2016 with each worth more than USD 1 billion. Projects include investments in Australia and Chile's lithium battery manufacturers, Brazilian power distribution transactions as well as the construction of Vietnamese solar cell factory.
Cooperation Department of MOFCOM disclosed that non-financial direct investment was made to 1475 foreign enterprises in 122 countries and regions in the first half of 2017, with a total investment of RMB94.42 billion (USD 13.43 billion) ), down by 52.8% YOY. Investment mainly directed to manufacturing and information transmission, software and information technology services with YOY increase of 1.6% and 44.6% respectively. The turnover of foreign contracted engineering business reached RMB11.54 billion (USD16.77 billion), and amounts of newly signed contracts reached RMB82.49 billion (USD 11.97 billion). Additionally, By the end of January, there were 90.8 million workers dispatched overseas. Total amount of non-financial direct investment newly made to 41 countries along “The Belt and Road” totaled USD1.79 billion, accounting for 13.3% of the total foreign investment, up by 5.8 percentage points over the same period of last year.
“Economic Information Monitor” reported that Overseas Assets Volumes of Central State Owned Enterprises exceed RMB 5 trillion with railway, electricity, communications, equipment manufacturing as dominant , and high-speed rail, nuclear power, high voltage are major assets types.
View
In the context of accelerating the transformation of clean energy in the world, coal-related industry, especially coal-fired power investment are highly sensitive. In recent years, foreign financial institutions hold the same stance on investing in coal-related projects, that is, generally repulsive but with considerations to actual development needs for a transitional plan. Greenovation Hub believes that this attitude is more pragmatic, and suggested that multilateral financial institutions defining more specific on coal and electricity investments, making clear quantifiable indicators in relation to energy efficiency, emission levels and pollution control. If certain coal-fired power project is indispensable to improve local power system construction and enhance its reliability, then a detailed explanation should be made to propose key indicators for alternative energy plan, and establish a comprehensive and long-term vision of the economic evaluation system.
With the global trend of de-carbonization, coal-fired power projects in many areas become stranded assets due to energy structure shift, comprehensive cost increase and environmental constraints. Greenovation Hub proposed to promote research on energy emissions level and investment economy assessment model for energy projects and improve energy infrastructure investment risk management system.
- For AIIB's energy investment strategy, Global Climate Action Network (CAN) proposes AIIB to develop quantitative goals for their investment strategies under 1.5 degree scenario set by Paris Agreement.
The agency believes that projects supported by AIIB must be bench-marked against the target of 1.5 degrees and net zero emission before 2050. In addition, It is necessary for AIIB to conduct a cost-benefit analysis to adequately price GHG emissions in cost estimates. Greenhouse gas pricing should be based on negative externalities under a 1.5 degree, a 2 degree target, or even a higher temperature rise target scenarios. This view is representative among all institutions that concern global climate goals.
- HSBC expands its prohibited businesses commitment in the palm oil sector, moving to industry sustainable consensus.
In February 2017, HSBC announced that it is expanding its prohibited businesses commitment in the palm oil business. IHSBC will not agree new financing to refiners, traders, growers and mills if they violate “No Deforestation, No Peat and No Exploitation” (NDPE) policy. Greenpeace recently led a campaign challenging HSBC on its palm oil lending practices. The former stated that since 2012, HSBC has been involved in over USD16.3billion loans and nearly USD 2 billion corporate bonds financing for deforestation-linked activities. HSBC seeks to join the Banking Environment Initiative and Tropical Forest Alliance, hosted by the World Economic Forum.
- New Development Bank holds second meeting. More than ten Non-for-profit organizations jointly responded
On March 31, 2017, New Development Bank held second meeting in New Delhi, India, dozens of human rights and environmental social organizations issued joint statement urging the New Development Bank to make specific commitments on sustainable development in its proposed strategy and requiring the bank to avoid from investing in large hydropower and fossil fuels projects. Organizations issuing the joint statement include Oxfam, Brazil Greenpeace, Brazil WWF, International Rivers, Amazon Watch, Friends of the Earth, GT Infrastructure and so on. They called on the bank to change inherent development model that ignored local community and to avoid repeating the mistakes of environment deterioration and inequality.
Resource
In October 2016, the Greenovation Hub issued a report which conducted a case study on China National Development Bank's environmental and social risk management. The report compares environmental and social security policies amonginternational development financial institutions and National Development Bank. The report concludes that: CDB should not be regarded as a "unilateral" bank as it becomes more active internationally, therefore, it needs to adapt to the global investment environment. The report also suggested that CDB strengthening its compliance, communication, policy implementation, management system and disclosure as well as ability to control risks.
The United Nations Conference on Trade and Development (UNCTAD) issued “Global Investment Trends Monitoring Report “on February 1st. According to the report, 2016 global FDI flow is expected to decline by 13% to USD1.52 trillion, and such decline is mainly due to weak global economy and lackluster world trade growth. It is particularly noteworthy that manufacturing Greenfield investments are falling sharply.
At the beginning of 2017, International Investment Research Office, Institute of World Economics and Politics of the Chinese Academy of Social Sciences issued "National Risk Rating for China Overseas Investments ". This rating consists of five indicators, including economic conditions, solvency, social elasticity, political risk and relations with China, and 41 sub-indicators. This rating considers 57 Countries as samples (including 35 Countries along Belt and Road) as they account for 85% of China's total outstanding foreign direct investment and 97.41% of China's total overseas direct investment to all Belt and Road Initiative countries . It concludes that developed countries generally have higher ratings than that of the emerging economies with lower investment risk. Top 10 Countries on the rating are developed economies. Only Singapore has low risk rating among all the Countries along The Belt and Road, while six Countries have high risk rating and the remaining 28 Countries are rated as moderately risky.
December 23rd, 2016, Green Finance International Research Institute of Central University of Finance and Economics released “Research on Environmental and Social Risk Management in Overseas Investment and Financing Activities”. This study summarizes features of funding sources for overseas Chinese projects and financing channels as well as status quo and characteristics of environmental and social risk management mechanisms of these financing channels, the study also analyses reasons for the failure of 118 M&A transactions from 2005 to 2013. Moreover, it conducted analysis by industry, region and risk level on all projects reviewed by financial institutions under the equatorial principle in the most recent reporting year. It then reviews some examples of environmental and social risk management tools and mechanisms in global investment.
Observation on China's Overseas Investment (OCOI) wishes to present multiple views and perspectives to enhance understanding concerning China's overseas investment and global footprint, so as to promote China's "going out" in a more responsible and more sustainable way.
We welcome experts and scholars sharing related cases and views with us.
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