Beijing’s Belt and Road Initiative (BRI) is now well over a decade old—and has invested hundreds of billions of dollars in infrastructure projects across the globe. However, following the commitment of Chinese state-backed financing, many projects have encountered environmental, social, and governance (ESG) problems during implementation.
As China has revamped the BRI, how has it sought to mitigate these risks and address project implementation challenges? AidData initially examined levels of ESG risk exposure, in its 2023 Belt and Road Reboot report, in China’s infrastructure financing portfolio between 2000 and 2021.
AidData recently extended this analysis to China’s grant- and loan-financed infrastructure portfolio in 2022 and revisited the wisdom of the “BRI 2.0” strategy of outsourcing risk management to multilateral institutions and Western commercial banks. In this renewed analysis, we found decreasing ESG safeguards in 2022, driven largely by a collapse in syndicated infrastructure commitments from Chinese state-owned creditors—from 40.5% of China’s total infrastructure financing in 2021 to 20% in 2022—based on volatility in markets and interest rates.
Scale and speed bring challenges in the early stages of the BRI: ESG risks
Both before and after the launch of the BRI, China has dominated the global infrastructure market on a key dimension: scale. Over the past two decades, Chinese state-owned creditors have provided over $792 billion in financial commitments to support over 5,118 infrastructure projects. During the BRI era (from 2014 to 2022), they provided $386.2 billion of aid and credit for 2,594 infrastructure projects.
However, China has also outpaced its peers and competitors on another important dimension: speed. On average, it takes institutions like the World Bank between 5 and 10 years to complete large-scale infrastructure projects. However, Beijing’s Belt and Road projects moved at a much faster speed—taking an average of three years to complete.
While China’s rapid rollout of large-scale infrastructure projects around the world expedited the construction of roads, railways, airports, seaports, and power plants, it also exposed significant implementation challenges. Between 2000 and 2017, more than half (54%) of Chinese-financed infrastructure projects in low- and middle-income countries faced significant environmental, social, and governance challenges (see page 122 of Belt and Road Reboot). These early-stage challenges inspired a redesign of the BRI and the eventual implementation of a “BRI 2.0” strategy.
Beijing’s attempt to redesign the BRI
As ESG challenges in Beijing’s overseas infrastructure portfolio became more acute, Chinese lenders and policymakers shifted gears and began codifying contractual safeguards and policy changes in order to mitigate these risks. This shift, which took place between 2018 and 2021, was part of a larger redesign and rebranding of the BRI that involved moving away from large-scale projects to ones that were “small and beautiful.” However, rather than overhauling the due diligence procedures of its own banks, Beijing’s strategy focused on outsourcing risk management to other lending institutions.
Chinese government agencies—such as China’s State Administration of Foreign Exchange—initially called upon the country’s banks to adopt more stringent ESG safeguards and to follow the lead of multilateral development banks. Beijing later took steps to require that Chinese companies “disclose their ESG data in 2026” to the China Securities Regulatory Commission (CSRC).
Some of these changes were achieved through increased use of syndicated lending instruments. China increasingly relies on Western commercial banks and multilateral institutions—with stronger due diligence standards and safeguard policies—to find better borrowers and better projects. In effect, it is outsourcing risk management, rather than relying on its own banks to do so. Beijing has also slowed the provision of credit through the policy banks, while expanding its lending operations through state-owned commercial banks. This change is significant because Chinese state-owned commercial banks typically require stronger contractual safeguards in their overseas loan agreements to address ESG challenges.
De jure safeguards usually establish a set of rules and standards related to ESG risk management, while also putting in place mechanisms to monitor compliance and sanction noncompliance. Therefore, AidData has evaluated the extent to which the de jure ESG safeguards that apply to China’s overseas infrastructure project portfolio identify the presence or absence of:
- rules or standards to establish behavioral expectations related to ESG risk management and mitigation;
- oversight mechanisms for monitoring compliance with those behavioral expectations;
- enforcement mechanisms for sanctioning noncompliance with those behavioral expectations, such as indemnification, withholding disbursements (see page 141 of Belt and Road Reboot).
Given that China’s overseas infrastructure project portfolio is primarily channelled through eight different types of financial instruments, AidData has evaluated the stringency of the safeguards that apply to each of these instruments. The table above shows that the bilateral lending instruments of Beijing’s policy banks (China Eximbank and CDB) have the weakest de jure ESG safeguards, while the syndicated and bilateral lending instruments of state-owned commercial banks have higher levels of safeguard stringency.
De jure ESl safeguards typically call upon borrowers to use various infrastructure project risk mitigation mechanisms, such as Environmental and Social Impact Assessments (ESIA) or Environmental Management Plans (EMP), as well as Resettlement Action Plans (RAP), Gender Action Plans (GAP), and Open Competitive Bidding (OCB). Such plans and assessments often require feasibility studies in advance of implementation, so that potential risks can be identified and mitigated proactively rather than reactively. For example, when a $1.36 billion syndicated loan was provided by multiple Chinese banks for the construction of the 1320MW Thar Coal Block-1 Power Plant in Pakistan in 2020, an ESIA was required.
Beijing’s redesign of the BRI yielded some early results. Although ESG safeguards remained weak during the early years of the BRI, 51% of China’s infrastructure project portfolio in low- and middle-income countries was supported by strong safeguards in 2021.
By 2022, Beijing’s approach to ESG risks with BRI projects had evolved
Preliminary analysis of China’s loan and grant-financed commitments between 2000 and 2022 indicates that commitment year 2022 represented a sharp break from the earlier trend of stronger ESG safeguards and lower ESG risk exposure during the “BRI 2.0” period (2018-2021). Although Beijing has taken significant measures to reduce ESG challenges and increase safeguards in the BRI since 2018, its financial commitments for overseas infrastructure projects in 2022 faced relatively high levels of ESG risk exposure.
AidData’s previous analysis showed that the level of ESG risk exposure in China’s loan and grant-financed infrastructure portfolio had fallen to 33% in 2021. However, this analysis of preliminary 2022 data indicates that this figure increased to 48% in 2022. Environmental and social risk exposure was especially prevalent—around 30% of all new infrastructure commitments in 2022 faced both these risks. Governance risk exposure was half that, at 16%. Many projects have risk exposure on multiple dimensions, bringing the percentage of projects with at least one type of risk exposure to 48%.
Between 2018 and 2021, Beijing made significant progress in reducing project implementation risk exposure by using financial instruments with strong ESG safeguards. 57% of China’s new loan- and grant-financed infrastructure commitments benefited from strong safeguards in 2021. However, by 2022, the application of strong safeguards dropped significantly—to 21%.
Beijing’s BRI 2.0 strategy relied heavily on ratcheting down bilateral financing from China’s state-owned policy banks (China Eximbank and China Development Bank) and ratcheting up the use of syndicated lending. The pivot to syndicated lending effectively outsourced ESG safeguards to Western commercial banks, multilateral institutions, and Chinese state-owned commercial banks. By 2021, nearly half of China’s infrastructure financing was syndicated (see Chapter 3 of Belt and Road Reboot).
However, AidData’s preliminary 2022 data shows a sharp decline in syndicated lending for infrastructure projects. This drop coincided with a decline in the use of strong ESG safeguards in China’s grant and loan-financed infrastructure portfolio.
The 2022 numbers expose a potential weakness in Beijing’s de-risking shortcut: the close tie between syndicated lending and its reliance on floating interest rates.
Syndicated facilities are typically dollar-denominated and priced according to floating benchmark rates, such as LIBOR (the London Inter-bank Offered Rate phased out in 2024) and SOFR (the Secured Overnight Financing Rate). Floating interest rates by nature fluctuate over time, but 2022 saw a perfect storm of volatility. LIBOR was the most common floating interest rate across China’s loan-financed infrastructure portfolio (especially for syndicated loans), but in mid-2021 the UK Financial Conduct Authority announced it would cease to publish LIBOR rates in July 2023. As an alternative, SOFR was established as the preferred replacement. However, during calendar year 2022, the U.S. Federal Reserve raised rates seven times in 2022, catapulting SOFR from near-zero in January 2022 to more than 5% by year’s end—an unprecedented one-year swing. This volatility, combined with the ongoing LIBOR-to-SOFR transition, made market-based financing prohibitively expensive for emerging market borrowers already facing debt distress.
Unlike bilateral lending from China’s policy banks—which is often fixed-rate and motivated by strategic considerations—syndicated lending depends on the risk appetite of financiers and the willingness of borrowers to assume floating-rate exposure. The data for 2022 suggest that one or both factors led to the collapse in demand for such loans. On one hand, creditors had to account for higher levels of volatility and uncertainty in the market, which may have led to more conservative lending practices. On the other hand, public and private borrowers saw the debt service requirements of their existing loans increase, which may have diminished their appetite for new loans. The result was a near collapse in syndicated infrastructure commitments from Chinese state-owned creditors—from 40.5% of China’s total infrastructure financing in 2021 to 20% in 2022. And this decline was accompanied by a dramatic reduction in infrastructure financing volumes.
The lesson of 2022 is that syndicated lending, while potentially useful for outsourcing risk management, is not a reliable de-risking shortcut during periods of global monetary tightening or uncertainty.
Looking to the future of ESG risk mitigation
Beijing’s efforts to address ESG challenges in its infrastructure project portfolio are still in their infancy. They only started gaining traction between 2018 and 2022. However, the events of 2022 highlight the shortcomings of Beijing’s ESG risk management workaround (outsourcing contractual safeguards to non-Chinese banks and multilateral institutions).
In addition to these challenges, there is a gap between de jure safeguards, what is codified in contracts, and de facto safeguards, the actual implementation of these safeguards. Many overseas infrastructure projects financed by Chinese creditors continue reporting challenges, such as the construction of the Pokhara airport in Nepal—a project that is now under investigation for financial irregularities. Another case in point is the 1320MW Thar Coal Block-1 Power Plant construction in Pakistan, where five Chinese creditors provided over $1 billion of financing. Although an ESIA was undertaken, local populations living in the vicinity of the project were not consulted about its implementation and received minimal compensation for the land, leading to displacement and protests.
Looking ahead, China will likely need to address the implementation gap between de jure and de facto safeguards. As it seeks to mitigate environmental, social, and governance risks, it will also need to address broader challenges associated with its flagship infrastructure initiative. Chief among these is the need to ensure that borrowers can service their outstanding infrastructure project debts without serial bailouts and restructurings.
Methodology note: All 2000-2021 statistics are taken from AidData's Belt and Road Reboot report based on the 3.0 version of AidData’s Global Chinese Development Finance (GCDF) dataset. To generate comparable statistics for 2022, we replicated the ESG methodology from Chapter 3 of the Belt and Road Reboot report and applied it to our newly collected data on China’s grants and loan commitments for infrastructure projects in 2022.
