Challenges of Developing Green Finance in the Belt and Road Initiative

Undoubtedly, finance is the bloodstream of a modern and robust economy. With this as preamble, facing the global challenges in developing the Belt and Road Initiative (BRI), the green finance is profoundly vital to the countries along the BRI route, both in coordinating and balancing their environmental and economic developments. Not surprisingly, it can also impact collaterally global climate change.

Ever since the BRI was proposed, promoting green finance has always been one of its fundamental missions. Yet in doing so, one quickly discovered that the BRI countries are confronted by some critical issues, such as imperfect environmental data, inadequate financial laws and regulations, lack of system design, and strategy. Indeed, faced with imperfect top-level design, insufficient innovation of financial products, and inadequate risk management and control, these shortcomings have contributed quite significantly to the slowing down of the BRI green finance development.

In discovering the various above-mentioned industrial and institutional obstacles, numerous solutions were proposed to mitigate them. However, what is perhaps the most severe challenge in developing the BRI green finance is "how to connect it with the livelihood of the people concerned." Unfortunately, thus far, this fundamental issue has either been neglected or to a certain extent, despised by the green financier. Such neglect could have and has a far-reaching impact.

Recently, a careful study by us of the above challenges in 14 countries along the BRI route in Southeast Asia, the Middle East and Africa. These countries are Pakistan, Malaysia, Myanmar, Indonesia, Vietnam, Egypt, Kenya, South Africa, Ethiopia, Djibouti, Zimbabwe, United Arab Emirates, Saudi Arabia and Iran. From our study, we discovered that in all the financial processes, the following serious issues were either neglected or ignored altogether.

First, there seems to be no consideration given to the needs of the corporations who have the intention of "going green." In our research, we discovered that numerous Asian countries, such as Indonesia and Malaysia, have in recent years issued green bonds. For example, in February 2018, Indonesia had issued a $1.25 billion five-year green bond, thus becoming the first Asian nation do so in the international market. Besides, besides the government green bonds, corporations in Indonesia also has issued green bonds. There is one serious shortcoming of such bonds, public or private. They tend to target almost exclusively enterprises that are "green" already! For enterprises which are either not "green" or not sufficiently "green," one choice is simply to forget the idea of receiving such bonds. The other and darker choice, however, is to receive such finance at a lower cost, enterprises may disguise as being "superficially green" or "close to being green."

The reason for such occurrence is due to the desire of the financial investors' intention of the rapid success of their investments. It is not uncommon that investors prefer to complete the finance process in one short step, and therefore lack the propensity to consider enterprises which have a great or significant interest in the green development but thus far not in compliance with the conditions to receive green bonds. Many enterprises in Asian countries incline to accelerate in the direction of greening. However, it is well known that transforming from non-green to green requires arduous process and is time-consuming. Indeed, if the corporations issuing green bonds would have the desire and vision to set up "transitional green bonds" and/or "light green bonds," which would allow enterprises a breathing space to develop green financial products such as more flexible "transitional" green bonds and "light green" bonds, then the corporations could use such investments to develop climate change-related projects. In this way, it can, on the one hand, reduce the emergence of fraudulent behaviors such as "superficially green" and "pretending green," and renders a more standardized process of investment, and on the other hand, attract and encourage the traditional enterprises to develop into a robust green mindset.

Second, the development of green finance has thus far not paid sufficient attention, in fact quite often none, to the interests of vulnerable groups. In our research in several African countries, we discovered that with green bonds, some indigenous enterprises were successful in attracting finance to invest in clean energy, (e.g. solar power plants and wind power plants.) Interestingly, the fact that by constructing such clean energy infrastructures, it quite often could, and had gained local government interest to provide additional support to increase the electricity output to power the economy. However, the construction process of these projects turns out not as regionally friendly as imagined. For example, to gain the advantages of sunshine and wind, it would have to occupy farmlands and block water sources, both which the local people's livelihood would depend on at best, and at worse even destroys the original ecological environment. It could and often does, force the already impoverished population to relocate. In such cases, such as "clean energy" projects in the name of environmental protection could bring additional environmental anguishes and social hardships. This clearly will deviate from the original green finance mission.

With the above consideration in mind, simply by investing in clean energy or developing green finance is not only insufficient to resolve the issues of economics and livelihood of the BRI countries, but it also is not adequate to mitigate the environmental coordination and global climate change. With this as preamble, before doing so, it is worthy for the developers to engage in serious comprehensive studies. Globally speaking, while developing clean energy is needed, it must not be carried out without seamlessly coupling with the development of other related industries.

For example, among the countries we have studied, we noticed the development of an innovative economic industry which can be termed as "solar power generation+." In this industry, with the solar panels used for power generation, one could simultaneously carry out potato and fungus farming. It is well known that potatoes and fungus are most suitable to grow in dim-light environments. Therefore, one could conceivably carry out such farming underneath the solar panels. Furthermore, below the solar panels, one also can graze cattle and sheep, thus rendering such animals to serve in the role of lawnmowers, and the grass can absorb carbon dioxide to reduce carbon emissions.

Such a multi-task "solar power generation+" model not only will not occupy farmland, but they can also prevent the displacement, and thus the destruction of the farmlands and grasslands. In fact, by doing so, it can enhance the productivity of the surrounding of the farmland, promote agricultural development, and create additional job opportunities.

Third, thus far, the development of green finance is too focused on "investment" and not enough on "exit of finance." Indeed, among the 14 countries we had investigated, most governments and investors nearly exclusively focus on investing in green industry projects, and ignore when the international market calls for such finance to "exit."

For example, several Middle Eastern countries appear to have a proactive attitude towards the development of green finance. They manifest a distinct desire to develop green industries and generate electricity through clean energy. However, the underlying reason for such an attitude is because the governments of such countries do not intend to utilize the fossil resource which they possess under the ground for domestic electricity usage, but to leverage it for higher-profit exports. However, in the past two to three years, due to falling oil prices and lower costs, these countries have re-initiated investments in traditional power plants to generate electricity through oil and natural gas. As a result, incentives are diminished to implement green industries, not to mention the development of green industries and clean energy through green finance. In fact, for some countries, there is simply a lack of desire to construct wind or solar power plants to generate electricity.

The above scenario is particularly obvious in Saudi Arabia and the United Arab Emirates (UAE.) For example, nearly 97% of UAE's electricity production today is fueled by natural gas, while the remaining 3% by oil, coal and renewable energy.

What we have noticed in such cases is that there exists a fundamental conflict between the chemical fuel industry and the clean energy industry. There is no doubt that if one did not reduce or withdraw from the traditional energy industries, investment in the fossil fuel industry will surely increase, which presents a clear dichotomy when one also intends to vigorously develop green finance and promote the clean energy industry.

Facing this reality, institutions who are aware of the seriousness of the challenge, such as the World Bank, the Asian Development Bank, the Asian Investment Bank, the Norwegian Sovereign Fund, the Irish Sovereign Fund, the University of Oxford and Stanford University, etc., have all issued various withdrawal declarations since 2013. $9.38 trillion US dollars of funds have been redirected from various fossil fuel industries.

In summary, it is our firm belief that the challenges of

(a) neglecting the enterprises' interest in green development,

(b) neglecting the interests of various vulnerable groups,

(c) increasing investment in the chemical fuel industry while claiming to develop green finance,

are not only confronting the 14 BRI nations which we have mentioned, but it is also likely to confront most, if not all, relevant BRI nations that are developing or wish to develop green finance. Thus, without mitigating the aforementioned challenges, and rationalizing the logic and power of green industry and green finance development, we see that it will be quite difficult to promote the development of green finance and green industry as the cornerstone of the national economic sustainable development of BRI.

(The authors are Feng Da Hsuan, Honorary Dean, Hainan University Belt and Road Research Institute and Liang Hai-Ming, Dean of Hainan University Belt and Road Research Institute)