Last week finance watchdogs, Market Forces and BankTrack, notified eight Chinese banks that loans issued to Australian coal projects may violate a Chinese banking policy. The policy, known as the Green Credit Directive, is one of the most innovative green finance policies produced by Chinese authorities to date. The policy requires Chinese banks to suspend, or even terminate, lending to projects based on environmental grounds. This marks the first time that NGOs have attempted to invoke the policy and persuade Chinese banks to re-evaluate the quality of loans based solely on environmental risks.
The coal projects are bad news for the Great Barrier Reef for a number of reasons. It would essentially transform the Great Barrier Reef into an international shipping highway, thus leading to a host of other environmental problems including pollution, coastline industrialisation, and climate change. Unlike Australia and the United States, China is one of the few countries that has incorporated environmental standards into banking regulations. Although the Green Credit Directive may offer one of the strongest policy protections in saving the world heritage site, it will only be as strong as its enforcement.
Instead of relying on banks to self regulate, China’s Banking Regulatory Commission (CBRC) should take advantage of the Green Credit Directive and actively enforce it. This could be done, for instance, by developing punitive consequences for bad bank behaviour, or creating grievance mechanisms for affected communities. However, failing to take any action will demonstrate banking regulators’ passivity, if not inability, to seize an opportunity to finally create some good news for China’s dismal environmental record.
By forcing banks to implement the policy, the CBRC could stop dirty financing to coal and showcase one of China’s most innovative banking policies to the world.
The Green Credit Directive obligates banks to abide by international environmental and social norms for both domestic and overseas investments. In cases where major hazards are identified, Chinese banks are obliged to suspend, or even terminate, loans from the client. It is a clever means of adding teeth to the country’s unique set of green finance policies. But despite the power of the CBRC to discipline Chinese banks in financing environmental degradation, it has not fulfilled its responsibility in holding Chinese lenders accountable when investing abroad.
In letters to the Chinese banks, Market Forces and BankTrack highlighted environmental, social, and financial risks Chinese banks face in approving credit to the coal projects, and drew further attention to infringements on international norms. The Great Barrier Reef is considered a crown jewel of the world’s natural wonders; the Australian coal projects would certainly jeopardise its preservation. The policy specifically states that banks must adhere to international norms when investing abroad. However, international safeguards that would be violated include the World Heritage Committee (UNESCO) standards, the International Coral Reef Initiative, and the Equator Principles. Current coal export terminals are already pushing the Great Barrier Reef onto the list of heritage sites in danger.
The NGO have also inquired whether banks were aware of the green credit policy, and if so, how the institutions were actively implementing the policy into loan approval and evaluation processes. The notification made clear that Chinese lenders and companies would be violating international and national environmental requirements, in addition to their state’s own policies.
To date, however, Chinese banks have not responded to the NGOs’ concerns or requests for information.
It is an uncomfortable, albeit unsurprising, silence from both Chinese banks and regulators, especially in light of past indifference to problems triggered by Chinese overseas investment. For instance, in a Bloomberg article on the use of child labour in mining in Congo, a Chinese ambassador said that it was not possible to police the myriad of Chinese investors who seek their fortune overseas. Although the ambassador noted that all investors should “respect the law”, it was a hollow statement that revealed how Chinese overseas investors and companies may face limited or virtually no accountability from Chinese authorities. Complicating the issue is the fact that unregulated Chinese investments are already damaging China’s international reputation.
Although Chinese authorities are scrambling to clean up air, water, and soil pollution domestically, comparatively little government attention has been paid to the critical role of Chinese banks financing environmentally damaging projects abroad, ranging from a gas pipeline in Burma, copper projects in Ecuador, to coal plants in Indonesia.
Chinese banks now exceed the World Bank in development finance. After years of advocacy from communities around the world, the World Bank developed safeguards on environmental and social standards. Chinese banks still have very few. Consequently, the CBRC must take more responsibility to enforce the strong policies that are available, like the Green Credit Directive.
Rey Edward is China Sustainable Finance Campaigner at Friends of the Earth US