The role of China's banking sector in providing green finance

Abstract

III. CHALLENGES AND OPPORTUNITIES CONCERNING GREEN FINANCE As discussed in Section III, Chinese banks have been making great progress, although the Green Credit Policy and other relevant green regulations are still at an early stage of implementation. However, based on the four phases typology of banking and sustainable development, (200) banks in China at present are just in a transition period from a preventive stage to an offensive stage, (201) as many of them have started integrating environmental risks into their credit risk management while some leading banks have proactively promoted green projects in their lending policies. Compared with the environmental performances of international pioneering peers, much work remains. For example, earlier research shows that many European banks have already reached the offensive stage in the early 2000s. (202) At that time, they have already started to develop environmental investment funds, to finance sustainable energy and report their environmental activities. Some niche players even started to incorporate the goal of sustainable banking, such as providing debt-for-nature swaps. (203) Thus, efforts from Chinese banks themselves, as well as from government and civil society can still be made to accelerate the greening processes of Chinese banking by facing the challenges and seizing the opportunities. A. Main Challenges and Opportunities for Greening Chinese Banks Currently the challenge has no longer been the lack of awareness from the banks themselves, but the focus has now shifted to the question how to implement a Green Credit Policy. The main challenges for banks that may influence their future environmental performance will be identified and discussed below. Further, these challenges could be corresponding opportunities for Chinese banks to catch up. 1. Collective Standards and Localisation. As discussed above, few Chinese banks have applied stringent international standards or norms. For example, according to The Banker magazine's indicating the Top 1000 World Banks for 2013, four big state-owned commercial banks including the ICBC, CCB, ABC and BOC, have been ranked into the Top 10 World banks based on their tier 1 capital. (204) By making use of this ranking, the gap for signing to the Equator Principles for Financial Institutions (EPFIs) has been exposed in comparison with other banks. This is shown in Figure 6 below. Obviously, four of six banks who have not been EPFIs yet, are Chinese banks. As Chinese banks help more Chinese businesses to go with their tremendous lending, pressures to sign international standards and initiatives from both international society and the domestic trend of accession are increasing, particularly for adopting the EPs for project financing. (206) At the global level, other international banks adopting international principles are urging China's peers to take the same measures to avoid competition disadvantages. Hence, those Chinese banks with overseas transactions, mainly including the two policy banks, Chexim and CDB, are primarily under pressure of adopting the EPs for their project financing work in host countries. Within the domestic banking industry, the EPs are often considered as well-known international standards for environmental and social sustainability, although project financing is not very common to comparably smaller-sized Chinese banking institutions. The problem is that the equator principles are only applicable to project financing in which the smaller Chinese banks do not engage. As a result, the EPs do not apply to them. During interviews with bank personnel, all of them have expressed their intentions to adopt strict environmental standards in line with the EPs, but they similarly expressed concerns about the difficulties in finding intentional standards to fit the particular context of China. For example, the EPs require banks to produce loan documentation in terms of ten principles for implementation when making a lending decision, which is not a conventional transaction procedure for banks in China. …

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