EU warns green bond initiative could benefit Chinese companies unfairly

The Global Green Bond Initiative is one of the EU’s largest financial instruments to fund sustainable infrastructure and climate-related projects with the bloc’s partner countries. Its declared aim is to mobilise between €15 and €20 billion in investments.

But European Commission and EU officials are now warning that some of these investments could end up benefiting Chinese companies, undermining Brussels‘ policy of diversifying away from Beijing in key supply chains.

In practice, the European Investment Bank (EIB) and other European development institutions will act as anchor investors and provide technical assistance for environment-related projects in third countries.

The green bonds may be used to finance solar farms in Algeria, wastewater treatment in India and a light rail line in the Dominican Republic.

Conceived during the previous legislative term as part of the European Green Deal, the governance framework was only finalised in April this year. In the intervening period, the geopolitical landscape has shifted dramatically.

“The main problem is that, given the market of renewable energy technologies, most of the money will likely go to Chinese companies,” a Commission official with direct knowledge of the matter told EU News. Like others who contributed to this story, they asked to be kept anonymous in order to speak freely.

There is particular concern over high-risk solar inverters, which the EU is trying to phase out. These introduce vulnerabilities in third countries connected with the European energy grid.

No China clause

The issue of “global macroeconomic imbalances” – a reference to China in all but name – will be the main topic of discussion at the European Council on Thursday.

But while Brussels has gradually shifted its trade policy toward Beijing into a defensive position, not all EU instruments have kept pace.

The Commission official pointed out that the Green Bond Initiative was conceived before the EU had fully developed its economic security doctrine – an effort to counter China’s growing dominance in key sectors, which is exerted via heavily subsidised firms that push competitors out of the market.

The upshot is that the EU-backed green bonds do not require partner countries to avoid Chinese suppliers and offer no incentive for them to do so.

The question of to handle Chinese suppliers in EU-funded projects abroad has long been a sticking point for European development finance. Brussels struggles to persuade third countries to buy from more expensive non-Chinese vendors unless it can cover the extra cost, and so far, it has been reluctant to do so.

But the imperative of excluding Chinese suppliers is not limited to supply chain dependencies that might be weaponised; it is also increasingly a matter of cybersecurity.

Cybersecurity risk

Last month, the European Commission circulated guidance requesting that all EU-funded projects generating renewable energy phase out high-risk power inverters – meaning Chinese-made ones – citing cybersecurity risks to the EU energy grid.

The concern is that firms that dominate in the solar inverter market, among them Huawei, might be able to remotely manipulate the energy grid, destabilise it, and in a worst-case scenario trigger full blackouts.

The Green Bond Initiative was given the green light before the Commission issued the guidance, which in any case only applies to projects outside the EU from 15 April 2027.

There are now concerns that the investment programme could both increase third countries’ exposure to risky Chinese technology and create security risks for Europe’s own energy infrastructure.

Energy grids do not operate in isolation, which is why phasing out Chinese inverters at home might make little sense if the same rules are not applied to Europe’s immediate neighbours. North African countries, many of which are part of the Green Bond Initiative, are the most exposed.

“Having EU-financed projects built by Chinese companies is precisely what we want to avoid,” a second Commission official told EU News, noting that the Mediterranean region is where China’s influence poses the highest risks.

Underlying tensions

The Commission has been pushing the EIB and other European investment institutions to apply the phase-out requirements for risky solar inverters across the board, but both institutions have pushed back and sought exemptions.

In the context of the Green Bond Initiative, since no exclusion mechanism exists, the problem may be as much about governance as procurement.

The Commission is expected to exert pressure on the initiative’s fund manager, Amundi, Europe’s largest asset manager. But it will have to do so against a project pipeline that appears to have been drawn up without those requirements in mind.

For investment banks, the priority is financial viability and return on investment, whereas supply chain considerations cannot translate into commercially unreasonable costs.

But in a context where critical dependencies are increasingly weaponised by China, and where the EU is increasingly serious about reducing its reliance on Beijing, geopolitical risk is becoming a decisive factor.

“The EIB wants exemptions on everything, the Commission is pushing back on the whole front,” a third EU official said. “The situation is still unclear; this back and forth will go on for a while.”

The European Commission did not reply to EU News’ request for comment by the time of publication. The EIB declined to comment.