What risks does the Belt and Road Initiative present to the Paris Climate Change Agreement and the United Nations’ Sustainable Development Goals? Dr Ben Caldecott looks at how to green the world’s biggest infrastructure programmes and the tools financial institutions will need to help them support it.
The Belt and Road Initiative (‘BRI’) – or ‘One Belt, One Road’ – is a core part of China’s ambition to play a much more substantial role in international affairs. BRI consists of two main components, the land-based ‘Silk Road Economic Belt’ (SREB) and the oceangoing ‘Maritime Silk Road’ (MSR).
It is a strategic initiative to integrate trade with China and increase Chinese investment overseas. BRI covers infrastructure investments in regions including Central, South, and Southeast Asia, as well as East Africa, the Middle East, Near East, and Eastern Europe, and even Latin America.
BRI is a way for China to invest its significant glut of savings overseas. Anticipated cumulative investment in BRI-related projects has been estimated at between US$4 and US$8 trillion.
Given its scale, the successful implementation of the Paris Climate Change Agreement and the Sustainable Development Goals (SDGs) will simply be impossible if the huge amount of capital invested under BRI is inconsistent with tackling climate change and ensuring sustainable development.
Greening BRI is therefore a priority of global significance.
A pre-requisite for greening BRI is understanding:
- the impacts that current and planned BRI projects will have on the local and global environment, as well as on sustainable development, and
- the stranded asset risks current and planned BRI projects face from different physical and transition risks related to environmental change, particularly climate change.
At present, we have no idea to what extent BRI projects individually or collectively are compatible, or incompatible, with different sustainability objectives.
Nor do we know their environmental risk exposure.
Why we need BRI data and analysis
We need this data and analysis to be made available to inform decision making by governments, private and public financial institutions, financial regulators, companies, and civil society. This is of systemic importance.
Revealing the local and global impacts of BRI projects on the environment and sustainable development will help to identify which projects should, or should not, go ahead.
Showing the impacts that companies and investors are having through their involvement in BRI projects – both positive and negative – can create significant opportunities to shift behaviour and ensure that positive choices are made.
Revealing the environmental risks facing BRI projects will help appropriately price the cost of capital. This, in turn, will make it harder for at-risk projects to go ahead or be refinanced, thereby helping to avoid stranded assets.
Stranded assets have suffered from unanticipated or premature write-downs and devaluations.
Researchers, practitioners, and regulators have become increasingly concerned with how significant non-linear risks related to the environment could strand assets – with significant implications for asset values in different sectors and geographies.
This directly and indirectly affects the performance of financial assets and potentially creates risks for the global financial system.
Benefits for investors
Properly pricing environment-related risks will benefit asset owners in China, as well as other owners of capital that will invest alongside, such as domestic financial institutions in BRI jurisdictions, international private capital, and multilateral financial institutions.
It will also improve the resilience of individual financial institutions and help to minimise the financial stability implications associated with the risk of substantial asset stranding.
Data and analysis are fundamental to realising positive environmental outcomes for BRI and this is, fortunately, something entirely soluble. New public and private satellite constellations have rapidly transformed the quality and quantity of earth observation data.
The pace of change has been particularly rapid over the last five years in large part due to new private providers launching constellations, sometimes consisting of hundreds of satellites.
Higher resolutions, additional spectrums, smaller and lighter instruments, and lower launch costs, mean that, year after year, the capabilities of constellations are improving.
When combined with data science and artificial intelligence to scan and interpret this vast amount of imagery, insights can be derived into what is happening on the ground and sea.
This is potentially incredibly impactful for measuring and managing environment-related risks and the impact assets have on the local and global environment. By harnessing these developments in EO and AI, we can secure the geospatial data and analysis required to green BRI.
Dr Ben Caldecott is founding Director of the Oxford Sustainable Finance Programme and an Associate Professor at the University of Oxford, as well as Co-Chair of the Global Research Alliance for Sustainable Finance and Investment.
To follow our exclusive industry insight, like us on Facebook, follow us on Twitter, connect with us on LinkedIn and follow our blog.