Paulson Institute Issues Policy Memorandum on How Chinese Policy Banks Can Help Improve Environmental Standards

Chicago, ILThe Paulson Institute has issued the latest in its series of Paulson Policy Memoranda, concise essays that offer concrete prescriptions on economic and related policy issues.  The memorandum, titled Profiting from Precaution – How China’s Policy Banks Can Enhance Social and Environmental Standards is written by global economic development expert and author, Kevin P. Gallagher.

In the new Paulson Policy Memorandum, Gallagher identifies Chinese overseas environmental lending standards, compares them to those of Western-backed lenders, offers a rationale as to why meeting and exceeding global environmental standards would be in the interest of China and its banks, and suggests options for improvement.

“Chinese policy banks have an unprecedented opportunity to leapfrog the rest of the world by adopting state-of-the-art environmental guidelines,” said Henry M. Paulson, Jr., chairman of The Paulson Institute and former U.S. Secretary of the Treasury and chairman and chief executive of Goldman Sachs. “China’s ability to establish early environmental and social guidelines has been notable but the country has only recently begun to build out its global footprint. As it does so, China can and should pursue the joint imperatives of economic and environmental sustainability.”

In the Policy Memorandum, Gallagher compares Chinese institutions’ lending guidelines with those of their Western-backed counterparts. For example, in comparison with the leading International Financial Institutions, the China Development Bank (CDB) incorporates four of the commonly accepted social and environmental guidelines, but does not include important measures such as public consultation, a grievance mechanism and an independent review and assessment.

Noting that Chinese institutions have already laid a foundation on which to build, Gallagher suggests that closing the gap with counterparts across the world would not be difficult.  He offers several approaches for Chinese banks and firms to consider, including: (1) partnering with international counterparts, such as the Inter-American Development Bank, in order to share political and other environment-related risks as well as to accelerate the spread of new ideas; (2) leveraging third-country opportunities that may emerge from China Ex-Im Bank’s reported collaboration with its U.S. counterpart in Ghana; and (3) expanding collaboration between Chinese lenders and Chinese corporations, which have also had to take a hard look at their environmental practices in the face of local political risk.

“To be sure, Chinese institutions have sprinted ahead of the curve in their early adoption of environmental and social guidelines for their overseas operations,” said Gallagher.  “However, in order to mitigate new political risks as their global footprint grows, and to better compete in and access global markets, Chinese policy banks should look to expand their environmental guidelines, broaden them and make them more understandable to public stakeholders.  By adopting enhanced practices, China’s policy banks may do more than just run ahead of the historical norm – they could become leaders themselves.”

Gallagher is associate professor of International Relations at Boston University, where he is co-director of the Global Economic Governance Initiative.  He is the co-author of The Dragon in the Room: China and the Future of Latin American Industrialization and other books.  An expert in global investment, he serves on the investment subcommittee of the U.S. Department of State’s International Economic Advisory Committee and is an advisor to the Investment Division of the United Nations Conference on Trade and Development.