Analysis: China Uses Green Loans to Tackle Environmental Problems

A new joint effort between China’s government and the International Finance Corporation (IFC) will likely wean industrial polluters in the country off of environmentally destructive bank loans. In late January, China’s State Environmental Protection Administration (SEPA) signed an agreement with the IFC to introduce the globally recognized Equator Principles in China, according to China Daily. The Equator Principles are a voluntary set of guidelines for assessing and managing the environmental and social risks associated with project finance.

Under the collaboration, SEPA and the IFC will conduct joint research on adapting the Equator Principles and developing environmental benchmarks for lending in China’s financial sector. The collaboration will provide a set of international standards for China’s “green loan” initiative, launched in July 2007 by SEPA in partnership with China’s Central Bank and the China Banking Regulatory Commission. The initiative aims to construct a platform for sharing the environmental records of industries with environmental authorities, the Central Bank, and commercial banks. Banks will also be pushed to factor in environmental considerations when distributing loans. The initiative aims to use financial tools to force “self discipline” on businesses for their own survival and development.

The green loan initiative represents another major attempt by SEPA to reform the Chinese government’s environmental efforts, after the much-touted green GDP accounting plan, which SEPA partnered on with the National Statistics Bureau, failed in 2007. After several rounds of crackdowns on industrial polluters, SEPA realized that it could not tackle China’s pollution single-handedly, and began seeking partnerships with other powerful government departments and agencies to explore market–based approaches to environmental problems. SEPA believes the use of adequate market tools will have a more profound impact in the industrial sector than administrative measures, forcing businesses to internalize environmental costs and reduce environmental problems from the start, rather than cleaning up afterwards.

Since the initiation of the green loan concept, SEPA has been working actively to develop specific guidelines and regulations that are easy to implement. The recent collaboration with the IFC on the Equator Principles is an immediate result of that effort.

China’s banking sector has willingly cooperated in the green loan endeavor. In November 2007, the China Banking Regulatory Commission took the initiative in issuing new guidelines for energy conservation and emissions reductions that apply to all financial institutions nationwide. The guidelines require tight control on lending to highly energy intensive and polluting sectors, while encouraging loans to “green” enterprises. That same month, 12 heavy polluters were blacklisted, having their bank loans recalled, suspended, or rejected.

Major commercial banks, including the Industrial and Commercial Bank of China (ICBC), Agricultural Bank of China (ABC), China Industrial Bank, and China Merchants Bank, are moving quickly to develop internal mechanisms to incorporate the environmental records of businesses into lending considerations and to link green loans with client rating and risk classification procedures.

Since 2006, ICBC has withdrawn 16.7 billion RMB (roughly US$2 billion) in loans from several highly polluting clients as well as potential environmentally risky customers, and it has handed out four times that much to green enterprises and projects. In 2007, the bank surveyed its 59,000 corporate clients to assess environmental performance. About 78 percent were cleared for green loans of more than 200 million RMB (roughly US$26 million), accounting for about 80 percent of the total surveyed clients.

China Merchants Bank, meanwhile, has adopted an environmental benchmark beyond the Equator Principles. In October 2007, it joined the United Nations Environment Programme’s (UNEP’s) Finance Initiative, a global partnership between UNEP and the financial sector to assess the impacts of environmental and social considerations of financial performance. By October 2007, the bank’s loans for renewable energy had increased by 26 percent since the start of that year, and loans for green equipment, water treatment, garbage treatment, and air pollution prevention and abatement had increased by 18 percent.

The banking sector has an internal incentive to shift toward green loans. Over the past two years, the Chinese government has taken serious measures to mitigate the impacts of heavy industries, including limiting the development of highly energy intensive and polluting sectors and closing down thousands of inefficient and dirty factories. Banks have suffered losses and high lending risks as a result. According to SEPA, 191 enterprises in Luliang City of Shanxi province were shut down or suspended in January 2007, incurring risks to more than 600 million RMB (roughly US$7.8 million) in loans.

The empowerment of China’s environmental authorities and the ready willingness of the banking sector to address pollution collectively indicate the strong political will of the government in tackling environmental problems. The excessive development of heavy industrial sectors, such as steel, cement, power generation, petrochemicals, is blamed for the nation’s serious environmental degradation and rapid rise in emissions. While the central government is making an effort to tackle this problem through rules and regulations, the development of responsible financing will likely align itself with those priorities and help bring about real environmental change in China.

This story was produced by Eye on Earth, a joint project of the Worldwatch Institute and the blue moon fund.