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Friday, November 27, 2015, 12:06

Green path set to attract investors

By Cecily Liu

Energy efficient focus of projects in belt and road initiative is helping to win backing from international funds

Green path set to attract investors
A solar electric power plant in Hami prefecture, the Xinjiang Uygur autonomous region, on the ancient Silk Road. Because of the long-term aims of the Belt and Road Initiative, infrastructure is likely to be built on a sustainable basis. (LI MINGFANG / XINHUA)

China’s Belt and Road Initiative is likely to make a major contribution to the global effort to combat climate change, according to analysts.

The project, which aims to improve connectivity along the historical Silk Road, is a catalyst for cross-border investment into energy-efficient infrastructure.

Because much of the infrastructure associated with the belt and road strategy is for the long term, the green agenda is built into the investment decision-making process. The importance of this environmental value for financial investments driven by the initiative will therefore trigger more private investment into sustainable projects.

“Environmental sustainability is a precondition for infrastructure provision, and China’s belt and road strategy has fully embraced it when it comes to financing and investment of infrastructure projects,” said Christopher Bovis, a professor of business law at the Business School of the University of Hull.

Bovis added that the environmental sustainability and energy efficiency that are core values in the belt and road strategy represent a distinctive competitive advantage over other investment industries and sovereign funds.

In addition, energy efficiency represents an industry in itself across the world.

Renewable energy and the need to reduce dependency on fossil fuels will increase innovation and provide for lucrative opportunities in investment and infrastructure financing in the countries along the modern silk routes, Bovis explained.

The Belt and Road Initiative, proposed by President Xi Jinping when he visited Central and Southeast Asia in October 2013, consists of two key trade routes to Europe — the Silk Road Economic Belt and the 21st Century Maritime Silk Road — to strengthen regional economic integration.

Many of the countries along the belt and the road are developing nations, suffering from severe ecological problems and the challenges of environmental pollution resulting from old policies. China’s development strategy is expected to help them upgrade their infrastructure and improve energy efficiency.

To achieve the regional integration vision proposed by the initiative, China has already deployed funds totaling around $100 billion. Sustainability is expected to be at the heart of project assessments relating to the belt and road funds.

Funding from China

So far, $40 billion has gone into the Central Asia-focused Silk Road Fund. An initial tranche of $50 billion has been committed to a new Asian Infrastructure Investment Bank (AIIB), and $5 billion has gone into a new Marine Silk Road Bank.

Klas Eklund, a senior economist at the Swedish bank SEB, said that these new development banks and financial organizations created to achieve the belt and road strategy will help create a more stable and transparent long-term environment for private investments, reducing risk and thereby stimulating private investors to join in greener practices.

“Consequently they may be able to crowd in private investment,” Eklund said.

This method of attracting private sector investment often happens because public sector-led multinational development banks and international financial institutions typically invest in research work for sustainable projects for the use of private investors.

They can also use their high credit rating to bring down the cost of financing for the entire project, thus making them more attractive to private investors.

In addition, the use of green finance instruments to fund sustainable infrastructure projects is consistent with the Chinese government’s strategy of growing China’s green bond market.

Unlike conventional bonds, green bonds only back projects with sustainability as a core objective. These bonds have proven popular with international funds that have sustainability as part of their mandate.

Green bonds are a new but rapidly growing asset class — about $40 billion worth of these financial instruments have been issued globally. But in China it is estimated that at least 2 trillion yuan ($313 billion) is needed to achieve its environmental targets under the 13th Five-Year Plan (2016-20).

Eklund said he expects green bonds to be used for green investments along the belt and road route.

“I also assume that the new investment banks will adhere to the Equator Principles and similar high standards,” he said, referring to a framework for managing environmental and social risk in projects. “They will stress test investments with respect to effects, and disclose environmental information to a much greater degree than previously.”

ESG — environmental, social and governance — is a common way of measuring the sustainability and ethical impact of an investment. The outcomes of the assessment play a role in helping asset managers make investment decisions, especially those who manage funds that practice socially responsible investment.

Eklund’s views are echoed by Mattia Romani, managing director for country and sector economics at the European Bank for Reconstruction and Development. He said the China-led financial institutions such as the AIIB and the Silk Road Fund can share lessons with other international counterparts on how to lead investment into environmentally efficient projects.

“The type of infrastructure we lay out over the next decade will determine the sustainability of the next decade, especially the emission intensity and consequences for climate change,” Romani said.

Long-term benefits

He added that all these institutions need to be investing in long-term sustainable projects. These may cost slightly more at the outset, but over the long term it makes economic sense as energy conservation will bring down the overall project costs. It is important for multinational development banks to emphasize these benefits to the private sector, Romani said.

Zhang Ying, associate dean for China business at the Rotterdam School of Management at Erasmus University, said that investing in sustainable infrastructure and efficient projects is crucial for China’s go-global image, so it is also a crucial part of the Belt and Road Initiative.

“Sustainability facilitated by China’s belt and road strategy would not just benefit China, but will benefit the whole world,” said Zhang, who is also a visiting scholar at Harvard Business School. “China’s push for sustainability shows that it is taking a lot of the responsibility to solve global problems like pollution.”

The Chinese government’s push to ensure the sustainability of belt and road-related infrastructure investment means that regulations will be made for private firms to implement these sustainability projects, and in turn it will help them to upgrade their technology for China’s domestic market.

“Many of these private sector firms are just surviving in China, and as the Chinese economy nears full capacity, much of China’s industrial production needs to be exported,” said Zhang.

“Because of China’s wish to maintain a sustainable image for its belt and road strategy, it will regulate these firms, and effective regulation will help them to go through a structural shift to become more sustainable as well.”

Thomas Puls, a senior economist at the Cologne Institute for Economic Research, said an additional factor that will help these countries to improve energy-efficient production is connectivity across the region facilitated by the Belt and Road Initiative. This is because more connectivity and trade create competition for energy-supplying companies across the region, meaning they strive for more efficient technology.

“Because of the trading of energy, only the most efficient and sustainable technology will be able to survive across this newly created common market,” Puls said, “and this will trigger environmentally friendly technology to develop.”

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