The funds for Latin America’s energy transformation need to be collaborative and not politicised, writes Global China academic Rebecca Ray.
Latin America has the potential to be a renewables powerhouse. It ranks highly for solar and wind power potential, and is home to some of the largest reserves of crucial transition minerals, like lithium and copper.
But many existing transition projects have led to clashes with local communities, who feel they have not been adequately consulted on potential environmental damage, or suitably compensated.
Billions of dollars will be spent on the energy transition in Latin America. The question, then, is: how best to direct this finance toward mining projects with high-level environmental, social and governance (ESG) performance? And in addition, toward renewable energy access for communities across the region?
A key part of the puzzle involves the main drivers of demand: Chinese investors, who in turn receive financial backing from Chinese public development finance institutions (PDFIs).
A new series of working papers – coordinated by the University of the Pacific’s (UP) Center for China and Asia-Pacific Studies in Peru, and the Boston University Global Development Policy Center in the US – traces these relationships and outcomes throughout Latin America.
The papers conclude that Chinese firms are capable of high-level ESG performance but require clear, simple regulations, as opposed to the existing complex patchwork of rules that can frequently create loopholes and misunderstandings in this sensitive sector. These would typically be provided by host governments, as well as PDFIs.
Furthermore, fully realising Latin America’s potential for renewable energy deployment will require deep coordination between national governments and PDFIs, to develop system-wide portfolios of investable projects.
Chinese finance and green supply chains
Among global PDFIs, Chinese institutions in particular have led on financing mining projects in Latin America. They provided hundreds of millions of dollars in support of the Toromocho copper mine in Peru, for example.
Renewable energy projects have generally attracted relatively less interest from public development finance institutions. They are instead being funded via multilateral development banks, such as the Inter-American Development Bank (IADB), often with goods and services provided by Chinese contractors. For example, the IADB’s recent utility-scale solar project in Guyana sourced its equipment from a joint venture between Sumec and XJ Group, both Chinese.
PDFIs have two main advantages in supporting supply chains that work for both local communities and global energy transitions.
First, their public ownership and mandate to pursue development goals means they have the advantage of “patient capital”. Focusing on longer-term, community-wide goals rather than short-term profits can give mining and energy companies the time needed to meet Latin America’s ambitious – but varied – environmental and social regulations.
Chinese banks have been well-known for directing this patient capital approach toward shared development goals in Latin America. This approach is particularly important in the sectors of mining and renewable energy, which rely heavily on a project’s exact location and can thus bring local economic benefits, or local environmental conflicts, or both, depending on their management.
Secondly, Chinese PDFIs traditionally defer to borrowing countries to oversee their projects’ ESG standards. However, the wide variety of ESG regulations across Latin America can create confusion and mismatched expectations between foreign investors and local communities: the former feels it has adhered to national government standards, while the latter feels consultation has been lacking.
PDFI-based ESG standards that meet or exceed local regulations, and form part of the financing contract, can help ensure companies know what is expected of them at every stage.
Chinese PDFIs are still devising their in-house ESG requirements, although the 2022 Green Finance Guidelines admonish banks to specifically develop mechanisms for community consultations before projects begin, and accountability and complaint mechanisms during a project’s operations. Further development of these standards will help ensure projects are compatible with the concept of a “just transition”.
PDFIs face rising obstacles
PDFIs also face two major internal bottlenecks in financing a just energy transition in Latin America.
First, although Chinese PDFIs have the capacity to bolster investments in renewable energy generation, their participation in this sector has been largely limited to older technologies, like hydropower. Newer technologies, such as solar and wind, are relatively rare in Chinese PDFI portfolios.
Chinese participation in the Latin American hydropower sector is often a result of PDFIs taking on legacy projects, first developed decades ago. The reason for this is simple: Chinese PDFIs do not yet have project development platforms to help design portfolios of new projects using 21st century technology, while regional governments have not necessarily developed these project ideas themselves.
More recently, PDFIs around the world – western as well as Chinese – have become more politicised in their funding as superpowers grapple to control transition supply chains. Gradually, their missions have shifted away from shared development goals, and toward the national interest of securing mineral supply chains.
For example, the United States Development Finance Corporation (a major national PDFI) recently offered USD 565 million in equity finance to Serra Verde’s Pela Ema rare earth mine in Brazil. But it came with the condition that the mine end its agreement with Chinese customers and sell only to US or US-allied firms.
A few days later, China announced new regulations aimed at limiting the ability of multinational firms that operate in China to relocate industrial production away from the country.
This geopolitical manoeuvring creates a problem for host countries as it diminishes their bargaining power and ability to pursue their own sustainable development goals through investor relations. They can also find themselves stuck between China and the US and increasingly forced to “take sides”, as has been seen with the recent US push to create a “critical minerals alliance”.
From capital to coordination
The solution to these challenges is clear: greater direct coordination between host governments and PDFIs to help build and deploy strategies for developing green supply chains that support local communities. This coordination needs to include developing portfolios of new mining and solar and wind energy projects that incorporate 21st century ESG standards.
These supply chains need to extend all the way from minerals to megawatts. This includes all the industrial steps between those start and end points, to promote high-level ESG performance at mining sites and deliver reliable, renewable energy access to communities throughout the region. For example, Chinese hydropower projects in the region were typically designed decades ago by Latin American governments, and do not incorporate current community consultation expectations. Coordination on new project development facilities can aim higher.
Chinese PDFIs should develop detailed project development guidelines with ESG standards, similar to those of multilateral funders. This will help them to better engage with communities, as Latin America shifts from older to newer renewable energy technologies.
Latin American governments would be wise to pursue these methods in building out their national strategies. Doing so will better position them amid the rising tensions between the US and China.
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