A green risk assessment

Wei Guoxiong manages loans at Industrial and Commercial Bank of China, the country’s biggest lender. He tells Meng Si about the evolution of environmentally friendly principles inside a global financial giant.

The Industrial and Commercial Bank of China (ICBC) is China’s biggest lender. ICBC’s chief risk officer, Wei Guoxiong, manages its lending business – including green credit. Speaking to chinadialogue, he explains that implementing green credit requires a comprehensive reform of the bank’s internal systems.

Meng Si: What motivated your bank to implement green-credit policies?

Wei Guoxiong: Banking operations are about risk, and environmental risks are closely tied up with the bank’s credit risks. If not managed carefully, environmental risks can result in operational losses. So there’s a need to do this that’s internal to the bank.

The ICBC is, by market value, the world’s largest lender, and is very influential in the financial world. The banking sector has a big impact on the economy, which in turn affects the environment, so there’s a close relationship between banking and the environment. People are paying a lot more attention to quality of life and to the quality of economic development.

Projects or companies that damage the environment can be more profitable, as they don’t bear the environmental costs – but responsible banks won’t make those loans, as they don’t just pursue profit. This is a value preference, just like our preference for measured risks.

MS: What has the bank done in terms of green credit and green financing? It has been three years since release of the Green Credit Policy. How has your green business developed?

WG: One aspect is the “one-ballot veto”. All projects for which loans are applied for must pass their environmental-impact assessment, or we don’t lend. And if we find potential environmental problems – such as illegal release of pollution – then we pull out, even if the environmental authorities haven’t found out yet.

Second, we give all companies an environmental rating – “environmentally friendly”, “up to standard”, “in need of attention” or “potential risk”. And each of those ratings carries a different credit policy. Environmentally friendly firms are given priority support, with lower interest rates and no need for guarantees. Those in need of attention pay higher interest rates, while those classed as potential environmental risks need to submit guarantees or collateral to ensure the security of our loan. There are also green credit ratings for individual projects, at eight different levels, in order to provide support for projects that are protecting the environment or saving power. And so a system of green lending has taken shape.

Third, we carry out active environmental monitoring of projects. Even if a project has passed the requirements and been accepted, we cannot guarantee problems won’t arise in the future. For example, if we found the illegal release of pollutants, we would handle that as a breach of contract, issuing a warning or calling in the loan as appropriate. But we would give the company a chance to make amends. First, we would require them to make changes and, as soon as that happens, lending can continue – unless it happens repeatedly. These rules are part of the system.

In the last few years, we have increased the proportion of our lending and the number of loans that go to firms rated as environmentally friendly or up to standard. Last year, over 9.5 trillion yuan [US$1.4 trillion] of loans were issued in China, with the ICBC lending over one trillion yuan [US$147.6 billion], making it the biggest single lender. But at the same time as increasing domestic demand and maintaining growth, we have reduced lending to firms with high energy consumption and carbon or pollution emissions by 7.1 billion yuan [US$1 billion]. Of loans submitted to our headquarters for approval, 26 were rejected due to environmental problems. Currently 99.8% of our clients are classed as meeting environmental standards.

MS: Have there been any cases where you have called in loans because of environmental issues?

WG: A couple of days ago, in Fujian [south-east China], there was an incident with a manufacturer of maintenance-free car batteries. It’s actually an environmentally friendly product, and the environmental-impact assessment had been passed. But we found in our monitoring that there were media reports of high blood-lead levels in the surrounding population, so we called in the loan. We have a dedicated media monitoring centre collecting that kind of information. 

We are no longer making new loans to small-scale steel, concrete, smelting or paper firms, and are gradually pulling out from existing loans. Those small companies are unable to ensure they meet environmental standards. Even if they pass the environmental-impact assessment, we won’t lend to them. Passing that assessment is just the baseline standard, it is not an indicator of excellence. Green credit should aim for excellence, not just adequacy.

For example, in loans to concrete makers we don’t just look at the technology and economics of the project itself; we look for economic loops, such as reuse of waste heat and industrial waste. Only then do we consider making the loan.

At the moment, we lend more to larger firms with better environmental measures, such as Baoshan Iron & Steel and Angang Steel.

MS: So once the environmental-impact assessment is passed, are lending decisions based mostly on return on investment?

WG: We also look at the current situation in that sector – for example, whether or not there is over-capacity in the industry. We used to do business with almost all of China’s steel manufacturers, but now we’re gradually pulling back from and limiting loans in that sector. China’s steel manufacturing capacity has leapt from 100 million tonnes to 700 million tonnes, but the amount we lend to the sector has actually fallen.

MS: What is your reaction to negative media reports about banks lending to firms that breach environmental laws? 

WG: If we could just tell at a glance which firms are polluters, that wouldn’t happen. But there is a lot to keep track of. Also, environmental protection is a relative concept, and there are different levels of environmental tolerance. You can’t use strict definitions in a lot of cases. For example, thermal-power plants produce pollution – should we support them? If they have sulphur-capture and energy-saving technology, we do. Power plants are going to release carbon, but you can replace smaller plants with larger ones in order to reduce emissions.

MS: What internal systems does the bank have in order to implement the Green Credit Policy? Are there dedicated staff?

WG: There is an industry centre within the credit-management department, which researches green-credit policies and monitoring and has more than 20 staff members. It started focusing on sectors where there was over-capacity – steel, concrete, aluminium and so on. Then it gradually shifted to researching and setting green-lending policies for the bank.

On the ground, everyone is involved. Bank staff get green-credit training every year, and we don’t just pay attention to information from the environmental authorities. Client managers check up on firms in person, to see if waste handling is up to standard, for example. If problems are found, the company’s environmental rating is reduced.

MS: What are the difficulties in developing green credit?

WG: Being the first to implement the policy meant there was competitive pressure from other banks. Also, we are a bank, not environmental experts. We can’t know everything; we can only keep up with the overall situation – not with the actual data, the technical environmental requirements and indices of each industry.

But we also run video lectures for the relevant staff throughout the bank, with officials or academics speaking about the low-carbon economy, clean energy and so on. And the environmental authorities have opened up an environmental-information sharing platform to all the banks, making it easier for us to get data.

MS: Some academics have suggested that financial institutions should build on green-credit policies and go on to explore derivative services and products such as environmental information or consulting in environmental-risk management. 

WG: There’s definitely going to be a need for environmental risk-consulting in the future, but at the moment we are primarily reliant on information and guidance from the environmental authorities. Currently, domestic environmental protection is government-led. The non-governmental sector is sometimes too radical.

And the capital costs of that sort of development would be high, as there are a lot of detailed and specialised issues, and sometimes conflicts of interest.

We are also paying attention to carbon trading and carbon finance. There’s a lot of talk about that overseas, but little actual action. We can’t see yet if it’s just speculation, or how much actual business there will be. At the least, the market isn’t yet mature, and we’re not involved. The prospects will depend on the efforts made to resolve issues by various governments – in particular, the determination of the United States and the Obama administration. Because the costs of developing the sector will be high. And it involves an economic transformation. For a developing nation such as China, that’s a challenge.

MS: Could you explain what you mean by “the non-governmental sector is sometimes too radical”?

WG: Some projects actually have limited or entirely controllable environmental impacts – or even directly or indirectly improve the environment. Take electricity generation from waste incineration as an example. If the technology and the management are right, the pollution can be kept within limits and there’s no risk at all to the local environment or the health of residents. That’s been shown in developed nations such as Germany and Japan.

Meng Si is managing editor in
chinadialogue’s Beijing office.

Feng Huiyuan, a
chinadialogue intern, also contributed to this article.

Homepage image from Tianjin University of Finance & Economics