The Green Leap Forward 绿跃进

Somehow, we missed a November 2008 report by Friends of the Earth and BankTrack called The Green Evolution: Environmental Policies and Practice in China’s Banking Sector (click here for Chinese version) (henceforth the “Report”) which provides an excellent overview of the green finance activities, including China’s nascent Green Credit program (one of the Green Whirlwind policies we gave an overview of previously), and a bank-by-bank assessment of China’s green finance practices.  In this post, I’d like to (i) describe the significance of using the financial industry as a lever point for environmental change, (ii) summarize the different ways in which the concept of “green finance” plays out with Chinese banks, (iii) discuss some of the more interesting observations by the Report, and (iv) conclude with the Report’s recommendations.

The Importance of Banks

The rise of China’s banks in the global financial superstructure (or what’s left of it), cannot be underestimated.  The Report notes that at this time last year, three Chinese banks–ICBC, Bank of China, and China Construction Bank–entered into the ranks of top five banks in the world by market capitalization.  Four major Chinese banks floated their shares on public exchanges in 2007, and three more have been considering doing so by 2010.  Chinese banks are also expanding their global reach, such as China Development Bank’s purchase of 3% of UK’s Barclay’s and ICBC’s investment in a  20% stake in South Africa’s Standard Bank.  These are the institutions that bankroll the world’s most important economy and its most energy consuming and highly polluting industries.  The thrust of green finance policies are predicated on the notion that financial institutions, as gatekeepers to the financial markets, represent a highly effective lever point to wield progressive energy and environmental policies.

Overarching Green Industrial Policy

What sets the stage for various green finance policies are three overarching environmental principles:

1. “Three Simultaneities” policy (三同时):  Refers to the need to consider energy efficiency and pollution prevention/minimization at the design stage of constructing a project.  What three things are being done simultaneously kind of escapes me, but the principle certainly makes sense.
2.  “Liang Gao”  (两高, literally ‘Two High’) framework: 14 highly energy consumptive and highly pollutive industries that have been identified by the MEP and will be the target of various sticks and carrots of energy conservation and environmental policies.
3. “Supporting the Larger and Restricting the Smaller” (上大压小): A philosophy of ‘Big is Better’ that favors large-scale thermal generation over smaller units on the account of efficiency and economies of scale.  According to the 11th Five-Year Plan, the government aims to cut 50 GW of capacity generated by small thermal power unites between 2006 and 2010.

The Emerging Green Finance Programs

Here are some of the green financing practices that have emerged in China:

• Green Credit Program:  It all starts with the Green Credit program that was adopted in July 2007.  It is a mandatory program that is currently limited in scope, consisting of a prohibition on bank lending to companies (at last count numbering some 38) that have been designated on a nationwide “credit blacklist” by the Ministry of Environmental Protection.  The program is limited to domestic companies and the evaluation of who makes the blacklist is conducted solely by MEP.
• CBRC Circulars:  In 2007, the China Banking Securities Commission  released two circulars: Announcement on Prevention and Control of Credit Risks for High Polluting Industries and  Instructucting Opinion on Saving Energy and Reducing Emissions, to prompt financial insitutions not only to implement the Green Credit policy, but to incorporate the government’s broader policies such as Liang Gao into their credit evaluation process.
• Complementary Green Whirlwind policies:  Namely the Green Securities policy and Green Insurance policy.   Just so we focus on credit financing, we shall leave the discussion of capital markets and insurance for another post.
• Annual CSR Reports: The CBRC also issued in 2007 the Opinion on Strengthening Banking Financial Institutions Corporate Social Responsibility.  In 2006, Shanghai Pudong Development Bank was thefirst to issue a CSR report.  China Constructions released theirs in 2007, while Bank of China, China Development Bank and China Exim Bank released theirs in 2008.
• China Exim-IFC MOU:  With Chinese investments in mineral-rich Africa reaching an all time high, there has been much scrutiny on their environmental and social impact. The China Import-Export Bank, one of the most important banks in providing overseas financing for Chinese enterprises, signed an MOU with the International Finance Corporation to build capacity in environmentally and socially sustainable Chinese investments in emerging markets.
• Equator Principles:  The Equator Principles has become the most well-known international standard to govern the environmental and social aspects of project financing.  A few months ago, Industrial Bank became the first Chinese bank to sign on.
• Other International Norms:  Other global initiatives include the Global Compact (signed up by China Development Bank) , the UNEP Finance Initiative’s Statement by Financial Institutions (Industrial Bank and China Merchants Bank), and the Carbon Disclosure Project.

The Results So Far

Given the infancy of the conceptual framework of Green Finance, the results so far have been understandably limited.  On the one hand:

• Some RMB 106.3 billion have been preferentially loaned in 2007 to help companies reduce emissions and conserve energy, says the CBRC; and
• Bank of Communications stated that it curt its lending to iron and steel industries by RMB 7.8 billion in 2007 while ICBC said it decreased its loans to polluting industries by 24% in 2007.

However,

• One would be right to question the validity of claims that over RMB 100 billion of financing has been given to truly green projects; it turns that that some of a lot of those projects include large hydro, nuclear and even coal (perhaps on the pretext of ‘clean’ or ‘cleaner’ coal).
• The impact of reduced lending to Liang Gao enterprises is small relative to the bank’s outstanding loan portfolio.  A telling factoid from the Report: as of May 2007, major Chinese banks had RMB 1.5 trillion in medium-to-long term loans outstanding to Liang Gao sectors, up 22% from the previous year.

Other Interesting Observations

Some interesting points raised by the Report:

• Leading the Pack:  ICBC seems to be the model Chinese bank on the green front.  Among its various green initiatives, It has developed a nine-category Environmental Information Labeling System which it has used to classify 47,000 out of its 60,000  borrower clients according to their environmental profile.
• The Green Credit Policy may have limited impact by itself; only 38 companies were blacklisted upon initial implementation out of some 8,000 that were cited for environmental violations during the first eight months of 2007.  The policy is compliance-oriented and relies on the MEP and data from local Environmental Protection Bureaus for implementation.  These local EPBs report to the provincial governments instead of the MEP, so the conflicts-of-interest are apparent; provincial governments may value short-term economic growth over greener paths of development.
• Contradictory Policies:  Policies working at cross-purposes to each other is a gripe that GLF has expressed in other posts, such as when discussing auto policies.  In this case, the Report laments that current pro-growth economic policies continue to set the tone on what kinds of projects get financed.
• Green “Uploading”:  The overseas investments in international banks may serve to green up Chinese banks as they will be pressured to meet international best practices as their stakes in these international banks increase or even to purchase such stakes in the first place.  Non-Chinese banks can upload environmental policies to their Chinese investors/owners, as Barclay may do to China Development Bank.

Recommendations

The Report outlines next steps:

• Take steps to ensure that the Green Credit policy is a floor, not a ceiling: The point here is that Chinese banks should implement their own internal environmental risk criteria into their credit review process because its good business.  Environmental risk not only translates to potential financial risks, but the due diligence process involved in understanding environmental risks may also uncover other sorts of risks that may not have otherwise been discovered.
• Address the question of international applicability of Green Credit:  Why limit it to projects in China?  What about Chinese projects overseas?
• Invite the participation of environmental groups:  Simply put, you can never have enough watchdogs.

If The Green Leap Forward were to make a recommendation, that would be to take the first recommendation above a step or two further to devise criteria for providing favorable financing for environmentally and socially regenerative (triple bottom line) projects, for instance: green building reconstruction in quake-hit areas in Sichuan.  Although there is some suggestion that there have been increased financing for projects to reduce emissions and reduce energy intensity, it is highly unlikely that any sort of systematic evaluation process exists to reward such projects.

With the banks all nervous and not so busy with credit financing deals these days, it would be an opportune moment to shore up some green financing policies rather than surf the interweb all day.

January 6th, 2009 | Tags: banking, China, energy, environment, green credit, green finance, green whirlwinds | Category: capital and finance, policy, uncategorized | Subscribe to comments | Leave a comment | Trackback URL