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China sustainable finance newsletter - Issue 24,
May 2015
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Sustainability in China’s Financial Sector
Increasing efficiency in financial regulations
The Development Research Center of the State Council published “Policy suggestions on making China's financial regulations more effective” (No 1, 2015). The paper draws upon international experiences in recommending methods for improving governance and framework reform. The research suggests that the government should develop different goals for different stages of regulatory reform. The authors conclude that the relationship between local and central governments should be clarified in terms of financial supervision and responsibilities. The paper argues that an improved regulatory environment will clarify the government’s “function as owner and regulator of financial institutions” while improving financial company management.
CBRC undergoes major restructuring
The CBRC has undergone the “first major” restructuring in its history. Among other changes, five departments will be renamed to reflect their function in supervising large commercial banks, national joint-stock commercial banks, foreign banks, or policy banks. As a result, the CBRC will now have 22 departments. Local CBRC offices were not required to restructure.
Policy Developments
CBRC, NDRC issue new credit guidelines on energy efficiency
Earlier this year, the China Banking Regulatory Commission and the National Development and Reform Commission published guidelines on developing and encouraging credit to energy efficiency. The guidelines state that “energy efficiency credit refers to credit and financing to support the banking financial institutions to improve energy efficiency using units, reducing energy consumption and provide”. The guidelines pertain to energy efficiency in the industrial, construction and buildings, transportation, and other energy conservation sectors. Banking institutions are expected to conduct strict inspection audits and comply with comply with the national industrial policy and environmental regulations. The guidelines are expected to improve the capacity of banks to improve energy efficiency credit risk identification and technical expertise in supporting environmental protection.
State Council announces policy bank reform
The State Council approved reforms for its three policy banks, marking a turn away from the increasingly commercial strategies of China Development Bank and China Exim Bank. According to the State Council website, “ ‘The CDB must stick to its positioning as a “development financial institution,’ while the China Exim Bank must build itself into a ‘policy bank with sustainable development capacities’ and the ADBC must become an ‘agriculture policy bank with sustainable development capacities’ “. The State Council also called upon the banks to improve risk management and internal controls. The banks are expected to refocus on supporting government initiatives, such as infrastructure and overseas M&A.
Renewed interest in Green GDP
In the continued effort against pollution, China’s environmental ministry will consider the use of green GDP, a performance indicator which measures environmental damage caused by economic growth. According to China Dialogue, “The government started researching the feasibility of implementing Green GDP measures 11 years ago. But the idea withered on the vine as the central government devolved more decisions on environmental planning to the provinces, who in a rush to meet ambitious targets gave to the nod to hugely-polluting projects”.
New environmental law helps put green principles into practice, first lawsuit filed under new law
Since becoming effective on January 1, 2015, the revised environmental protection law has taken bites out of environmental crimes. For instance, several steel and nickel pig iron producers in the industrial city of Linyi have shut down under the new law. Supplementary measures to the revised environmental protection law have been issued by the MEP. With these measures, the MEP has pledged “zero tolerance” for illegal pollution and has provided an update on its enforcement. The promotion of green performance bonds are also encouraged. The measures include:
- Measures of the Competent Environmental Protection Department on Enforcement of Daily Penalty (No.28 MEP Order)
- Measures of the Competent Environmental Protection Department on Seizures and Distraints [sic] (No.29 MEP Order)
- Measures of the Competent Environmental Protection Department on Ordering Enterprises to Restrict Operations and Suspend Operations to Make Corrections (No.30 MEP Order)
- Measures on Sharing Environmental Information by Enterprises and Public Institutions (No.31 MEP Order)
These measures went into effect as of January 1, 2015. Each measure contains specific information and details on how violations should be fined, managed, or corrected. In response to the new environmental law, State Council Premier Li Keqiang has emphasized its enforcement, saying, “The enforcement of the environmental protection law is not a cotton swab but a triumph card”.
Chinese court has also accepted the first environmental lawsuit. In March 2015, the All-China Environment Federation lodged a lawsuit against Zhenhua Co. Ltd., which had repeatedly ignored warnings that it was emitting excess sulfur and dust. The company had already been on the MEP’s blacklist. The lawsuit was filed in Shandong province, asking for 30 million yuan (4.8 million U.S. dollars) in compensation for air pollution damages. In a news release, the MEP stated that “Non-governmental organizations will play a bigger role in representing public interests for environmental cases in the future”. The lawsuit may set precedent for subsequent environmental lawsuits within China.
Better enforcement of environmental laws in China will help turn environmental risks into companies’ environmental liabilities, with financial implications for Chinese banks and investors.
Civil Society Activities
NGOs examine implementation of Green Credit Guidelines overseas
The Green Credit Guidelines, revised to include overseas investments in 2012, stand as one of the most visionary policies shaping sustainable finance in China. Yet many challenges remain in ensuring Chinese banks comply with it, especially when investing overseas, according to a report co-published by Chinese NGO Greenovation Hub and Friends of the Earth US. The report found that a main challenge in implementation is the enforceability of the guidelines, as well as the lack of communication between Chinese banks and civil society. A Chinese version of the report can be found here, and an English version is available here.
Chinese NGO reveals “phantom workers” approving EIAs
Chongqing Liangjiang Voluntary Service Center published a report documenting 129 fake environmental assessors, in addition to falsified reports. The assessors have been deemed “phantom workers” as they did not do any work on the EIAs they approved or signed; environmental protection staff are prohibited from taking outside work. Chongqing Liangjiang sent the report to the MEP, which then launched an investigation into the matter. A spokesman for the NGO noted that proper environmental assessments will reduce costs in the future. This report has implications for Chinese banks, who may rely on the veracity of EIAs in their due diligence proceses.
New reports on “Greening China’s Financial System”, growing a green bond market
Financial Research Institute of the Development Research Center of the State Council of China (DRC) and the International Institute for Sustainable Development (IISD) have published a preliminary in-depth study on incorporating green principles into China’s financial system. The study, “Greening China’s Financial System”, examines existing research on various green financial instruments and policy approaches from both China and internationally. The goal the research is to “develop specific proposals for greening China’s financial system, based on an analysis of current practice in China and an exchange of experience with international experts”.
In cooperation with IISD, Climate Bonds Initiative launched the report, “Growing a green bonds market in China: key recommendations for policymakers in the context of China’s changing financial landscape”. The report focuses on the particularities of fostering a green bond market in China, offering “Chinese-specific green definitions, standards and verification processes that can be leveraged in the design of a robust green bonds market are reviewed”. The report discusses the current state of play of China’s bond market and how to best “green” municipal and corporate bonds.
EITI publishes study on level of information disclosure from Chinese companies
The international transparency scheme for the oil, gas & mining industries, EITI, published in March a new study which assessed how much information Chinese companies have published about their operations in EITI member countries around the world. At least 90 Chinese companies are involved in EITI reporting globally, including some of the world’s biggest oil and mining names such as China National Petroleum Corporation, China National Offshore Oil Corporation and China Nonferrous Metal Mining. Chinese firms are involved in EITI ‘Multi-Stakeholder Groups’ – the national committees that oversee implementation – in at least six countries, which in itself goes beyond the minimal requirements. Global Witness wrote in response to the report that “the time seems right for leading firms to engage with and support the [EITI] scheme at a more institutional level. An immediate step would be for industry leaders in China to make a public commitment to the scheme and the principles it enshrines”. To view in Chinese, please click here. Several stock exchanges, including London Stock Exchange’s Alternative Investments Market and the Hong Kong Stock Exchange, as well as the US securities regulator, require some form of EITI reporting.
Chinese tuna company withdraws IPO due to understating environmental, sustainability risks
Late last year, China Tuna Industry Group (CTI) Holding Limited withdrew their IPO application from the Hong Kong Stock Exchange after government and civil society pressure from Greenpeace. After learning that the company had “provided outdated information to the investment community in its Application proof version of prospectus”, in addition to overlooking environmental and sustainability risks involved with its fishing plans, Greenpeace alerted the Hong Kong Stock Exchange, which immediately suspended the IPO. Greenpeace further notified China’s Bureau of Fisheries, which launched an investigation into the company, stating: “The (draft) prospectus has gravely misled investors and the international community, and caused a tremendous negative impact.”
International cooperation and developments in sustainability
MDBs, IDFC, CDB agree to climate finance “Common Principles”
Led by the World Bank, multilateral development banks and the International Development Finance Club agreed to “Common Principles” establishing climate change finance tracking principles in development finance. The principles offer common definitions and guidelines, but do not cover on their implementation. As a member of the IDFC, China Development Bank is a signatory to the principles.
Asian Infrastructure Investment Bank to be “lean, clean, and green”
Since the deadline to join the China-led Asian Infrastructure Bank closed at the end of March, questions regarding its governance and approach to sustainable development is likely to become a next priority. Recently the bank has pledged to be “lean, clean, and green”, as well as “be corruption free, maintain environmentally sound policies and work with a streamlined bureaucracy”. In early May, the NGO Forum on the Asian Development Bank sent a letter to the new bank, calling on “robust social and environmental standards will be applied in the principles, policies and actual operations of the AIIB”.
PBOC defines vision for green finance
People’s Bank of China has published a report outlining its vision for greening China’s financial sector. “Establishing China’s Green Financial System” was written and reviewed by an expert task force from government agencies and research organizations. The report emphasizes practicality and raises the notion of a green lending institution.
Download Chinese version of this newsletter here
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