Managing Environmental Impacts

China’s outward foreign direct investment (OFDI) has been increasing dramatically. During the 2008-2009 financial crisis, global foreign direct investment (FDI) decreased by 40%, whereas China’s OFDI increased by 8% (UNCTAD, 2013). In 2012, Chinese investors invested US$77.22 billion in 141 countries and regions, an increase of 28.6% over 2011 (MOFCOM, 2013). In the post-financial crisis era, Chinese companies and banks provided funds to countries that were short of money but eager to develop. In these countries, Chinese investments have been generally welcomed, but they have also led to some concerns. For example, Chinese investors invested in some high-risk environmental projects, including some that had been turned down by other investors due to high risk. Environmental impacts can cause turmoil and lead to criticism from communities and host country governments, thus jeopardizing projects. Chinese investors are faced with the responsibility and challenge to protect the environment in the countries hosting their investments while promoting local economic development.

Multi-national companies from other countries have also experienced some of the same issues that Chinese companies are facing now. Through years of investment, these companies have garnered experiences and lessons regarding the environmental and social risk of foreign investment. Chinese companies can utilize these experience and lessons to create opportunities for their own investments and risk management systems. WRI conducted six case studies, each focusing on a non-Chinese multi-national company, and used an integrated analytical framework to analyze environmental and social risk management. This analysis has shown that strong environmental and social risk management can benefit companies, while weak risk management can result in profit losses and reputational damage.

This working paper consists of six cases, and includes an array of sectors. The cases are summarized below:

  1. In the 1960s, the US company Freeport-McMoRan Copper and Gold Inc. began mining in Papua, Indonesia. Freeport’s investment began during a politically tumultuous era. Its investment is also associated with widespread human rights violations and environmental degradation in Indonesia’s remote and impoverished areas. With increasing pressure from the international community and local tension erupting in the 1990s, Freeport eventually redesigned the way it handled environmental and social issues. Although Freeport has now greatly reduced its environmental impact and brought benefits to the local communities, the effects of the difficult situation from the previous era are still seen today, and violent situations still occur.
  2. Australian BHP Billiton entered Papua New Guinea in 1981 to explore the Ok Tedi copper mine. In the ensuing 17 years, the waste from the copper mine polluted the nearby Ok Tedi River and Fly River basin. The international community exerted great pressure on BHP Billiton, contributing to the company withdrawing its investment in 2001.
  3. Newmont Mining Corporation, a US company, developed Ahafo Mine Project in Ghana in 2003. From 2005 to 2006, the project led to nearly 10, 000 homeless or relocated people. Three years later, a cyanide spill in a nearby river led to widespread deaths of local fish populations. Although Newmont paid significant attention to environment and social impacts, this project still caused considerable impacts.
  4. Malaysian Sime Darby invested in the palm oil industry in Liberia. The Liberian government and Sime Darby signed a franchise agreement giving Sime Darby the right to use 220, 000 hectares of land in 2009. Lack of clarity over land ownership led the government to represent local communities and residents in negotiations with Sime Darby to gain support for the project, but it created tension between Sime Darby and local communities. It hindered the progress of the project, leading to huge financial losses.
  5. Asia Pulp & Paper (APP) is one the world’s largest pulp and paper companies; its projects have contributed to large-scale deforestation in Indonesia. Since the 1990s, APP operations both directly and indirectly led to conflicts among local communities, exacerbation of climate change, and destruction of local vulnerable species habitats. Through the efforts of NGOs, large downstream enterprises boycotted APP, which led to significant financial loss. This pressure led to APP’s commitment in February 2013 to use sustainable development best practices.
  6. The Camisea Natural Gas Project is Peru’s biggest energy project. The project is financed by a consortium led by Argentina PlusPetrol with additional funds from international financial institutions. Although both the Peruvian government and the Inter-American Development Bank established detailed environmental regulations and “security” policies, the consortium only took partial responsibility for environmental protection and stakeholder communication. Located in an ecologically sensitive area in Peru, the Camisea project is one the world’s most controversial natural gas projects.

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