Dr. Guo Peiyuan
Translated by Valentina Wu
Significant progress has been made in the development of green finance in China since the Green Credit Guidelines launched in 2012. Chinese banks are encouraged not to finance polluting companies and to support environmentally friendly projects. For decades, microfinance has been generating great social impacts by giving small loans to the poor. If microfinance embraces the concept of green finance, huge environmental returns will also benefit the poor, who are the most vulnerable victims of China’s pollution.
Green credit policy in China
There are two driving force of green finance in China: financial returns and environmental protection. Obviously, environmental problems will put risk on business and investment. In 2007, the Ministry of Environmental Protection (MEP) introduced a series of new policies, which was concluded as three major green economic policies by media: green credit, green insurance and green securities, aiming to fight China’s pollution by economic measures.
At first, environmental agencies pushed these policies harder as they could use the financial tools to help restrain pollution. However, financial institutions did not know how to evaluate environmental performance as their expertise was reading financial reports. In 2009, the MEP, the China Banking Regulatory Commission (CBRC), and the People’s Bank of China decided to share environmental violation information with each other. The MEP has been sharing the “black list” with the financial agencies, asking them to limit loans to those polluting companies.
In 2012, CBRC issued the Green Credit Guidelines, which detailed the concept of green credit, encouraging financial institutions to increase their support to low carbon economy, circular economy and green finance, to prevent environmental and social risks, and to increase the environmental performance of their own. Other than saving water and energy in a huge number of bank branches, risk control and product innovation are the main focus of doing green finance around the world.
Practices of Chinese Banks
The development of green finance of Chinese banks can be summarized into three phases: 1) Learning how to do green finance from international organizations such as the International Finance Corporation (IFC), the French Agency for Development (AFD) and the World Bank; 2) Green finance product innovation, mostly energy efficiency financing, for example: green finance products from Industrial Bank and Shanghai Pudong Development Bank (SPD Bank); 3) Systematical green finance product lines and services.
Energy efficiency financing products are closely related to the energy management contract (EMC) model. Companies can borrow from a bank for the purpose of improving energy efficiency, and pay back the loan with the money saved from energy conservation. Banks can also lend money to energy management companies (EMCos), who have signed income distribution agreement with companies. EMCos pay back the loan with their proportion of returns from the energy saved. The two models above are the most common ones in China’s energy efficiency financing market.
Green bonds have also begun to emerge in China. CGN Wind, underwritten by SPD Bank and China Development Bank, issued a one billion yuan, five year bond to finance wind energy developments, using a combination of “fixed rate + rate”, with the floating rate tied to China Certified Emission Reduction (CCER). Green bonds will be an innovative trend in the near future internationally.
Green finance of micro-credit companies
Product innovation
Successful cases on energy efficiency financing by commercial banks can be duplicated by micro-credit companies, if they can meet the energy saving needs by individual households or small business. For instance, energy efficiency financing can serve for equipment financing to big brand’s suppliers. Energy saving equipment providers receive loans and sell the products to suppliers, boosting their sales at the same time. Just like the case of IFC’s cooperation with Coca*-cola by providing loans to Coke’s distributors, who used the loan to keep their small business -- selling Cokes -- running and paid back the loans by the money they earned.
Risk control
The first step of risk control is a list of polluting industries or companies that need to limit credit to. From the banks’ perspective, a database of environmental violation records is needed. However, very few systematical environmental violation data can be found in China. Environmentalists use the Water Pollution Map to locate polluters. Banks in China can also use the platform to check if a company has serious violation records.
Although the database only offers information at company level, micro-credit companies can use the data to locate polluting areas. For instance, if a province is found to have many records of soil being polluted by heavy metal, individual farmers and small farms will face the risk of production loss and sales drop. Environmental information can help to avoid risks even though the connection is not that clear or direct. If environmental information is integrated in one database, frontline employees can evaluate and control different risks according to the data.
Environmental performance of micro-credit companies
Based on the cost analysis of a micro-credit company, the energy consumption does not take a big proportion of the total cost. However, micro-credit companies can save large amount of energy if individual branches save a little as they usually have huge number of branches across China. Opening up a new branch only takes 90 days on average in China, and emissions can be reduced by simply setting up a rule of green building material purchasing.
The article is a summarization of Dr. Guo Peiyuan’s speech on “Green Credit and Ecology of Rural Areas” conference.