ESG Risk Managment: Recommendations for the AIIB

This paper (available in Chinese here) proposes a new approach to managing environmental, social and governance risks (ESG) within the Asian Infrastructure and Investment Bank (AIIB).  The approach has been designed to meet two imperatives: speed of implementation and the effectiveness of environmental and social protection.  The AIIB does not have to choose between these outcomes, which are all-too-often presented in conflict.  An approach to ESG risk management that is based on engaging local people as counterparties might allow the AIIB to invest in infrastructure as quickly as is required while also delivering high social and environmental performance.

One cannot understand the AIIB without realizing how poorly international institutions like the World Bank, International Monetary Fund (IMF) and Asian Development Bank (ADB) align with Chinese interests – that is, the interests of the world’s most populous nation and its second-largest economy. 

The Chinese have a voting share in the World Bank that bears little relationship to their economic importance.  When China asks the IMF to help address Asia’s infrastructure gap, it finds the Fund preoccupied with helping the Eurozone nations bail out German banks who have lent to Greece.  At the ADB, they must accept that Japan retains a permanent hold on the institution’s presidency.

These institutions’ ongoing failure to invest in Asian infrastructure will have an impact on the Chinese economy. China’s forward-looking economic performance requires that places like Laos, Myanmar, Pakistan and Indonesia develop, not just as providers of raw materials for Chinese manufacturing, but also, sources of demand for Chinese goods. We therefore presume that the AIIB was born of the realization that, if China cannot influence the World Bank or Asian Development Bank to build the infrastructure its neighbors need, the only choice is an alternative. 

Western countries such as Germany, France and the United Kingdom made a courageous decision to buck American opposition to the AIIB and join the project.  But they did so with some reservation, which is that they are afraid the AIIB will make the rest of Asia look like China. They are worried that economic prosperity will be gained at the cost of irreversible environmental, social and political damage.

This is not a specious concern: China’s model of economic growth has long favored implementation over environmental protection, transparency, minority rights and other similar issues. The longstanding position of the Chinese is that their trajectory of economic development is little different than that followed by the West more than a century ago.  Look at the Ruhr Valley or Pittsburgh or Liverpool in the early 1900s, they say, and you will see the same problems you see in Guangzhou or Harbin today – and in regimes with similar corruption issues.

This is undeniably true. The difference is that those problems happened in a world where carbon emissions had not risen to the point they are today, largely because the planet’s population is roughly five billion people larger than it was in 1900. This means less margin for environmental error and a far greater propensity for disruption of social cohesion. And so, the AIIB will have to adjust and innovate.

This paper (also available in Chinese) offers our thoughts and analysis on why, how and when this might happen in practice.