China‘s sustainability story

China is a place of extremes. From crazy-busy megacities to rural isolation, it is home to almost a fifth of the world’s population.¹ China’s economy is booming, second only in size to the US, and showing first-quarter growth of over 6%² – more than double the UN predictions for the rest of the world.³

Growth like this doesn’t come without costs. China’s economy is based on technology and manufacturing, both of which have resulted in the high emissions that give China its reputation as a polluting country. It is in fact the largest emitter of carbon dioxide, exceeding US and EU emissions combined.⁴

China – the context

To understand sustainability in China, it’s vital to switch off our comfortable, western perspective. Economic growth has been vital to lift much of the population out of extreme poverty. Whilst a prosperous middle class has emerged, China is still defined by many who don’t have enough to eat.

The environment simply hasn’t been the priority; hence unsustainable agricultural practices and the over-exploitation of natural resources have become the norm.⁵

We must also recognise our part in China’s pollution record, due to western ‘outsourcing’. We have passed on much of the ‘dirty work’ in terms of manufacturing as well as sending our waste that way, before China stopped accepting our recycling in 2018.⁶

China has reached a pivot point. As environmental crises affect more people, with floods, droughts, water pollution and famines,⁷ the environment has increasingly become the next problem to solve.

China continues to be about the extremes. Yes, there are areas of pollution so bad they are known as cancer villages, and cities choked with smog, but that must be balanced against the green tech and innovative projects reaching far ahead of the UK, both in terms of scale and ambition.

We’ll explore how China is tackling environmental degradation in the key themes of regulation and policy, renewables, ecology and technology, as well as addressing the issue of social and human rights.

Regulation and policy

China’s first environmental protection law was passed in 1989, and wasn’t upgraded until 2014. In fact, the country’s regulations are of a typical standard globally, but critics say that the issue is the gap between legislation and actual implementation.⁸

The hope is that zones of best practice can improve the overall picture. In 2018, China approved the creation of three sustainable development zones in Shenzhen, Guilin and Taiyuan⁹ which will implement the United Nations 2030 Sustainable Development Goals.

They will be demonstration sites, focused on different targets – from clean energy and ecological protection to urban development, but with the shared goal of eradicating poverty and ending hunger.¹⁰ Currently, seven more sites are planned, all with far reaching ambitions.

Renewables

China is responsible for the most emissions globally, but it is also a world leader for renewable energy. Last year, the solar and wind capacity built by China exceeded any other nation,¹¹ and China has recently switched on the largest floating solar plant in the world.¹² China is, according to the Global Commission on the Geopolitics of Energy Transformation, well placed “to become the world’s renewable energy superpower.”¹³

Nevertheless, China remains dependent on coal, and the demand for electricity continues to grow as wealth increases.¹⁴ There are plans to increase the number of coal-fired power stations until 2030.¹⁵

Ecology

It’s time for superlatives again with biodiversity, because China is home to nearly 10% of all plant species and 14% of animals in the world.¹⁶ Approximately half of its species, such as the giant panda and ginkgoes, are found nowhere else,¹⁷ making it vital for biodiversity on Earth. Until recently, China had a poor record on protecting its nature,¹⁸ but there are signs of change.

Tree planting programmes, such as the Shandong Ecological Afforestation Project¹⁹, mean that China is responsible for a quarter of human-caused greening since 2000. The goal has been to conserve and expand forests to mitigate land degradation, air pollution and climate change.²⁰

Nevertheless, ‘planting trees’ is far from a fix and there have been negative consequences from planting in places that were never forests, such as the drying up of water resources.²¹ It’s worth noting that mitigation for climate change is not a valid substitute for sensitive environmental management.

China’s network of nature reserves play a vital role in preserving biodiversity, yet despite an increase in the number of reserves, the total area has declined by 3% from 2007 to 2014 – often in areas where economic development has collided with nature reserve boundaries.²²

Technology

China’s expertise in technology can help with sustainability. Indeed, experts predict that the electric vehicles (EVs) revolution has started in China, with subsidies to produce EVs and batteries as well as obligations for car manufacturers to produce a certain percentage of EVs. China already produces over half of the world’s EV batteries²³ and 60% of all new electric cars in the world.²⁴

China has always shown an interest in artificial intelligence, with some stating that it is leading the way.²⁵ Many also believe that AI can help solve global environmental crises, from improving energy efficiency to tracking endangered animals.²⁶ However, cost, as ever, proves the major barrier to this becoming a reality in the short-term.

Social and human rights risk

It’s hard to talk about China without acknowledging the country’s incredibly poor human rights record. The human rights charity Freedom House have scored China 11/100, ²⁷ meaning it is classified as one of the least free countries in the world. The tight control of all aspects of Chinese society by the Communist Party means that dissenting voices are often supressed.

The state of human rights in China was brought into sharp focus just before Christmas when the story of a secret message smuggled out of a Chinese prison in a Christmas card hit headlines. ²⁸ The totalitarian nature of state control which exists in China has facilitated rapid economic growth. In turn, the strangle hold exerted by the Communist Party has been key to achieving recent shifts towards tackling the environmental degradation of industrialisation.

It is difficult to square the circle of investing in China in order to aid the transition to a lower carbon economy whilst simultaneously ignoring the human rights record of the country. However, somewhat paradoxically, in order to bring meaningful change to the current global position on climate change, the world is relying on China to make rapid progress in this area.

Investing in China

Chinese stock exchanges combined are the largest in Asia by market capitalisation, and the second largest in the world. Though unlike other large exchanges, they are not entirely open to foreign investment, due to tight capital account controls exercised by Chinese authorities. Over the past decade, China has realised the need for foreign investment, liberalising financial markets which have previously been dominated by domestic investors. This is driving higher standards of ESG integration and reporting, with large foreign asset owners seeking investments with strong ESG credentials. This is reflected in the new mandatory ruling for listed companies to disclose environmental information, building on China’s rapid progression in green finance while helping address remaining barriers.

The question regarding social risks of investment in China is difficult and is likely to be personal. Some will likely see the movement of China away from coal and the increased focus on renewables and other environmental factors as necessary in order to combat the problems of climate change and ecological destruction. However, some might view the suppression of the Chinese population by the ruling Chinese Communist Party as too much of a hurdle.

The FP WHEB Sustainability Fund is widely used in the Holden & Partners EST portfolios, carefully considering the balance of these sustainability arguments from both an environmental and social perspective. This fund includes China Everbright International Ltd,²⁹ which operates in mainland China and offers environmental protection services. The efforts of the company to manage natural resources mean that the fund managers at WHEB concluded that the environmental benefits of the stock outweigh the social risks posed by their country of operation.

Coronavirus

Of course, it is hard to discuss economics in China currently without mentioning Coronavirus. It is worth noting that an authoritarian state can organise its citizens very effectively in order to stop the spread and mass infection of a virus such as this. Such control may be more difficult to exert in western democracies where people are more used to individual freedom and liberty. Please see our recent article on this topic³⁰ for more information.

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¹ https://www.worldometers.info/world-population/china-population/

² https://www.bbc.co.uk/news/business-47957685

³ https://www.un.org/development/desa/dpad/wp-content/uploads/sites/45/WESP2019_BOOK-CH1-en.pdf

⁴ https://www.forbes.com/sites/rrapier/2018/07/01/china-emits-more-carbon-dioxide-than-the-u-s-and-eu-combined/

⁵ https://www.weforum.org/agenda/2018/07/what-we-can-learn-from-china-s-fight-against-environmental-ruin

⁶ https://www.theguardian.com/environment/2018/jan/02/rubbish-already-building-up-at-uk-recycling-plants-due-to-china-import-ban

⁷ https://www.weforum.org/agenda/2018/07/what-we-can-learn-from-china-s-fight-against-environmental-ruin

⁸ https://www.theguardian.com/environment/2014/apr/25/china-strengthens-environmental-laws-polluting-factories

⁹ http://www.globaltimes.cn/content/1090499.shtml

¹⁰ http://www.chinadaily.com.cn/a/201803/24/WS5ab5b3b5a3105cdcf6514007.html

¹¹ https://www.iea.org/weo2018/fuels/

¹² https://www.pv-tech.org/news/worlds-largest-floating-solar-plant-connected-in-china

¹³ http://geopoliticsofrenewables.org/report

¹⁴ https://www.iea.org/weo2018/fuels/

¹⁵ https://unearthed.greenpeace.org/2019/03/28/china-new-coal-plants-2030-climate/

¹⁶ http://www.cn.undp.org/content/china/en/home/ourwork/environmentandenergy/in_depth/biodiversity-conservation-.html

¹⁷ https://www.researchgate.net/publication/10745960_Protecting_China’s_Biodiversity

¹⁸ https://www.theguardian.com/environment/2018/nov/29/china-urged-lead-way-efforts-save-life-on-earth-un

¹⁹ https://www.worldbank.org/en/results/2017/07/26/china-afforestation-project-in-shandong-improves-environment-and-farmers-incomes

²⁰ https://www.nature.com/articles/s41893-019-0220-7

²¹ https://theconversation.com/chinas-fight-against-desertification-should-not-be-done-at-the-cost-of-water-security-83678

²² https://www.researchgate.net/publication/330608602_Changes_in_area_and_number_of_nature_reserves_in_China

²³ https://theconversation.com/the-electric-vehicle-revolution-will-come-from-china-not-the-us-116102

²⁴ https://www.openaccessgovernment.org/green-technologies-east-and-west/56080/

²⁵ https://www.inc.com/magazine/201809/amy-webb/china-artificial-intelligence.html

²⁶ https://www.techrepublic.com/article/how-ai-could-save-the-environment/

²⁷ https://freedomhouse.org/report/freedom-world/2019/china

²⁸ https://www.bbc.co.uk/news/uk-50883161

²⁹ http://www.whebgroup.com/media/2019/11/20191016-Portfolio-Holdings.pdf

³⁰ https://www.holden-partners.co.uk/coronavirus-update/