China's Green Credit Guidelines may yet promote financial regulations that help address climate change, suggests Jakob Thomä
Christiana Figueres, chief climate official of the United Nations, caused a stir with her comments that China is 'doing it right' in terms of climate change policies, given that the country is the world’s largest emitter of greenhouse gases.
She supported this claim by saying that China has some of the toughest energy-efficiency standards for buildings and transportation and is a big supporter of photovoltaic technology. But China’s role in expanding the policy spectrum in terms of what are ‘feasible’ instruments for fighting climate change has also been underappreciated. Nowhere is this more true than in the area of financial regulation.
China is the only major economy that has begun to integrate climate constraints into financial regulation (unless one counts Fiji as a major economy, where the central bank has stipulated mandatory lending requirements for its banks). While these new regulatory policies are still in a development phase, they set the stage for comprehensive regulatory reform designed to decarbonise the Chinese financial sector.
The most notable of these policies have been the “Green Credit Policies”, first issued in 2007, then revamped in 2012 as “Green Credit Guidelines”. While many of the green credit policies are recommendations on process (as opposed to outcome), they are starting to be relevant. Banks now need to report on Key Performance Indicators related to the “Green Credit Guidelines”.
Failure to comply by mid-level managers can be grounds for the Chinese Banking and Regulatory Commission (CBRC), the Chinese financial regulator, to prevent appointments to senior positions within the Chinese state-owned banks. Although the CBRC has yet to make use of this power, this could be a game-changer in terms of managers’ behaviour and future compliance.
Defining what is green
Although the international focus has been on Green Credit Guidelines, a range of additional measures have been implemented. All Chinese banks have to report any legal environmental liabilities connected with their investment and a number of additional ‘environmental indicators’ to the CBRC.
The European equivalent would be if Deutsche Bank, in addition to its financial reporting, reported environmental indicators and legal risks to BaFin, the German financial regulator, or eventually the European Central Bank. While Chinese banks are currently struggling with issues related to accounting and monitoring, particularly in terms of defining what is ‘green’, over time this reporting will become more sophisticated.
Interestingly, new public environmental disclosure requirements for certain industries in China suggest that public disclosure for the financial sector is on the horizon. Indeed, the reporting related to companies’ environmental performance already has regulatory consequences for the financial system. Chinese companies in certain industries will now face an environmental credit rating based on a four-colour scale. Beginning in March, banks are discouraged from lending to companies with a “red” (the worst) rating.
It is too early to speak of a revolution: many of these policies are still being developed, fine-tuned, and expanded. At this stage it is still difficult to assess the actual impact of these policies. As an example, investment in coal in China grew 10% on average over the past decade, although it has already begun to level off since last year. This suggests that the Chinese financial system is still ‘high-carbon’.
Regulatory policies such as lending limits to the real estate sector may have even run counter to incentives for investments in energy-efficiency. At the same time, these measures are leaps and bounds ahead of European and US policy, which seem to ignore the question of ‘greening’ financial regulation entirely.
Financial regulation has a significant role to play in ‘levelling the playing field’ for climate-friendly investments, an issue Chinese policies are beginning to address.
Of course, the actual regulatory instruments mobilised to ‘green’ the financial system may be very different, depending on the respective financial system parameters and constituencies. In Europe, for example, tax incentives for savings’ interest, which already are being used to channel investment, may be the most immediate lever available to policymakers to incentivise climate-friendly investments.
A number of different actors including the 2° Investing Initiative, Climate Bonds Initiative, and Carbon Tracker have put forward regulatory policy proposals. The European Commission is exploring the topic of ‘mobilising private capital for climate-friendly investment’. In that respect, Christiana Figueres’ comments undoubtedly hit the right tone. In terms of greening financial regulation, China is not only “doing it right”, but paving the way.