China Prohibits Banks From Lending to Environmentally Destructive Companies

China has adopted new financial sector regulations designed to limit environmental problems including pollution and climate change, according to a report released today by Friends of the Earth-U.S.

The environmental group said that China's effort to improve the sustainability of its financial sector could provide U.S. regulators with ideas for how to approach the financial crisis here.

"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 Michelle Chan of Friends of the Earth, one of the authors of the report. "As this report shows, China offers some interesting examples of how sustainability can be incorporated into financial regulation."

The report, The Green Evolution: Environmental Policies and Practice in China's Banking Sector, describes recent regulations that prohibit banks from lending to companies that fail to comply with environmental laws. In particular, the report found that as part of China's "Green Credit Policy," the country's Ministry of Environmental Protection has put 38 firms on a "credit blacklist" due to environmental violations, resulting in at least $293 million (U.S.) in loans being denied or recalled. It also details China's new "Green IPO" (initial public offering) policy, which requires companies in polluting or energy-intensive industries to disclose environmental information and face a public comment period before stock is sold to the public. Twenty out of 38 companies reviewed had their IPOs rejected or subjected to further assessment by the Environment Ministry since the policy's start in February 2008.

The report found that some Chinese banks, particularly those that received government bailouts, have curtailed lending to polluting and energy-intensive industries. For example, in 2007, Bank of Communications reported that it cut lending to the iron and steel industries by $1.14 billion (U.S.), and ICBC decreased loans to polluting industries by 24 percent.

"China's banking crisis led to massive government bailouts starting in the late '90s," Chan said. "But it wasn't no-strings-attached. Banks had to make drastic changes, and new regulations forced banks to follow prudent lending practices, including taking the environment into account. Policy makers in the United States should demonstrate the same kind of vision."

Although China's green finance policies have recently led to positive changes, the report also points out significant shortcomings. For example, Chinese banks still lag behind international best practices for environmental credit risk management, public reporting, and stakeholder engagement. Also, the scope of China's Green Credit Policy is limited, as the policy does not apply to Chinese banks' growing international lending portfolios. In addition, China's green finance policies may be insufficient to counter contradictory policies that have expanded the use of environmentally harmful energy sources including coal, large-scale hydropower, and nuclear power.

The full report can be viewed at: https://www.foe.org/pdf/Chinese_Bank_Report_2008.pdf.