Green Finance in China: Mega-Dams, Deforestation, and the ESG Paradox

China's green finance ambitions have reached unprecedented scale, with the country leading global green bond issuance in 2024–2025. Yet, beneath the veneer of sustainability lies a paradox: the same nation championing climate action is also a major financier of deforestation-linked industries and controversial infrastructure projects. This misalignment between rhetoric and practice raises critical questions for investors, particularly as geopolitical tensions and ecological risks threaten to erode the credibility of China-led green bonds.

The Yarlung Tsangpo Dam: A Geopolitical and Ecological Quagmire

China's $167 billion Yarlung Tsangpo Dam, set to become the world's largest hydropower project, epitomizes this contradiction. While framed as a cornerstone of China's net-zero strategy, the dam's location on the Yarlung Tsangpo River—known as the Brahmaputra in India and the Jamuna in Bangladesh—has sparked regional alarm. India and Bangladesh fear the project could weaponize water flows, destabilizing agriculture and ecosystems downstream. Environmental experts warn of seismic risks in a tectonically active zone and irreversible biodiversity loss in a critical biodiversity hotspot.

For investors, the dam's green credentials are further clouded by its geopolitical implications. India's potential retaliatory hydropower projects in Arunachal Pradesh and Bangladesh's diplomatic caution highlight the lack of transboundary cooperation. Meanwhile, sustainability-focused investors like Susanta Mazumdar of Tribeca Asia Infrastructure Fund have labeled the project an “ecological disaster waiting to happen,” urging caution.

Deforestation-Linked Lending: Green Bonds or Greenwashing?

China's role as the largest international creditor to deforestation-linked companies further undermines its green finance narrative. Between 2018 and 2024, Chinese banks provided $23 billion in credit to forest-risk firms like Royal Golden Eagle Group (RGE) and COFCO, both implicated in tropical deforestation. Despite sustainability-linked loans (SLLs) tied to environmental targets, watchdogs like Global Witness argue these mechanisms lack rigor. RGE, for instance, received a $1 billion SLL in 2024 despite ongoing allegations of land clearing in Indonesia.

The Forest 500 ranking reveals a stark gap: four of China's six major banks scored zero in deforestation policy strength, while only Agricultural Bank of China addressed human rights abuses. This regulatory laxity raises concerns about ESG compliance, particularly as Chinese banks continue to fund companies with documented environmental violations.

Regulatory Gaps and Investor Due Diligence

China's 2022 Green Finance Guidelines aim to restrict credit to environmentally harmful projects, but enforcement remains inconsistent. The absence of binding due diligence frameworks and transparency in lending practices leaves room for greenwashing. For example, the Yarlung Tsangpo Dam's reliance on special government bonds and relending tools for carbon reduction lacks third-party verification of its ecological impact.

Investors must scrutinize these gaps. While China's green bond market offers attractive yields—such as its 1.7% onshore 10-year sovereign yield—projects like the Yarlung Tsangpo Dam and deforestation-linked loans expose portfolios to reputational, regulatory, and geopolitical risks. The “greenium” (premium for green bonds) may not justify the volatility if projects fail to meet ESG standards.

Strategic Recommendations for Investors

1. Demand Transparency: Prioritize investments in Chinese green bonds with third-party certifications (e.g., CBI, Bloomberg Green) and verifiable impact reports.
2. Assess Geopolitical Risks: Factor in regional tensions, such as India's potential countermeasures against the Yarlung Tsangpo Dam, which could disrupt supply chains or trigger diplomatic friction.
3. Evaluate ESG Compliance: Avoid projects linked to weak deforestation policies or companies with repeated environmental violations. Use tools like the Forest 500 rankings to assess lender accountability.
4. Diversify Exposure: Balance China-led green projects with investments in regions with stronger ESG frameworks, such as the EU's Taxonomy for Sustainable Activities.

Conclusion: Navigating the Green Finance Paradox

China's green finance initiatives are undeniably ambitious, but their credibility hinges on resolving the misalignment between domestic sustainability goals and overseas practices. For investors, the key lies in rigorous due diligence, leveraging data to assess both the promise and peril of China-led projects. As the Yarlung Tsangpo Dam and deforestation-linked lending illustrate, green bonds are not inherently safe havens—without robust oversight, they risk becoming vehicles for ecological and geopolitical instability.

In an era where ESG criteria are reshaping capital markets, investors must look beyond the green label. The future of sustainable finance depends on aligning capital with accountability, not just ambition.