The glacial pace with which Chinese state-owned banks are moving towards green credit

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Ever since People’s Bank of China issued a notice requiring financial institutions to take protection of natural resources and the environment into account in loan decisions back in 1995, green credit policy has pretty much been hung on the wall, as Senior State researcher Yuan Qingdan told chinadialogue.

The Ministry of Environmental Protection research finds only 12% banks fully implemented green credit policy, while 18% had no information available on their policy.

Here are the problems:

i)The financial sector in China is just not in the same kind of pressure to care about the environment, rarely getting the blame for financing the very companies that contribute to the carpet smog.

ii)Provincial governments 地方政府, who are bent on economic growth, often ignore environmental objectives issued from the central government, and therefore does not oversee this aspect of regulations on city-level commercial banks; that’s a lot of governments and even more banks.

iii) Worst yet, small companies that remain statistically invisible under the radar, where regulation cannot reach at this stage, get their loans from local credit cooperatives which do not account for the environment.

The way out:

i) once there is the will from the central government, news standards can be implemented relatively quickly because Chinese banking is centralised. But for now financial institutions are not held accountable–a fact which must change.

ii) role of activist shareholders will be crucial. Outside China, you have the likes of UN-backed principles for responsible investment, Fair Pensions, a UK charity that uses internet tools to empower ordinary pension holders AND Cambridge Uni Banking Environmental Initiative, a bank-led consortium seeking to redirect capital in environmentally friendly ways.

More organisations of such nature would need to develop in stature.

iv) new penalties were introduced in January for companies that pollute, and it is expected that these penalties will now be higher than the cost of non-compliance (before, companies preferred to pollute and pay the fines which were minimal). If penalties are good enough, and the regulations are ENFORCED properly, this will surely enable the market mechanism, i.e. shareholders fearful of losing profit will lead to drop in stock value of companies that pollute. This is the logic that IPE’s Ma Jun is talking about and is trying with all his resources to facillitate by gathering and revealing pollution of companies.

v) Importantly, how the nation-wide carbon trading scheme, which has yet to be implemented, is enacted, will also influence pollution output in China. That is something environmentalists and indeed everyone living and breathing the smog should look forward to.

photo by Flicr user “g0d4ather

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