Keeping an Eye on China’s Bankers

Last August, a major pollution story broke in China: 5,000 tonnes of toxic chromium tailings had been dumped near a Yunnan reservoir, contaminating water supplies and killing livestock. Worse revelations were to come. The company behind the incident, Luliang Chemicals, had been illegally discarding chromium slag by south China’s Nanpan River for more than a decade—280,000 tonnes of it in total.

China’s environmental activists had questions, and not just about the local governance and company management that had allowed such devastating pollution to go unchecked for so long. Campaigners, led by Yunnan-based NGO Green Watershed, also wanted the government to publish details of the financial institutions that had provided financial backing to Luliang. They wanted to know which banks had lent the company money and details of the regulatory response to the disaster.

Green Watershed put these questions in a freedom of information request and filed it with the Kunming branch of the People’s Bank of China, the provincial banking regulator and the provincial environmental authorities. It also organised an open letter, signed by twenty-four Chinese NGOs, asking China’s sixteen listed banks to disclose whether or not they had made loans to the company and two connected firms. This was the first time such a request had been made in response to a major pollution incident in China.

The freedom of information request was refused: by the People’s Bank of China due to “commercial secrecy”; by the environmental authorities due to “scope of government function”; and by the banking regulators on grounds of “information technology limitations.” Only two banks, Pudong Development Bank and Industrial Bank, responded to the open letter, each stating that it had no lending relationship with Luliang Chemicals. The other fourteen remained silent.

Unlike financial institutions in most of the world’s leading economies, China’s banks are still able to keep a closed lid on the ecological and social impacts of their lending decisions, as the Luliang case makes abundantly clear. But civil society activism in this sector offers room for hope. And there are signs that NGOs may be starting, slowly, to prize open that lid.

The latest environmental rankings [PDF] of the country’s listed banks, published last month by Green Watershed and partners, is a case in point. The existence of these rankings points to growing levels of public supervision over China’s financial sector, and is raising hopes for more systemic financial regulation from both industry and government.

Green Watershed was the first of China’s NGOs to start advocating for social responsibility and green lending in the banking sector, back in 2002. The years since have seen some progress. In 2007, the State Environmental Protection Agency (now the Ministry of Environmental Protection) together with the People’s Bank of China and the China Banking Regulatory Commission (CBRC) issued a document on limiting credit to polluting industries, considered the launch-pad for China’s green credit policy. Following this, CBRC and the People’s Bank of China released a string of guidance documents, in a bid to make loans to energy efficient and low-emissions industries an important factor in the rating of banking institutions.

Though seen as a bold move, the green credit scheme has faltered in implementation. Transparency on lending decisions remains weak and environmental performance a long way from global standards. In this context, NGOs have continued to push for improvements: in 2008 Green Watershed launched a discrete project on “Green Credit Advocacy,” and since 2009 it has carried out an annual assessment of banking performance.

At the end of April this year, Green Watershed published the Environmental Record of Chinese Banks (2011), the third edition of the annual study which tracks and evaluates the environmental performance of China’s listed financial institutions, compiled in partnership with seven other Chinese NGOs. (Rather confusingly, though the report was published this year, it is labelled 2011 and uses data from 2010.)

The sixteen banks investigated are: Industrial and Commercial Bank of China (ICBC), Bank of China, China Construction Bank, Agricultural Bank of China, Bank of Communications, China CITIC Bank, China Minsheng Bank, China Merchants’ Bank, Industrial Bank, Shanghai Pudong Development Bank, China Everbright Bank, Bank of Beijing, Huaxia Bank, Shenzhen Development Bank, Bank of Nanjing, and Bank of Ningbo.

The report drew on four sources of information. First, the authors used the banks’ own publications, such as corporate social responsibility reports, annual reports, and corporate websites. Second, they looked at information on the websites of the banking regulators. And third, they analysed reports in Chinese or foreign media on the lending and investment activity of the banks, or their environmental performance. Lastly, a questionnaire was sent to each institution, though this proved a limited stream: only three institutions, the Industrial and Commercial Bank of China, Shenzhen Development Bank, and the Industrial Bank, responded.

Green Watershed and its partners used the collected information to rank the banks based on eleven indices: environmental transparency; environmental policies; use of environmental measures; existence of a designated environmental department; loans to polluting or energy-hungry firms; environmentally friendly loans; reputation; adherence to international environmental norms; internal environmental performance; peer and client advocacy; and overseas impact.

Overall, the environmental transparency of the banks was deemed to have improved across the board since last year’s report. The best performers were: Industrial Bank, Industrial and Commercial Bank of China, Shanghai Pudong Development Bank, China Merchants’ Bank, and Shenzhen Development Bank. Agricultural Bank of China, Beijing Bank, Nanjing Bank, Ningbo Bank, and Everbright Bank, brought up the rear.

The positions of ICBC, CITIC, Industrial Bank, Shanghai Pudong Development Bank, Huaxia Bank, and Shenzhen Development Bank had improved since the previous rankings. But Construction Bank of China, Bank of Communications, China Merchant’s Bank, Bank of Beijing, Bank of Nanjing, and Bank of Ningbo had all fallen. The Bank of China and China Minsheng Bank staying in the same positions as last year, while Agricultural Bank of China and Everbright Bank were new additions to the list.

Whether or not banks subscribe to international environmental norms is an important marker of their performance in this area. But the number of Chinese financial institutions adopting global green-lending standards has stayed stubbornly low. Industrial Bank has outstripped its peers here, having signed up to the Equator Principles—a voluntary set of standards for assessing social and environmental risk in project financing—as well as the United Nations Environment Programme’s Finance Initiative (UNEP FI) and the Carbon Disclosure Project, a scheme that tracks the carbon emissions and climate actions of the world’s biggest firms.

China Merchant’s Bank has also joined UNEP FI, while ICBC is a member of the Carbon Disclosure Project. China Construction Bank, Minsheng Bank, and CITIC have made preparations to join the list of signatories to the Equator Principles, but are yet to actually do so. There is no news of any other Chinese bank preparing to adopt any international standards.

Green Watershed’s annual reporting project is the only scheme in China to comprehensively investigate and rank the environmental performance of the country’s banks. That it is being produced by people outside the financial sector is telling. And it should spur China’s financiers to take the reins and get their houses in order.

In 1974, the world’s first environmental and social full services bank, GLS Bank, was founded in Germany, set up specifically to provide preferential loans to the ecological, social and cultural projects that normal banks often weren’t interested in. In the decades since, Germany has developed a mature set of green lending policies and mechanisms and the Equator Principles have been adopted throughout its banking sector. The government is also actively involved in developing green-credit products.

In the United States, commercial banks have clear social obligations enshrined in law, including towards the environment. And there has been a shift from shareholder-value orientated corporate structures towards stakeholder theory, which acknowledges the need to consider the interests of different participants, such as customers, staff, and society. Banks in the United Kingdom, Japan, and Canada generally apply the Equator Principles and operate green-lending policies.

In China too, there are stirrings of change, as the financial system itself responds to expressions of public oversight. On February 24 this year, CBRC published guidelines on green lending, providing a regulatory framework that has been warmly welcomed by environmental campaigners. Could a new order for Chinese finance be on its way at last?