Tuesday, May 15, 2012

Keeping an eye on China’s bankers

[Green Watershed�s annual Environmental Report on Chinese Banks (2011)
is the only project in China to comprehensively investigate and rank the
environmental performance of China's banks.]

Keeping an eye on China�s bankers
By Wang Haotong
May 14, 2012


Last August, a major pollution story broke in China: 5,000 tonnes of
toxic chromium tailings had been dumped near a Yunnan reservoir,
contaminating water supplies and killing livestock. Worse revelations
were to come. The company behind the incident, Luliang Chemicals, had
been illegally discarding chromium slag by south China�s Nanpan River
for more than a decade � 280,000 tonnes of it in total.

China�s environmental activists had questions, and not just about the
local governance and company management that had allowed such
devastating pollution to go unchecked for so long. Campaigners, led by
Yunnan-based NGO Green Watershed, also wanted the government to publish
details of the financial institutions that had provided financial
backing to Luliang. They wanted to know which banks had lent the company
money and details of the regulatory response to the disaster.

Green Watershed put these questions in a freedom of information request
and filed it with the Kunming branch of the People�s Bank of China, the
provincial banking regulator and the provincial environmental
authorities. It also organised an open letter, signed by 24 Chinese
NGOs, asking China�s 16 listed banks to disclose whether or not they had
made loans to the company and two connected firms. This was the first
time such a request had been made in response to a major pollution
incident in China.

The freedom of information request was refused: by the People�s Bank of
China due to "commercial secrecy"; by the environmental authorities due
to "scope of government function"; and by the banking regulators on
grounds of "information technology limitations". Only two banks, Pudong
Development Bank and Industrial Bank, responded to the open letter, each
stating that it had no lending relationship with Luliang Chemicals. The
other 14 remained silent.

Unlike financial institutions in most of the world�s leading economies,
China�s banks are still able to keep a closed lid on the ecological and
social impacts of their lending decisions, as the Luliang case makes
abundantly clear. But civil society activism in this sector offers room
for hope. And there are signs that NGOs may be starting, slowly, to
prize open that lid.

The latest environmental rankings of the country�s listed banks,
published last month by Green Watershed and partners, is a case in
point. The existence of these rankings points to growing levels of
public supervision over China�s financial sector, and is raising hopes
for more systemic financial regulation from both industry and government.

Green Watershed was the first of China�s NGOs to start advocating for
social responsibility and green lending in the banking sector, back in
2002. The years since have seen some progress. In 2007, the State
Environmental Protection Agency (now the Ministry of Environmental
Protection) together with the People�s Bank of China and the China
Banking Regulatory Commission (CBRC) issued a document on limiting
credit to polluting industries, considered the launch-pad for China�s
green credit policy. Following this, CBRC and the People�s Bank of China
released a string of guidance documents, in a bid to make loans to
energy efficient and low-emissions industries an important factor in the
rating of banking institutions.

Though seen as a bold move, the green credit scheme has faltered in
implementation. Transparency on lending decisions remains weak and
environmental performance a long way from global standards. In this
context, NGOs have continued to push for improvements: in 2008 Green
Watershed launched a discrete project on "Green Credit Advocacy", and
since 2009 it has carried out an annual assessment of banking performance.

At the end of April this year, Green Watershed published the
Environmental Record of Chinese Banks (2011), the third edition of the
annual study which tracks and evaluates the environmental performance of
China�s listed financial institutions, compiled in partnership with
seven other Chinese NGOs. (Rather confusingly, though the report was
published this year, it is labelled 2011 and uses data from 2010.)

The 16 banks investigated are: Industrial and Commercial Bank of China
(ICBC), Bank of China, China Construction Bank, Agricultural Bank of
China, Bank of Communications, China CITIC Bank, China Minsheng Bank,
China Merchants� Bank, Industrial Bank, Shanghai Pudong Development
Bank, China Everbright Bank, Bank of Beijing, Huaxia Bank, Shenzhen
Development Bank, Bank of Nanjing and Bank of Ningbo.

The report drew on four sources of information. First, the authors used
the banks� own publications, such as corporate social responsibility
reports, annual reports and corporate websites. Second, they looked at
information on the websites of the banking regulators. And third, they
analysed reports in Chinese or foreign media on the lending and
investment activity of the banks, or their environmental performance.
Lastly, a questionnaire was sent to each institution, though this proved
a limited stream: only three institutions, the Industrial and Commercial
Bank of China, Shenzhen Development Bank and the Industrial Bank, responded.

Green Watershed and its partners used the collected information to rank
the banks based on 11 indices: environmental transparency; environmental
policies; use of environmental measures; existence of a designated
environmental department; loans to polluting or energy-hungry firms;
environmentally friendly loans; reputation; adherence to international
environmental norms; internal environmental performance; peer and client
advocacy; and overseas impact.

Overall, the environmental transparency of the banks was deemed to have
improved across the board since last year�s report. The best performers
were: Industrial Bank, Industrial and Commercial Bank of China, Shanghai
Pudong Development Bank, China Merchants� Bank and Shenzhen Development
Bank. Agricultural Bank of China, Beijing Bank, Nanjing Bank, Ningbo
Bank and Everbright Bank, brought up the rear.

The positions of ICBC, CITIC, Industrial Bank, Shanghai Pudong
Development Bank, Huaxia Bank and Shenzhen Development Bank had improved
since the previous rankings. But Construction Bank of China, Bank of
Communications, China Merchant�s Bank, Bank of Beijing, Bank of Nanjing
and Bank of Ningbo had all fallen. The Bank of China and China Minsheng
Bank staying in the same positions as last year, while Agricultural Bank
of China and Everbright Bank were new additions to the list.

Whether or not banks subscribe to international environmental norms is
an important marker of their performance in this area. But the number of
Chinese financial institutions adopting global green-lending standards
has stayed stubbornly low. Industrial Bank has outstripped its peers
here, having signed up to the Equator Principles � a voluntary set of
standards for assessing social and environmental risk in project
financing � as well as the United Nations Environment Programme�s
Finance Initiative (UNEP FI) and the Carbon Disclosure Project, a scheme
that tracks the carbon emissions and climate actions of the world�s
biggest firms.

China Merchant�s Bank has also joined UNEP FI, while ICBC is a member of
the Carbon Disclosure Project. China Construction Bank, Minsheng Bank
and CITIC have made preparations to join the list of signatories to the
Equator Principles, but are yet to actually do so. There is no news of
any other Chinese bank preparing to adopt any international standards.

Green Watershed�s annual reporting project is the only scheme in China
to comprehensively investigate and rank the environmental performance of
the country�s banks. That it is being produced by people outside the
financial sector is telling. And it should spur China�s financiers to
take the reins and get their houses in order.

In 1974, the world�s first environmental and social full services bank,
GLS Bank, was founded in Germany, set up specifically to provide
preferential loans to the ecological, social and cultural projects that
normal banks often weren�t interested in. In the decades since, Germany
has developed a mature set of green lending policies and mechanisms and
the Equator Principles have been adopted throughout its banking sector.
The government is also actively involved in developing green-credit

In the United States, commercial banks have clear social obligations
enshrined in law, including towards the environment. And there has been
a shift from shareholder-value orientated corporate structures towards
stakeholder theory, which acknowledges the need to consider the
interests of different participants, such as customers, staff and
society. Banks in the United Kingdom, Japan and Canada generally apply
the Equator Principles and operate green-lending policies.

In China too, there are stirrings of change, as the financial system
itself responds to expressions of public oversight. On February 24 this
year, CBRC published guidelines on green lending, providing a regulatory
framework that has been warmly welcomed by environmental campaigners.
Could a new order for Chinese finance be on its way at last?

Wang Haotong is a journalist based in Beijing.

This article is published as part of our Green Growth project, a
collaboration between chinadialogue and the Energy Foundation.

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