Image courtesy: Conventus Law
Chinese banks like the China Development Bank and the Chinese Import-Export Bank have a notorious reputation for being involved in some of the world's most socially and environmentally irresponsible projects. Often, these projects are rejected by other development financiers, when Chinese banks step in (Chan, 2023). Over this decade, China has enacted some policy changes to ensure greater capital allocation to achieve climate targets both domestically and internationally. So far, China’s most preferred policy intervention in the green finance space has been the facilitation of green finance (Climate Bonds Initiative, Sintao Green Finance, 2021). These are essentially first-stage policy interventions that make open and public databases on environmental standards, guidelines, etc. They designate pilot zones for this that signal the impact of the policies; market mechanisms are to be employed later.
Last year, China’s Green Finance Guidelines were introduced in this context. On June 1st, 2022, the People’s Bank of China, in tandem with six other government agencies issued “the guidelines for Establishing the Green Financial System”. This set of guidelines is meant to make tangible strides in the government’s ecological civilization paradigm (Wang, Bing, 2022). These guidelines follow the 2019 guidelines and are meant to focus specifically on green banking - loans and credit. The guidelines essentially attempt to achieve carbon neutrality in the portfolio of Chinese financial institutions. These set of regulations are significant because, for the first time in China’s policy interventions in green finance, the banks are encouraged to use their positions as financiers to leverage better investments - maintaining a greener portfolio.
Previously, China’s financial institutions referred to the requirements listed under the Task Force on Climate-Related Financial Disclosures. This regulation promoted disclosures in the following areas - governance, strategy, management of risk, and targets. However, disclosure was not mandatory (Climate Bonds Initiative, Sintao Green Finance, 2021). The new guidelines are meant to mitigate Environmental, Social, and governance risks (ESG) by integrating these risks into the management system. This is significant as it encourages the development of new governance to tackle these risks (Beibei, 2022). According to these guidelines, the senior management and the board appointed by them are to be responsible for achieving green targets. This is meant to strengthen information disclosure and establish a system to evaluate and assess green finance (Wang, Ziying, 2023).
Further, the guidelines include the BRI projects within their gambit, stating they had to comply with national laws and follow international practices and guidelines. Following a similar legislation in 2012, known as the Green Credit Guidelines, the 2022 legislation tries to increase the accountability of financial institutions by appointing a board of directors who will then appoint a board to ensure the guidelines are followed. Similar to other features in Chinese banking, individual bankers are to be held accountable for adherence to the green finance policy. Not adhering to green standards is supposed to impact staff reviews and compensation. However, the consequences of flouting regulations are still in the dark. According to Michelle Chan, Vice President of Programs or Friends of the Earth, founder of BankTrack, and the President of the Amazon Watch Board:
These requirements make China’s Green Finance Guidelines the strongest in the world – better than international environmental benchmarks like the Equator Principles.
The major strength of the guidelines comes from including most of the insurance framework within the guidelines. Since insurance is a key part of project funding, the 2022 guidelines extend the green finance policy to credit companies in China. The insurance sector has now come under the gambit of these guidelines quite comprehensively - insurance companies, reinsurance companies, and insurance asset management companies. It also attempts to align itself with the policies of the Belt and Road Initiative and requires projects abroad to follow international guidelines and improve risk management in overseas projects (Wang, Bing, 2022). Significantly, the guidelines also ask banks and insurers to create grievance councils that can be used by third parties like NGOs. However, the arbitration process and its efficacies are yet to be understood.
However, this set of guidelines could be a significant one in China’s overall financial architecture. Although much ado has been made about green bonds in China’s green finance infrastructure, much more money is directed through banks and credits. China’s banking system has historically been a juggernaut, being able to mobilize capital on a large scale, often making rhetoric a reality. In 2022 however, green loans only accounted for 10% of overall loans, revealing the potential for growth (Wang, Bing, 2022). The guidelines also fall short on a few counts. One, they ignore the deforestation aspect in their ESG guidelines, and several banks continue to support companies that are actively engaged with deforestation (Beibei, 2022).
The guidelines also fall short because they hold companies to national standards overseas, even in places where national standards are low. If China is committed to responsible investment, it cannot cite only national standards as a benchmark for BRI projects. Further, the guidelines do not set up mechanisms to make projects more local-friendly. Chinese banks have had a long history of ignoring local communities when they have claimed that projects would be unfriendly to the environment; banks should have to consult with local communities before bankrolling projects in different locations, a gaping hole in the regulations (Chan, 2923). Being voluntary guidelines, they are weak in achieving implementation stringently; the language of these new guidelines has borrowed from the 2012 guidelines, which increased green credit but did not stop banks from supporting companies that have bad environmental track records (Beibei, 2022).
Considering the power of the banking sector in China in capital allocation, there is great potential for change. However, although the regulations have been a step in the right direction, their efficacy can only improve with tighter regulation and a focus on implementation.