Three Steps Toward Green Finance in China

Authors

Amy Jiao, Intern, BSR

Amy Jiao, Intern, BSR

In February 2012, the China Banking Regulatory Commission (CBRC) issued the Green Credit Guidelines to encourage implementation of its green credit policy, which was launched in 2007. The guidelines encourage banks operating in China to deny loans to energy inefficient, polluting, or socially risky enterprises, and instead to support green industries and projects.

Although the International Finance Corporation (IFC) has advocated for green finance for many years, China is one of the few developing countries whose government regulators have released official documents to drive it. Building on China’s experiences, the IFC launched the Sustainable Banking Network in December 2012 to help emerging market regulators develop similar approaches.

To implement the CBRC guidelines, many banks have compiled their own green credit policies, standards, and indicators. For example, the Industrial and Commercial Bank of China (ICBC) has developed 54 industry green credit policies, covering 85 percent of all corporate loans. In 2012, ICBC loaned 593.4 billion yuan to green projects and industries, and refused to lend to projects and customers that fell short of the bank’s standards.

BSR spoke with Ye Yanfei, the deputy director-general of the CBRC statistics department, to understand more about the implementation of the guidelines. Ye pointed to the guidelines' positive impact, which has been reflected in Chinese banks’ voluntary CSR reports, such as the Bank of China (in Chinese). Ye also identified three main challenges to implementation. Chinese banks lack:

• Expertise needed to build sophisticated, effective, and holistic systems to evaluate environmental risk and to ensure compliance on the ground
• Legal rights to enforce their credit policies among customers, which limit the ability of banks to drive environmental benefits
• Adequate incentives to develop green finance if faced with a conflict between environmental sustainability and profitability, as some environmental projects have a poor or unclear financial return on investment

Based on Ye’s remarks, BSR believes that three things may advance green finance in China:

Specific and Universal Requirements, Indicators, and Standards for Chinese Banks 

Currently, the standards compiled by individual banks vary in quality and coverage, which dilutes the effect of the guidance. The Chinese government should either issue its own detailed standards, tied to international standards, or urge Chinese banks to sign up for or use relevant international standards directly, such as the Equator Principles, and the IFC’s environmental, health, and safety guidelines. As the current guidelines reference current Chinese laws, the standards should provide more guidance on best practices, rather than just the minimum for legal compliance. This is particularly relevant for social risks, which are harder to identify, measure, and monitor than environmental risks.

Transparency on the Implementation of the Green Credit Policy and Guidelines 

There is no requirement for banks to disclose their green credit performance, and the public can get information only from banks’ voluntary CSR reports. If banks’ standards and performance were publicly defined, reported, and accessible, companies would be able to build trust with stakeholders and demonstrate their management of social and environmental issues.

Formal Processes for Consultation and Collaboration with Stakeholders

Although the guidelines encourage public consultation, banks need to set up more formal processes for consultation and build internal capacity to implement these processes. Building early local buy-in of projects and ensuring that local stakeholder concerns are considered in project development will be crucial for the long-term success of bank-funded projects.

The challenges of implementing green credit policies are not unique to China, as BSR has seen through our work with many banks around the world to improve their environmental and social performance. In China, we talking to bank leaders to help them develop appropriate standards, build internal capacity to implement them, develop suitable transparency mechanisms, and engage with local stakeholders. From our previous experience, we recognize this will not be easy, but it will be important as Chinese banks move to more effectively reduce their risks and identify opportunities to contribute to sustainable development in the country and around the world.

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