I. Global Green Bond Taxonomy

To facilitate green financing projects under the BRI, it is fundamentally important to work towards a global taxonomy of green bonds. Without a clear green bond taxonomy, it is difficult for investors to distinguish between green and brown projects, apply policy incentives for green products, and prevent “green washing”.Footnote ⁹ Currently, there are four commonly used and globally recognized standards for green bonds. In addition to China's Green Bond Catalogue, there are the Green Bond Principles developed by the International Capital Market Association, the Climate Bonds Taxonomy by the Climate Bonds Initiative, and the Common Principles for Climate Mitigation Finance Tracking developed by the joint climate finance group of multilateral development banks and the International Development Finance Club.Footnote ¹⁰ A unified classification or taxonomy system is an essential step.

As a result of the lack of a unified taxonomy for green bonds, the issue of coal investments has become controversial. Xie Wenhong, China programme manager for the Climate Bonds Initiative, noted that an assessment carried out in late 2019 estimated that almost 30% of China's green bonds were considered “un-investable” by international investors due to a mere 2% of coal assets within them.Footnote ¹¹ While EU issuers and financiers generally do not consider coal within their portfolio of investable assets, China's Green Bond Catalogue and National Development and Reform Commission (“NDRC”) Green Bond Guidelines includes “green coal” and “clean coal use”.Footnote ¹²

The investments in coal-fired plants have sparked controversy and even protests from local communities. Scholars note that while China is making commendable efforts to reduce its carbon emissions at home, the BRI threatens to lock China's partners into the same high-emission development that China is now trying to exit. Chinese companies are involved in at least 240 coal projects in 25 BRI countries, including in Bangladesh, Pakistan, Serbia, Kenya, Ghana, Malawi, and Zimbabwe. China is also financing about half of proposed new coal capacity in Egypt, Tanzania, and Zambia. While a few of these new plants will use the latest technology, many are less advanced and are not being planned with the carbon capture technology that would boost efforts to control climate change.Footnote ¹³ Bernice Lee, founding director of think-tank Chatham House's Hoffmann Centre for Sustainable Resource Economy, noted that the increasing bad publicity China has received for financing expansion of coal power around the world is forcing a rethink. In this regard, many BRI projects involving coal plants have received no new financing since 2019.Footnote ¹⁴

All of these efforts finally culminated in May 2020, when a new consultation draft of the Green Bond Catalogue was released by China's central bank (the PBOC), the NDRC and the China Securities Regulatory Commission (“CSRC”). The draft catalogue removes “clean coal” use, coal-fired power, coal mining and coal washing, bringing China into closer alignment with international standards.Footnote ¹⁵ The draft catalogue also includes hydrogen power, smart power grids, power storage and trade in sustainability-certified commodities for the first time.Footnote ¹⁶

II. Heighted Expectations from Investors

Alongside greater pushback from environmental groups, more stringent disclosure and reporting frameworks are being advocated by investors. Investors are increasingly wary about “green washing”, whereby investment funds adopt sustainable labels for its reputational benefits, but do not enforce tangible metrics to measure and report the sustainable impact of the underlying investments.

Importantly, investors have higher and more stringent expectations as to how “green” their investments should be. While some investors are only concerned with not investing in certain industries such as fossil fuel, which constitutes low level exclusion investing, other investors desire positive impact investing, whereby a positive environmental impact must necessarily result from the investment.Footnote ¹⁷ In this regard, setting up a transparent reporting framework for green bonds is crucial such that investors can have peace of mind and clarity in what their investments are funding.

In 2019, International Business Council (“IBC”) members flagged the existence of multiple ESG reporting frameworks and the lack of consistency and comparability of metrics as pain points.Footnote ¹⁸ Consequently, the IBC invited the World Economic Forum—in collaboration with Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers—to identify a set of universal, material ESG metrics and recommended disclosures. In a white paper released in September 2020, the IBC recommended 21 core and 34 expanded metrics and disclosures, which are organized under four pillars that are aligned with the SDGs and principal ESG domains: Principles of Governance, Planet, People and Prosperity. Companies are encouraged to report against as many of the core and expanded metrics as they find material and appropriate, on a “disclose or explain” approach.Footnote ¹⁹ This set of “Stakeholder Capitalism Metrics” and disclosures can be used by companies to align their mainstream reporting on performance against ESG indicators and track their contributions towards the SDGs on a consistent basis.Footnote ²⁰

III. Regulatory Developments

In addition to novel solutions like the “Stakeholder Capitalism Metrics”, which companies can voluntarily adopt, there have also been significant developments on the regulatory front. In order to meet the EU's climate and energy targets for 2030 and reach the objectives of the European Green Deal, it is fundamental to direct investments towards sustainable projects and activities and a common language and a clear definition of what is “sustainable” is needed. In this regard, the action plan on financing sustainable growth called for the creation of a common classification system for sustainable economic activities, or an “EU taxonomy”. The result of this was the EU's Taxonomy Regulation which entered into force on 12 July 2020. The regulation puts forth a common classification system to determine whether an economic activity is environmentally sustainable. Delegated acts will define technical screening criteria for each environmental objective and establish a list of environmentally sustainable activities.Footnote ²¹

In addition, from 10 March 2021, the Sustainable Finance Disclosure Regulation (“SFDR”) is set to apply to all asset managers that raise money in the EU, whether they are based within the EU or not.Footnote ²² The SFDR forms part of the EU's wider Sustainable Finance Framework and aims to make the sustainability profile of funds more comparable and better understood by end-investors. SFDR focuses on pre-defined metrics for assessing the ESG outcomes of the investment process. Much more emphasis will be placed on disclosure, including new rules that must identify any harmful impact made by the investee companies. For example, asset managers have to describe in adverse impact statements how it will take into account adverse impacts which investee companies have on sustainability factors when making investment decisions. In particular, Article 9 covers products targeting sustainable investments and is applicable where a financial product has sustainable investment as its objective and an index has been designated as a reference benchmark.Footnote ²³

It is worth noting that much of these developments are being pioneered within the EU, where the market for sustainable investments is more mature. As China's green bond market flourishes, it is foreseeable that companies in Asia will also adapt and incorporate stricter ESG disclosure frameworks and classification systems. Loh Boon Chye, the chief executive of the Singapore Exchange, noted that companies in Asia are catching up with their Western peers in adopting sustainability and ethical practices. He noted that 2020 has been an inflection point, and more companies are adopting sustainability and ESG practices. Indeed, according to an MSCI survey of institutional investors in the Asia-Pacific, 79% of investors increased ESG investments “significantly” or “moderately” in response to the pandemic, which is slightly higher than the global share of 77%.Footnote ²⁴

IV. Third-Party Certifications

Another solution is external verification through certification by reputable third-party institutions. For instance, the Climate Bonds Standard and Certification Scheme is a labelling scheme for bonds, loans and other debt instruments. The certification is divided into 2 phases: pre-issuance verification and post-issuance verification. Certification of a Climate Bond at the Pre-Issuance phase enables the issuer and underwriters to market the bond as a Climate Bonds Certified bond in their investor roadshow. Post-issuance verification must be taken in 24 months after issuance to confirm Post-Issuance Certification and maintain the Climate Bonds Certification. After the Post-Issuance verification, the Certification must be maintained by the issuer by submitting annual reports throughout the tenor of the bond, up until it matures. Although not mandatory, issuers can also engage a verifier for regular assessment throughout the tenor of the bond. This would provide investors with additional assurance.Footnote ²⁵

The Hong Kong Quality Assurance Agency (“HKQAA”) has also developed a Green Finance Certification Scheme to provide third-party conformity assessments for Green Finance issuers. Similarly, there are two types of certification, the pre-issuance stage certificate that validates the adequacy of the Environmental Method Statement in producing positive environmental effects, and the post-issuance stage certificate that verifies the continuous implementation and effectiveness of the Environmental Method Statement regarding the proposed positive environmental effects.Footnote ²⁶ The HKQAA Green Finance Certification may be useful to attract BRI financiers which are promoting its green bonds in Asia.

V. Feasibility Analysis and Impact Assessment

As seen from the necessity of post-issuance certifications, it is important to track the actual impact of the project being financed to assure investors that the proposed positive environmental effects are actually taking place. Rajeev Kannan of Sumitomo Mitsui Banking Corporation notes the following:

Indeed, as BRI green-financed projects tend to be complex infrastructure projects, the challenges faced are not straightforward, and require frank and open discussion amongst all stakeholders in order to determine the project's bankability, viability and sustainability.

Accurate forecasting of environmental harm is critical to ensure the longevity of green projects. Inaccurate environmental and social impact assessments and inadequate compensation and resettlement plans will create significant problems later on in the project's life cycle. For example, several high-profile BRI projects have been held out as negative examples associated with inadequate project feasibility forecasting, such as the Hambantota Port in Sri Lanka, the Malaysian East Coast Rail Link, the Jakarta-Bandung railway project and the Kyaukpyu deep seaport and special economic zone in Myanmar.Footnote ²⁸ Without proper impact assessments, developers run the risk of project “time bombs”, where the extent of environmental damage only becomes evident later in the project's life cycle.Footnote ²⁹

The Asia Society Policy Institute recommends that an environmental and social impact assessment be conducted after project approval and ahead of any construction, in consultation with local stakeholders.Footnote ³⁰ Impact assessments should be a mandatory tool for BRI projects, and these assessments should be rigorous, transparent, and involve local stakeholders. A full spectrum of risks should be assessed, and mitigation measures, including adequate compensation and resettlement plans, should be implemented if necessary. This will help to alleviate the risk of “time bomb” projects, which has the polar opposite effect of any green project aimed at sustainability.

VI. Conflict Avoidance and Dispute Resolution

Finally, it is crucial for parties to set aside time to consider what form of dispute resolution mechanism might work best for them. This could be a matter of bargaining power, or perhaps a question of anticipating who might be the claimant and whose assets might be the subject of enforcement.Footnote ³¹ Confidence in how disagreements will be handled will encourage continued investment and sustainable growth.Footnote ³²

From an enforcement perspective, arbitration may be preferred over litigation as arbitral awards enjoy cross-border recognition and enforcement through the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”). Alternatively, the Chinese International Commercial Courts (“CICC”) could be considered. The CICC would be a familiar and comfortable choice for Chinese parties and can also be strategically useful where assets are located in China as the CICC courts are permanent bodies of the Supreme People's Court (“SPC”). Additionally, the CICC is set up to be more internationalized than local courts. The judges are familiar with international laws and norms and proficient in English and Chinese.Footnote ³³ An Expert Committee composed of Chinese and foreign experts have also been set up and the members may mediate cases, and give advice and suggestions on relevant judicial interpretations and judicial policies formulated by the SPC.Footnote ³⁴

Since large-scale BRI infrastructure projects take several years to develop and execute, they are reliant on the parties having an amicable working relationship. While disagreements will necessarily occur, it is important that the parties’ working relationship is preserved. Mediation would thus be an apt tool as it encourages a more conciliatory, face-saving approach, and it is also a style of conflict resolution that is familiar and well-entrenched within the Asian dispute resolution culture.Footnote ³⁵ In any case, due to the political and economic ramifications of large-scale green projects under the BRI, it would be important for parties to have recourse to a more conciliatory avenue to discuss disagreements.Footnote ³⁶ Mediation is also bolstered by the United Nations Convention on International Settlement Agreements Resulting from Mediation (the “Singapore Convention on Mediation”), which came into force in September 2020, facilitating the enforcement of mediated international settlement agreements.

According to a McKinsey report, distressed infrastructure projects have one thing in common: they lack adequate controls. Specifically, they do not have robust risk-analysis or risk-management protocols.Footnote ³⁷ The key advantage of dispute boards is their ability to adopt proactive risk management and dispute avoidance. For instance, under the Singapore Infrastructure Dispute-Management Protocol (“SIDP”), dispute boards are required to carry out regular site visits and are equipped with a range of informal and formal tools to diffuse disagreements between the parties before they escalate. Explaining the rationale behind the SIDP, Indranee Rajah, Minister in the Prime Minister's Office, noted that infrastructure disputes usually involve a mixture of legal, factual, and technical issues. It would thus be helpful to have neutral third parties with technical, financial, and legal expertise looking at the disputed issues early on. The board can suggest solutions, including non-binding suggestions or advice, and parties can also agree for them to give binding rulings. The process is very flexible, and the end goal is to eliminate issues that can be settled early and upfront, and leave only those things that really need to be contested to arbitration or litigation.Footnote ³⁸ As such, dispute boards are a notable option amongst the arsenal of dispute resolution tools available to parties.