China now ranks second in the world as a financier of industries linked to tropical deforestation—and a new report shows the country’s banks hold the keys to a better path.
“Between January 2016 and April 2020, Chinese FIs [financial institutions] provided at least US$15 billion in loans and underwriting services” to companies involved in the production of the “Big Six” rainforest-imperilling commodities—beef, soy, pulp and paper, palm oil, rubber, and timber—in Southeast Asia, Brazil, and Central and West Africa, write Ward Warmerdam and Tom Picken in a recent post for China Dialogue. Warmerdam, senior researcher at Profundo, was lead author of the report, recently published by Forests & Finance, while Picken is director of Rainforest Action Network’s Forests and Finance Campaign.
That level of financing makes China the second-largest underwriter of tropical forest-risk commodities, far behind Brazil at $53 billion, and ahead of Indonesia at $14 billion.
In their analysis of more than 300 companies, the researchers identified 75 Chinese creditors, “including the Big Four Chinese commercial banks,” as having directly financed forest-risk commodities, along with more than 100 institutional investors, mainly asset managers and insurance companies “with financial relationships to these creditors.”
The study also revealed that 66% of forest-risk financing by Chinese FIs is focused on Southeast Asia, with Central and West Africa and Brazil accounting for 19 and 13%, respectively. Pulp and paper and rubber each receive one-third of that funding.
The exposure of Chinese FIs to Indonesia’s pulp and paper sector stands as a powerful illustration of the material and ESG risks generated by the unhappy correlation between their investments and “illegal or unsustainable corporate practices like deforestation, peatland degradation, land and forest fires, land rights violations, and bribery,” the authors state.
“About one-third, or $5 billion, of Chinese loans and underwriting captured by our data went to two family-controlled conglomerates that dominate the Southeast Asia pulp and paper sector: Sinar Mas Group (parent of Asia Pulp and Paper) and Royal Golden Eagle Group (parent of APRIL and Toba Pulp Lestari),” explain Warmerdam and Picken. “Both groups have a well-documented track record of deforestation, land fires, and violations of land rights and human rights.”
The authors say companies continue to operate in the midst of a constant stream of illegal fires, as well as the ongoing land conflicts between local communities and pulp suppliers. “Sinar Mas and Royal Golden Eagle supply chains remain ‘locked in’ to wood fibre produced on flammable peatland to meet the demand of its mills.”
In terms of China’s financial footprint in Central and West Africa—and the carbon footprint that it generates—the study found that “approximately 19%, or $2.8 billion, of Chinese forest-risk loans and underwriting was directed to groups operating in this region, with 79% attributable to rubber and 21% to timber.” A major recipient of that money is the state-owned China Forestry Group Corporation (CFGC), which was “provided with $663 million between January 2016 and April 2020.”
In Brazil, Chinese FIs provided at least $1.4 billion in loans and underwriting services to soy production in the country between January 2016 and April 2020.
While the Chinese government’s on-paper awareness of ESG risks like deforestation and human rights violations is “arguably ahead of other countries in the world” the authors add, its talk far exceeds its walk. While the country may produce solid policy—including the 2012 Green Credit Guidelines and the 2017 Guidelines on Regulating the Banking Industry in Serving Enterprises’ Overseas Development and Strengthening Risk Control—those documents “lack legal weight,” and “implementation appears weak.”
To help the Chinese government improve its policy response, the Forests & Finance study proposes “a set of minimum standards based on the three ESG pillars (environment, social, and governance) and 34 criteria that Chinese FIs should demand of their clients and investees.” Some of those “concrete steps” include clear policies, enhanced due diligence to screen potential investments, regular monitoring of client and investor activities, engaging responsively with civil society, opening lines of communication with affected communities—and ultimately, divesting from companies that “fail to take immediate action to correct any ESG policy violations and put in place corrective actions to prevent reoccurrence.”