Green Credit Directive

In February 2012 the China Banking Regulatory Commission (CRBC) issued the Green Credit Directive, (sometimes translated as the Green Credit Guidelines). The Directive has a status which is obligatory but not legally binding, so much depends on how seriously the CRBC takes implementation and on how it interprets the provisions of the Directive. So far this is not clear, but it can be seen at the very least as an opportunity to hold banks responsible for following certain standards.

The Directive applies to the policy banks (ie. the China Development Bank, ExIm Bank and the Agricultural Development Bank of China), state-owned commercial banks such as ICBC and the Bank of China, privately owned joint-stock commercial banks, rural co-operative banks and rural credit co-operatives.

It contains a number of provisions that are relevant to social and environmental issues and can be used to ask the banks about how they are implementing their obligations. The most useful ones that we have identified are (with key points emphasised in bold):

Chapter 1: General Provisions

  • Article 3 Banking institutions shall promote green credit from a strategic height, increase the support to green, low-carbon and recycling economy, fend off environmental and social risks, and improve their own environmental and social performance, thus optimizing their credit structure, improving the quality of services, and facilitating the transformation of development mode.
  • Article 4 Banking institutions shall effectively identify, measure, monitor and control environmental and social risks associated with their credit activities, establish environmental and social risk management system, and improve relevant credit policies and process management. The environmental and social risks mentioned herein refer to the hazards and risks on the environment and society that may be brought about by the construction, production and operating activities of banking institutions’ clients and key affiliated parties thereof, including environmental and social issues related to energy consumption, pollution, land, health, safety, resettlement of people, ecological protection, climate change, etc.

This section gives information about what kind of risks the banks are obliged to examine. The part referring to the low-carbon and recycling economy can be used to justify asking the banks to finance energy efficiency and new forms of renewable energy such as solar and wind, rather than coal.

Chapter 2: Organization and Management

  • Article 9 The senior management of a banking institution shall assign a senior officer and a department and configure them with necessary resources to organize and manage green credit activities. Where necessary, a cross-departmental green credit committee can be set up to coordinate relevant activities.

It is not usually clear from the banks’ websites who this person is or how the department can be contacted. Nevertheless asking about this can be useful.

Chapter 3: Policy, System and Capacity Building

  • Article 11 Banking institutions shall develop client environmental and social risk assessment criteria, dynamically assess and classify client environmental and social risks, and consider the results as important basis for credit rating, access, management and exit. They shall adopt differentiated risks management measures concerning loan investigation, review and inspection, loan pricing, and economic capital allocation. Banking institutions shall prepare a list of clients currently faced with major environmental and social risks, and require these clients to take risk mitigation actions, including developing and having in place major risk response plans, establishing sufficient, effective stakeholder communication mechanisms, and finding a third party to share such risks.

Of course it is open to interpretation what constitutes a ‘major environmental and social risk’, however this clause may present a framework to open the discussion in projects where such a risk may exist. There are few signs so far that the clause about stakeholder communication mechanisms are being implemented, but that does not mean we should not ask about them.

Chapter 5: Process Management

  • Article 17 Banking institutions shall strengthen credit approval management, and define reasonable level of credit granting authority and approval process according to the nature and severity of environmental and social risks faced by the clients. Credits may not be granted to clients whose environmental and social performance fails to meet compliance requirements.
  • Article 18 Banking institutions shall, by improving contract clauses, urge their clients to strengthen environmental and social risk management. As for clients involving major environmental and social risks, the contract shall provide for clauses that require them to submit environmental and social risk report, state and avow that they will strengthen environmental and social risk management, and promise that they are willing to be supervised by the lender; the contract shall also provide for clauses concerning the remedies banking institutions can resort to in the event of default on environmental and social risks made by the clients.
  • Article 19 Banking institutions shall enhance credit funds disbursement management, and consider appropriation management, and regard how well clients have managed environmental and social risks as important basis for credit funds appropriation. As for projects to which credit is granted, all stages, including design, preparation, construction, completion, operation and shutdown shall be subjected to environmental and social risk assessment. Where major risks or hazards are identified, credit funds appropriation can be suspended or even terminated.
  • Article 20 Banking institutions shall strengthen post-loan management. As for clients involving potential major environmental and social risks, relevant and pertinent post-loan management actions shall be developed and implemented. They shall watch closely the impact of national policies on the clients’ operation, step up dynamic analysis, and make timely adjustment to asset risk classification, reserve provisioning and loss write-off. They shall establish and improve internal reporting system and accountability system concerning major environmental and social risks faced by the clients. Where major environmental or social risk event occurs to the client, the banking institution concerned shall timely take relevant risk responses and report to competent supervisory authorities on potential impact of said event on itself.
  • Article 21 Banking institutions shall strengthen the environmental and social risk management for overseas projects to which credit will be granted and make sure project sponsors abide by applicable laws and regulations on environmental protection, land, health, safety, etc. of the country or jurisdiction where the project is located. The banking institutions shall make promise in public that appropriate international practices or international norms will be followed as far as such overseas projects are concerned, so as to ensure alignment with good international practices.

These are the most interesting sections: projects shall comply with domestic law and banks need to follow appropriate international practices. They will also be subject to environmental and social risk assessment at all stages, including operation and decommissioning.

In south east Europe and Turkey, it may also be argued that projects shall comply with EU law, since most of the countries aspire to join the EU within the lifetime of any infrastructure project constructed now. “Appropriate international standards”, of course, is subject to interpretation, but standards like the Equator Principles or environmental polices of international financial institutions may be useful reference points.

Chapter 5 (sic): Internal Controls and Information Disclosure

  • Article 24 Banking institutions shall make public their green credit strategies and policies, and fully disclose developments of their green credit business. As for credit involving major environmental and social risks, the banking institutions shall disclose relevant information according to laws and regulations, and be subjected to the oversight by the market and stakeholders. Where necessary, an eligible, independent third party can be hired to assess or audit the activities of banking institutions in performing their environmental and social responsibilities.

This section is yet to be implemented in most cases, but at least presents a basis for requesting information.