Time to volunteer

Adopted by Industrial Bank in 2008, the Equator Principles – a voluntary code for sustainable finance – are making inroads in China. Now, more banks must sign up, argues Ni Huan.

China’s Industrial Bank officially adopted the Equator Principles – an international set of voluntary standards for sustainable financing practices – in October 2008, becoming China’s first and still only Equator Bank. One year later, it disbursed the country’s first project loan to meet all of the Equator requirements, marking the start of formal application of the principles in China. It is now worth considering whether more Chinese commercial banks can be encouraged to adopt the Equator Principles – advancing voluntary compliance and enhancing environmental regulation in the banking sector. This, in the end, may be the most effective way of promoting sustainable banking in China.

The Equator Principles, which are based on the environmental and social performance standards of the International Finance Corporation (part of the World Bank Group), were jointly established by several global financial institutions in June 2003 and have since become widely recognised in financial and investment sectors. In the past four years, the Equator Principles have been adopted by nearly 70 financial institutions in developed countries and emerging economies, whose branches cover more than 100 countries and whose project-financing business accounts for 85% of the global portfolio.

Industrial Bank’s move to become China’s first Equator Bank is accredited to its senior management’s strategic outlook, as well as the Chinese government’s earlier efforts to introduce and promote Equator Principles in the sector. In 2007, The People’s Bank of China, China Banking Regulatory Commission (CBRC) and the State Environmental Protection Administration
now the Ministry of Environmental Protection (MEP) – jointly announced the launch of the Green Credit Policy in China. The policy aims to restrict lending activities to enterprises and projects that violate environmental regulations and limit the expansion of energy-intensive and highly polluting industries.

Following the start of non-coercive measures to influence the banking sector, the government has promulgated more detailed regulatory policies over the past three years. The policy absorbed some concepts of the Equator Principles and provided guidelines for the banking sector in China, as explained by a CBRC spokesperson in December 2007. In March 2008, the vice minister of the MEP, Pan Yue, admitted in a press conference that one of the main barriers to implementing the Green Credit Policy was the lack of specific industrial standards for banks to follow.

At the policy-research level, the Equator Principles are still the benchmark referenced by Chinese policymakers in decisions relating to sustainable finance. And the principles are also the central foundation of the Green Credit Policy. However, in contrast to the voluntary Equator Principles, the policy is compulsory for all commercial banks’ financial products. There is another important difference between the two: while the Green Credit Policy above all stresses standards on environmental protection, energy saving and emissions control, the Equator Principles pay equal attention to social development and ecosystems.

The Equator Principles have their problems. Cases in recent years where institutions have breached the standards have given pause for thought to some Chinese commercial banks considering joining the scheme. The standards have received inconsistent and unequal treatment in different host countries and are applied mainly in developing nations where environmental regulations are lax. A report issued in 2005 by BankTrack, the international network of NGOs monitoring the operations of the private financial sector, criticised the principles as a “greenwash” tool – a public-relations exercise without any real environmental impact – for some global Equator Principles Financial Institutions (EPFIs) operating in developing countries.

Moreover, not all OECD countries (developed world countries) have sound environmental and social standards in place as part of their legal frameworks. Back in late 2003, a new signatory to the principles, Barclays Bank, provided project financing to Iceland’s Karahnjukar hydropower project – a scheme that attracted controversy due to a lack of transparent environmental and social evaluation. The tar sands project in Canada, which has received investment by the Royal Bank of Scotland, has attracted the most attention. Tar sands projects have been labelled “the most destructive project on earth” by environmental organisations following their expansion in the first few years of this century.

The Equator Principles have also had little effect restricting projects financed by syndications. The Sakhalin-II oil and gas project halted by the Russian government was a classic case. The project, which launched in 1994, was financed by six EPFIs and two other export credit insurance organisations. During the construction, these institutions turned a blind eye to the borrowers’ violations of certain social and environmental standards as required by the Equator Principles, and NGOs protested against the project. It ended up in court. In September 2006, the Russian court ruled to suspend the developer’s construction permit and the whole project was halted in January 2007, even though 80% of the work was completed. Although the syndicated financial institutions and borrowers took corrective action and finally completed the project, the Equator Principles failed to restrict the institutions’ lending activities at an earlier stage.

Although the Equator Principles have certain defects, adopting them still has positive impacts on financial institutions. Research published by World Development journal shows that the corporate social responsibility (CSR) policies of those signed up to the principles are rated significantly higher than those that aren’t. It also indicates that adopters tend to be large firms that can cover increased real costs brought by signing up. In addition, EPFI shareholders have not reacted negatively to the adoption, which “implies that shareholders expect that adhering to the Equator Principles will not affect shareholder value”. The conclusion of this study is that, despite the increased costs, adopters of the principles enhance their reputation and brand image by demonstrating their CSR policies and practices to the public. This is positive and attractive to many native banks which have already floated on the stock market.

Moreover, the “failures” of the Equator Principles can be addressed with enhanced government regulation. The Chinese government is encouraging commercial banks to learn and adopt international standards in sustainable financing. Since 2007, several of China’s large commercial banks have started feasibility studies for adopting the Equator Principles. Some have done so solely in reaction to the new regulations, but most are doing so on a voluntary basis. They see signing up as learning process in which to obtain new tools for risk management and product development in order to address fierce competition in the banking sector. In so doing, the active involvement of these banks in implementing the Green Credit Policy is turned into a commercial opportunity.

In addition to chairing policy research on implementing the Equator Principles in China and the Green Credit Policy, the Policy Research Centre for Environment and Economy (PRCEE), under the MEP, has also led the translation of the Equator Principles and relevant environmental, social and governance (ESG) guidelines for 63 sectors. And the organisation has also provided technical support to commercial banks willing to learn from the Equator Principles. The banking regulators have also frequently invited environmental-protection officials to attend sustainable-financing forums sponsored by leading banks and have actively participated in dialogues with practitioners of sustainable banking and discussed regulatory policies with them.

In January 2008, MEP signed an information-sharing agreement with CBRC. This was the first time that the environmental regulator shared information with an economic regulator. So far, MEP has supplied four batches of data on enterprises’ environmental performance. MEP also has shared more than 40,000 environmental-data entries with the credit-management system administered by the People’s Bank of China since March 2008. This enables commercial banks to receive the environmental records of businesses on time. Based on the credit information, banks are able to make decisions to decline loan applications or restrict loan disbursement to polluting borrowers and force them to make necessary amendments.

With all these factors in place – political support and increasing availability of data – the time is right for more of China’s commercial banks to adopt the voluntary Equator Principles. However, whether or not adopting these measures will have any measurable effect on green lending practices remains to be seen. 

Ni Huan is a project manager for SynTao, a consulting company that focuses on corporate social responsibility and socially responsible investing.

Homepage image by Wolfgang Staudt