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FINANCE: China Takes Lead on Green Investing

Abid Aslam

WASHINGTON, Nov 21 2008 (IPS) - China's efforts to green its financial sector have earned a thumbs-up from U.S. environmentalists, who say regulators here could learn from Beijing's recent success in stimulating investments that don't despoil the planet.

Friends of the Earth-U.S., in a new report, highlighted Chinese financial sector policies designed to limit pollution and climate change and to encourage lenders and investors to take a longer-term and broader view of risk – one that factors in the risk of losses stemming from potential environmental problems.

Michelle Chan, an author of the report, urged regulators here to draw on the Chinese experience as they craft new rules for the troubled U.S. banking sector.

"Because of the financial crisis and bailout, we in the U.S. have a historic opportunity to update regulations in ways that enable Wall Street to finance a sustainable future," said Chan. "China offers some interesting examples of how sustainability can be incorporated into financial regulation."

The study, 'The Green Evolution: Environmental Policies and Practice in China's Banking Sector', hailed regulations that it says are working to prohibit Chinese banks from lending to companies not in compliance with environmental laws.

"There has been significant progress in the development of sustainable finance in China, including the creation of influential regulations, internal bank compliance mechanisms, and some public reporting," said the 59-page report.

Chinese banks – and particularly those that received government bailouts, Friends of the Earth noted with an eye to the massive taxpayer-financed rescues now being doled out to U.S. banks – have slashed lending to polluting and energy-intensive industries. The report highlighted the example of the Bank of Communications, which in 2007 reported that it had cut lending to the iron and steel industries by 1.14 billion dollars. Also cited is the Industrial and Commercial Bank of China, which the report said reduced its loans to polluting industries by 24 percent.

Thanks to a raft of policies and rules introduced over the past two years, the report said, green concerns have been given higher priority. The Ministry of Environmental Protection was created and has so far consigned 38 firms to a "credit blacklist" because of environmental violations. In consequence, at least 293 million dollars in loans have been denied or recalled.

One recent measure, the "Green IPO" (initial public offering) policy requires companies in polluting or energy-intensive industries to disclose environmental information and face a public comment period before they can sell stock to the public. Twenty out of 38 companies reviewed since the policy took effect in February have had their IPOs rejected or subjected to further assessment.

To be sure, the report also expressed concern.

China embraced green finance policies relatively recently, it said, so for now the country's banks continue to fall short of best international practice when it comes to managing environmental credit risk, reporting to the public, and engaging advocacy groups and other stakeholders.

The pro-environment policies do not apply to Chinese banks' growing portfolios of loans to projects and clients overseas, the report said. It nevertheless acknowledged ongoing efforts to adopt the Equator Principles, a set of environmental standards for international banks.

At home, it added, the environmental impulse is constrained by China's overwhelming dependence on readily available but problematic sources of energy, including coal, large dams, and nuclear power.

Even so, Chan said, Chinese banks have had to make drastic changes and "policy makers in the United States should demonstrate the same kind of vision."

Chan has long worked with financial firms and advocacy groups to highlight worrying Chinese ventures. Her endorsement of the green finance initiatives likely will draw attention because of this background, and because even Wall Street executives regard her as one of a small number of advocates with a credible grounding in finance.

Earlier this year, the World Bank issued a separate study detailing China's growing role in financing desperately needed transportation, communications, and other infrastructure in Africa south of the Sahara desert. Calling this "a hopeful trend for Africa", it described Chinese firms as dealing with social and environmental issues – the resettlement of populations displaced by large dams, for example – much as have their Western predecessors and competitors.

Noting that Chinese investors complied with local environmental laws, the bank's July report suggested that if Africans want Chinese firms to improve their environmental performance, then African governments must upgrade their national regulations.