China faces urgent environmental challenges such as climate change, habitat and biodiversity loss, air and water pollution, water scarcity and desertification and erosion. The country is second largest economy in the world and its growing influence must be matched by responsibility and sustainability of its investments.
China’s most notable green finance instrument is ‘Green Credit Policies’, first issued in 2007, then revamped in 2012 as ‘Green Credit Guidelines’.
In 2007, China’s Ministry of Environmental Protection (MEP) and the China Banking Regulatory Commission jointly announced the ‘green credit’ initiative under which the environmental performance of loan applicants must be taken into account by the bank. Loan applicants with poor compliance records are required to pay higher interest rates, and serious violators are denied credit.
The Guidelines follow China’s groundbreaking Green Credit Policy that encouraged Chinese banks to lend more to energy efficient and environmentally sustainable companies and less to polluting and high energy consuming enterprises. The Guidelines also show the banks how to integrate sustainability thinking into their lending cycle and will be applied to all lending – both domestic and overseas.
While many of the ‘green credit policies’ were recommendations on process (as opposed to outcome), they are starting to be more relevant. Banks are now obliged to report on key performance standards related to the ‘Green Credit Guidelines’.
In 2012, the Ministry of Environmental Protection’s Policy Research Centre published a report ranking China’s 50 biggest banks by market capitalisation on sustainability criteria in connection to lending. Only 12% of the banks examined were fully implementing a green credit policy. Implementation was not ideal at over half of the banks, while 18% had no information available on their policy.
With mandatory requirements for effective environmental and social risk management, banks can effectively identify, assess, monitor, control and mitigate environmental and social risks.
While the Green Credit Guidelines are more and more recognised, there are still some drawbacks.
Compared to other countries, the financial sector in China is under less pressure to protect the environment. When an environmental problem arises, the media blames the company and government regulators, but rarely the financial bodies that lent money to the company.
In the sector as a whole, lending to polluting, energy-hungry and resource-extracting industries is still high.
China’s Green Credit Guidelines are mandatory, but their implementation in some cases still resembles a voluntary environmental scheme. China needs both a market environment and legal environment more conducive to promoting environmental protection. Not even the state-owned banks seem to differ significantly on green lending gaps from private banks.
Sustainable finance instruments such as environmental regulation and standards are important tools in providing incentives for sustainable development in any country or region. The essential role of the banking sector in promoting a green and sustainable economy is acknowledged, as well as the risks presented by activities that are detrimental to the environment and local communities. As there are some limits seen in the implementation in the Chinese case, the Green Credit initiative is estimated to be 5 on the GML scale.