Courtesy : chinadialogue.net

Green finance in china

n 1 June, the China Banking and Insurance Regulatory Commission (CBIRC) issued a new set of green guidelines. These lay out detailed expectations for banks and insurance companies to identify, monitor, prevent and control their environmental, social and governance (ESG) risks.

Policymakers in China have been showing a growing interest in green finance. Traditionally, policies in the area have mainly focused on encouraging financial flows into supporting green, non-polluting and low-carbon businesses. But in recent years, there have been signs of regulators signalling to financiers that they should also be more mindful of their dealings with the not-so-green businesses. New requirements and expectations around risk management and disclosure are emerging in this context, including those to be found in the new guidelines.

While it is encouraging to see the Chinese banking regulator stepping up efforts to properly manage environmental and social risks, the new guidelines are still short on managing deforestation risks and, as voluntary guidelines, weak on ensuring implementation.

Potential to tackle not-so-green financing

The guidelines, formally titled “Green Finance Guidelines for the Banking and Insurance Industries”, contain interesting new language. At Global Witness, we see at least four highlights with the potential to help financiers to be more mindful of environmentally and socially harmful businesses, and eventually move away from financing them.

• Firstly, the guidelines have squarely placed ESG risk management on the agenda of Chinese banks and insurance companies. Until now, the sector’s risk management system has been required to follow a set of guidelines issued in 2016, which fell short of clearly articulating risks linked to the environment and society. The new guidelines go further by asking that a particular governance structure be put in place to ensure these financial institutions are implementing them.
• Secondly, they set clear expectations for banks and insurance companies to better understand their credit customers’ environmental and social credentials. Companies are asked to conduct due diligence in this regard and use their financing as leverage to encourage better performance. The guidelines say banks and insurers should “strictly restrict” granting credit to clients that face significant environmental and social risks. For the first time, there is an explicit statement that banks and insurance companies should reduce the carbon emissions of not only their own operations but also their portfolios.
• Thirdly, the guidelines are not limited to operations in China. Article 25 says “banks and insurance companies should actively support the green low-carbon construction of the Belt and Road Initiative”. That means they must strengthen environmental and social risk management concerning their overseas projects, especially those under the BRI. They are expected to request their clients and their main contractors and suppliers comply with local laws and follow relevant international practices or guidelines to ensure the project is “substantially consistent” with good international practices.
• Fourthly, they ask banks and insurers to set up a grievance or response mechanism for credit-granting decisions that face significant environmental and social risks. This expectation potentially means that third parties such as NGOs or impacted communities can raise concerns with the banks about their investment decisions. 

Blind on forests and weak on implementation

The new Green Finance Guidelines are a positive step forward, especially in their potential to divert finance away from not-so-green businesses. But can they help shift the billions that Chinese banks and other investors put into companies linked to the destruction of climate-critical forests? 

The need is substantial, with China playing a significant role in the future of the world’s forests. Last June, a report published by Global Witness, the NGO I work for, found that from January 2013 to April 2020, Chinese financial institutions provided over US$22.5 billion in loans and underwritings to major companies producing and trading forest-risk commodities – pulp and paper, rubber, timber, palm oil, soy and beef. This places China sixth, after Brazil, Malaysia, the US, Indonesia and Japan, on the list of the world’s largest deforestation-financing countries. And it’s one of only two countries among the six, the other being Japan, that are not major producers themselves.

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Furthermore, as the world measurably edges closer to the 1.5C limit in global average temperature rise, the global financial sector must take urgent action to reduce its impacts on forests. Eliminating emissions from deforestation combined with regrowing and restoring forests could reduce global net emissions by up to 30%, according to the UN Environment Programme.

The new guidelines provide a framework for financiers to undertake due diligence on companies operating in forest-risk sectors. However, alone they will not be sufficient to ensure that Chinese financiers are not financing companies linked to deforestation. This is especially so because there is a risk that the guidelines may not cover environmental and social risks embedded in forest-related global supply chains. The guidelines have a clear focus on limiting financing for high-polluting and carbon-intense sectors, currently limited to six industries: coal power, petrochemicals, chemical engineering, steel production, building-materials production, and non-ferrous metal smelting. 

Chinese banks are still at a very early stage of fully understanding and incorporating ESG considerations into their operations, according to a 2021 report by the Institute of Finance and Sustainability, a think tank. Thus, it is quite likely that banks will not prioritise addressing deforestation-related risks in their investments. Our 2021 investigation also found that the Chinese banking sector seems to have a deforestation “blind spot”. Five of China’s largest banks, which are also the biggest Chinese financiers for the forest-risk sectors, have very weak or no commitment to tackling global deforestation, according to Forest 500, an annual assessment of companies most exposed to tropical deforestation risk.

Chinese financiers currently have inadequate safeguards to address deforestation

There is also the question of implementation and accountability. What are the consequences for the banks when they continue to support harmful businesses? Much of the strong language on environmental and social risk due diligence in the new guidelines is taken from the 2012 Green Credit Guidelines, which have not stopped Chinese financiers from backing companies with questionable environmental track records.

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The best solution to ensure implementation and accountability would be to elevate relevant requirements in the new guidelines into a national law. The law on commercial banks is currently being revised. According to an earlier draft proposal by the central bank, the revised law will include substantial new requirements on risk management but the focus has so far been solely on financial risks. The lawmakers must expand the definition of the risks to include non-financial risks, such as ESG risks, and set out principles that the banks should follow, for example not to finance environmentally and socially harmful businesses. This would provide a legal basis to formulate secondary regulations that can further spell out binding requirements on ESG due diligence, including in sectors linked to deforestation.

There are clear warning signs that Chinese financiers currently have inadequate safeguards to address deforestation risks. The Chinese regulator must seize this opportunity to enshrine in national law the environmental and social risk management expectations found in this new set of green finance guidelines, and position China as a leader in global efforts to save the remaining climate-critical forests and the people dependent on them.