Greening Banks

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GREENINGBANKSHighlights of 2012 International Green Credit Forum


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Over the course o 2012, IFC joined hands withbank regulators rom Asia, Arica and LatinAmerica to launch a powerul new platorm orthe development o national environmental and

social risk-management guidelines or nancialinstitutions. The Sustainable Banking Network isacilitating innovation and regulatory advances bysharing knowledge and technical resources.

The momentum or this important initiativecame rom the rst International Green CreditForum hosted by IFC and the China BankingRegulatory Commission (CBRC) in Beijing in May

2012. Regulators rom ten emerging markets,supported by senior banking executives romChina and elsewhere, conrmed a growingconsensus that sustainable banking practices aresound business practices.

As the largest multilateral source o debt andequity nance or private enterprises in emergingmarkets, IFC, part o the World Bank Group, isalso a leader in applying environmental, social

and governance (ESG) sustainability standardsto ensure the protability and integrity o ourinvestments. Through our sustainable nance

journey over almost two decades, IFC has workedactively with nancial institutions in emergingmarkets to create business opportunities andstrengthen lending portolios through sustainablebanking practices.

We have ound time and again that sustainablebanking protects banks' assets and opens upnew nancial product areas and markets. It also

Foreword


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improves resilience during tough economictimes. Reducing the use o non-renewableresources and avoiding negative impactson the environment are just some o the

strategies that also yield nancial returns.

However, banks require a level playingeld beore they can make the leap to newpractices and management systems. I doneright, the returns to banks and society couldsignicantly enhance the competitiveness oemerging market economies.

A ew bank regulators have taken the lead tocreate appropriate rameworks and incentivesto support adoption by local banks. Chinaand Bangladesh have issued groundbreakingsustainable nance polices in recent years.Brazil has a rich array o policies in place andmany lessons to share. It is very clear rom theearly pioneers that there is no one-size-ts-all approach. But there is much to be learnedrom a community o peers, sharing their

experiences and oering tools and strategiesthat have worked.

With that in mind, IFC is committed tosharing what weve learned and to acilitatethe exchange o knowledge and innovative

approaches among emerging market bankregulators. We are proud to play a coordinatingrole and support the Sustainable BankingNetwork to help build capacity and partnerships.

This eBook provides an exciting snap shotp o howregulators are already engaging with the newrontier o sustainable banking and developingnationally appropriate models. It is among therst o many tools to acilitate knowledge sharingand collaborative learning.

Karin FinkelstonAsia Pacifc Vice President, IFC

Video: Highlights o the 1st InternationalGreen Credit Forum, Beijing, 2012

To watch the video on YouTube, click here.
http://youtu.be/9NvAgW0D654http://youtu.be/9NvAgW0D654


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Table o Contents1. About this eBook 6

2. Context and Key Messages 8

2.1 The Business Case ForSustainable Finance 8

2.2 A Role For Banking Regulators 8

2.2 Outcomes And Next Steps 10

3. Overview o Emerging Market

Regulatory Initiatives 12

3.1. Bangladesh 12

3.2. Brazil 12

3.3. China 14

3.4. Indonesia 14

3.5. Korea 14

3.6. Nigeria 15

3.7. Thailand 15

3.8. Vietnam 15

4. Chinas Regulatory Experience

with the Green Credit Policy 16

4.1. An Overarching National

Strategy 164.2. Interagency Collaboration 18

4.3. Provincial Regulatory

Experiences 18

4.4. Innovation By Banks 20

5. Equator Bank Experiences 24

5.1. About The Equator Principles 245.2. Itau Bba Bank, Brazil 24

5.2. Standard Bank, South Arica 25

5.3. China Industrial Bank 26

6. Perspectives o International

Organizations 28

7. Useul Resources 30

Sustainable Banking Network

or Regulators 30


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1. About this eBookOn May 16-17, 2012, the Chinese BankingRegulatory Commission (CBRC) and IFC, a membero the World Bank Group, jointly hosted the rstInternational Green Credit Forum in Beijing. It was

the rst time high-level representatives o bankingregulators rom emerging markets had gatheredto discuss good practices in sustainable nance.

The event attracted around 300 participantsrom 16 countries, including Bangladesh,Brazil, China, Canada, India, Indonesia, Japan,Korea, Laos, Malaysia, Mongolia, Nigeria, SouthArica, Russia, Thailand, and Vietnam. Among

them were senior representatives o bankingregulators rom 10 countries, senior executivesrom the top 25 Chinese banks, heads o 36 localbranches o the CBRC, and 13 banks rom 10countries outside China.

Through this eBook, IFC and CBRC aim toprovide an overview o the presentations anddiscussions that comprised the two-day event andto share thoughts on the next steps or banking

regulators. We have also included some notablehighlights o national regulatory initiativessubsequent to the Forum.

With more than a decade o experience providingtechnical assistance to emerging market banksand regulators, IFC addresses sustainabilityissues through a dual approach: i) seekinginvestment opportunities, and ii) creating

robust risk management systems. IFCs supportto CBRC and Chinas Ministry o EnvironmentalProtection was the rst example where IFCs

Perormance Standards and the World Bank GroupEnvironmental, Health, and Saety Guidelinesserved as international reerences or nationalpolicy development in an emerging market.

Sustainable nance and green bankingare terms that describe the integration oenvironmental and social (E&S) considerationsinto mainstream banking practices. Suchintegration reduces both reputational and creditrisk in banks lending portolios. It also opensup new lending opportunities that benet theenvironment and society.

The rst International Green Credit Forum exploredeorts by China and other emerging markets topromote green economies through bankingpolicies, regulations, and capacity building orbanks. Participants agreed that sustainability isboth a business challenge and opportunity or thenancial sector.

Through this eBook, we hope to support

ongoing sustainable banking eorts byemerging market regulators and inspire similarinitiatives in other countries. This publication isone o the rst knowledge products to supportthe newly established Sustainable BankingNetwork or Regulators.(See Resources

section or more inormation)


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Successul businesses will be the ones

which can adapt to the changing businessenvironment specically by adoptingthe belie that business success andenvironmental and social well-being gohand-in-hand.

Karin Finkelston, Vice President, IFC


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2. Context and Key Messages

2.1. THE BUSINESS CASE FORSUSTAINABLE FINANCE

A growing number o nancial institutions

worldwide are adopting policies, systems andlending practices to reduce negative private sectorimpacts on the environment and society. They aredoing so to ensure that economic developmentdoes not come at the cost o human well-being,natural resources and vital ecosystems. They arealso protecting their lending portolios rombusiness risks and identiying new businessopportunities oered by the green economy.

A number o global challenges have reinorcedthe urgency or the nancial sector to playa proactive role. As each o the conerencekeynote speakers pointed out, the eects oclimate change, natural resource constraints,severe pollution, growing populations, andthreats to ood security are just some othe converging pressures aecting nationaleconomies. These challenges require achange in how the private sector plans and

collaborates to develop solutions or thecoming decades.

As capital providers, banks are ideally placed tohelp the private sector respond to sustainabilityrisks sooner and more eectively. This in turnreduces losses in banks own lending portoliosdue to ailure o businesses to adapt to neweconomic realities, manage stakeholderrelationships, and comply with regulations.

Maintaining good environmental and social (E&S)management systems can thereore help protectthe assets o nancial institutions. It can also helpthem navigate dicult economic conditions.

IFCs 15-year engagement with emergingmarket nancial institutions has identied theollowing key benets when banks adopt E&Smanagement systems1:

Lower cost o capital Improved quality o loan portolio New business opportunities (e.g. renewable

energy, clean technology, underserved markets)

Better terms o insurance Better ratings by analysts Attracting unds or international nance

institutions that support E&S activities Recognition and awards Improved brand value

2.2. A ROLE FOR BANKING REGULATORS

Banking regulators at the rst InternationalGreen Credit Forum agreed sustainability is aglobal trend and sustainable nance a businessimperative. Sustainable nance was recognized asboth a risk management and business opportunity.Case studies and experiences shared by banks andregulators conrmed that:

Sustainability adds measurable value to banksportolios

1IFC, (March 2007), Banking on Sustainability Financing Environmental and Social Opportunities in Emerging Markets
http://www1.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/ifc+sustainability/publications/publications_report_bankingonsustainability__wci__1319578181361http://www1.ifc.org/wps/wcm/connect/topics_ext_content/ifc_external_corporate_site/ifc+sustainability/publications/publications_report_bankingonsustainability__wci__1319578181361


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Sustainability protects banks and economiesagainst risks and losses

Yet nancial institutions ace numerous obstacles

to adopting sustainable nance practices. Amongthese is the need or a level-playing eld orbank competition. Banking regulators thereoreplay a vital role in guiding and supportingbanks to adopt new and innovative practices. Incollaboration with other regulatory agencies, theycan create i) a sound policy context, and ii) aneective implementation ramework to help localnancial institutions prepare or the transition tosustainable banking practices.

Several emerging markets have been rst-movers in sustainable nance. China, Brazil andBangladesh, in particular, provided detaileddescriptions o their experiences and lessonslearned. Vietnam, Indonesia and Nigeria arealso in the process o establishing green creditrameworks or their national economies.Subsequent to the Forum, Nigeria launched theNigeria Sustainable Banking Principles.

The participating regulators identied theollowing success actors to develop eectivepolicies and implementation rameworks orsustainability nance:

Establish a legal system and supervisionmechanism in coordination with otherregulating agencies

Oversee the implementation o green credit

and provide capacity building or banks Develop guidelines or principles or green

banking, including sector-specic guidelines.

Establish monitoring and supervisionmechanisms to ensure consistency

Provide economic incentives to promotelending to sustainable projects and businesses

Create an environment or collective learningamong stakeholders in the green nancial sector

They also identied challenges and opportunitiesgoing orward:

Improve availability and access to inormation

about the E&S perormance o borrowers

Continue to build the capacity o banks around

E&S management

Ensure ongoing regulatory drive to support anational transition to sustainable nance

Develop technical resources to support banks

Agree on denitions o types o sustainable

nance

Provide more inormation on opportunities

and business models or sustainable nance

Measure the impact o green credit application

in terms o banks portolios and contributions

to the economy

The participating regulators identied a need orcommon standards or themes that could guidethem in policy development and implementation.Three themes were explored in greater depth:

I) DATA COLLECTION

One o the main barriers or implementing green

credit policy is that the banks have little or no accessto companies E&S perormance inormation. Mostcountries have not built the necessary database o


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companies environmental and social records,thus the current inormation is too limited orbanks to analyze the borrowers E&S risks orregulation violations.

II) MEASURING IMPACT

Ater implementing sustainable nance

policies, it is necessary to measure the impact o

implementation and strengthen its infuence.

Regulators should assess the infuence and range

o the policy, the experience learned during the

implementation, and ways to improve. For the

commercial banks adopting the green creditpolicy, regulators should measure the extent,

capability and outcome o implementation,

and analyze good practices as well as problems

exposed during the process.

III) PROVIDING MARKET INCENTIVES

Some commercial banks pointed out that i they

reject polluting companies, they may lose certainpremier customers in the short term and

reduce revenue. Moreover, most companies in

the environmental-protection industries are small

and medium enterprises and start-ups with ewer

assets to use as leverage. Banks usually do not

grant loans to these businesses due to the high

risk and low return on investment. Thereore,

governments should continue to discuss how

to encourage commercial banks to implementsustainable nance practices through market

incentives and mechanisms.

2.5. OUTCOMES AND NEXT STEPS

The rst International Green Credit Forumdemonstrated the value o shared learning and the

participating regulators rom emerging marketscalled or the creation o a Sustainable BankingNetwork or Regulators to assist them in:

Sharing experiences Building partnerships Developing common resources

IFC supports the Network as a strategic andtechnical partner. An initial Steering Committee or

the Network has been ormed, consisting o IFC,CBRC and Bangladesh Bank, with a view to rotatingSteering Committee members and involving otheremerging market regulators. The Networks goalis to reduce the learning curve or regulators andhelp them more quickly design systems thatwork. It was also agreed that members o theNetwork would collaborate on developingknowledge products, with this eBook being the

rst o such products.

Bangladesh Bank ormally oered to host the nextinternational Forum. Other regulators welcomedthe proposal and the establishment o an annualorum. The next Forum will take place in Dhaka,the capital o Bangladesh, in early 2013.

Banking regulators rom Bangladesh, Brazil,China, Indonesia, Korea, Nigeria, Thailand andVietnam shared their experiences to date with


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3. Overview o Emerging MarketRegulatory Initiatives

implementation o sustainable nance policies,

regulations, and capacity building or localnancial institutions. The ollowing sectionprovides an overview o the various nationalinitiatives, including some notable highlightssubsequent to the Forum.

3.1. BANGLADESH

Bangladesh has developed a national

Environmental Risk Management (ERM) Policy andStrategy Framework, which Bangladesh Bank, thecountrys central bank, made mandatory or the

nancial sector in 2011.

The Policy is being implemented in three phases

between 2011 and end o 2013. Phase I (2011)

included a ocus on promoting governance

and policy, incorporating ERM in core risk

management, creating a Climate Risk Fund, andsupporting training, marketing and reporting

activities. Phase II (2012), which is being

implemented, includes developing sector-specic

environmental policies, Green Strategic Planning,

setting up Green Branches, and delivering

programs to educate bank clients and improve

bank disclosure and reporting.

Bangladesh Bank has particularly emphasizedthe need to manage or treat risk rather than

tolerate or transer risk. Sustainable banking

is seen as an opportunity to move to resource-

ecient and low-carbon industries, including greenindustry and green economy in general.

Implementation o the ERM Policy will include aPolicy or Preerential Treatments or CompliantBanks. Bangladesh Bank publishes the names o thetop 10 banks that are most compliant in an eortto encourage nationwide compliance. Compliantbanks will be given priority to open new branchesand receive licenses. For instance, Bangladesh Bankwill give permission or establishing a small andmedium enterprise branch subject to installation osolar panels.

Going orward, Bangladesh Bank has identiedthe ollowing priorities: to build capacity amongsta; to apply Green Banking and use the ERMguideline eciently; to develop a culture within theorganization based on environmental governance;

to replicate global and local best practices; to shareknowledge and technical know-how with peergroups; to achieve urther integration with CreditRisk Management; to apply a quantitative approachor Environmental Risk Rating; and to develop adatabase or technical support.

3.2. BRAZIL

The regulatory ramework or sustainable bankingin Brazil is characterized by a combination o sel-regulation by banks and regulations introduced


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by the Central Bank o Brazil (BCB) and relevantsectoral ministries. Since 2004, our Brazilian bankshave signed the Equator Principles: Ita Unibanco(2004), Banco Bradesco S.A. (2006), Banco do Brasil

S.A. (2006), and CAIXA Economica Federal (2009).

In the mid-1990s, the rst Green Protocol waslaunched. Through this ramework, publicbanks committed themselves not to nance

environmentally degrading undertakings and to

provide support to sustainable productive systems.To achieve this, the banks adapted their procedures

or analysis and concession o credit. In 2009,

Brazils banking association (Febraban) and theMinistry or Environment introduced the secondGreen Protocol, which establishes sustainability

standards or commercial nancial institutions.

The Ministry or Environment and Brazilian CentralBank also established a technical cooperation

agreement to monitor social and environmentalactions and practices in the nancial system.

Since 2008, several regulations have been

introduced, which aect nancial institutionsoperating in the dierent natural biomes o Brazil:

Resolution 3.545/2008 was introduced or rural

credit and applies to the Amazon Biome. Itrequires nancial institutions to request rom

borrowers, i) documentation to ensure compliance

with environmental laws and regulations, and ii)environmental licenses and permits.

Resolution 3.813/2009 aims to avoid deorestation

and prohibits the production o sugarcane crops to

produce ethanol and other biouels in new areas.This resolution applies in the Pantanal and Amazonbiomes and Upper Paraguay River Basin, amongother areas.

Resolution 3.876/2010 prohibits the concession orural credit to people or companies that maintainworkers in slavery conditions according to a listpublished by the Ministry o Labor. The resolutionapplies to the whole country.

Resolution 3.896/2010 establishes a program toreduce emissions o greenhouse gases in agriculture,

and is supported by resources rom the National

Bank o Economic and Social Development.

In 2011, the Central Bank o Brazil introduced aregulation establishing procedures or the internal

capital adequacy assessment process. Circular3.547 ICAAP applies to nancial institutions with

total assets greater than 100 billion Reais. Banksalso need to explain how they consider the social

and environmental damages in their business

activities when they evaluate and calculate theirrequired capital.

Going orward, Brazil aims to establish minimum

standards o sustainability through proposedrules or guidelines and apply them to all nancial

institutions. The main challenges are to determinei) to what extent should social and environmental

issues be incorporated into nancial institutions

policies and strategies, risk management and dailyoperations; and ii) the appropriate combination o

rules and guidelines.


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3.3. CHINA

In July 2007, the China Banking Regulatory

Commission (CBRC), the Ministry o Environmental

Protection and the Peoples Bank o China jointlylaunched the Green Credit Policy. This high-level

policy declaration demonstrates political will to

encourage Chinese banks to reduce lending to

enterprises with high levels o pollution and energy

consumption and to increase lending to those that

promote energy eciency and emissions reduction.

In December 2007, CBRC introduced the Credit

Guidance on Energy Efciency and EmissionReduction Lending. This guidance note was

CBRCs immediate ollow-up to the Green Credit

Policy to translate high-level political will into

bank-level implementation.

In February 2012, CBRC introduced the Green

Credit Guidelines, outlining the three pillars or

banks implementation as (i) environmental and

social risk management, (ii) identiying relatedbusiness opportunities; and (iii) managing banks

own ootprints.

Going orward, CBRC plans to develop a robust

monitoring and evaluation system to improve

clarity and consistency in policy implementation.

Specically, a set o key perormance indicators

will be developed and launched. Sector-specic

technical guidelines are also required to assistbanks in understanding E&S risks, particularly or

high-risk sectors.

3.4. INDONESIA

In 2010, the Governor o Bank Indonesia andthe State Minister o Environment signed a jointagreement on Coordinating the Increased Roleo Banking in Environmental Conservation andManagement. In July 2011, Bank Indonesia, GreenRadio and IFC jointly organized the rst GreenBanking Conerence in Indonesia.

Going orward, Bank Indonesia plans to launcha Green Banking Policy in 2012 to improve thecompetitiveness o banks associated with greennance; enable a level-playing eld; increase

the loan portolio o green sectors; enhancebanking regulation and supervision related toenvironmental protection; and to develop eectiveincentive schemes, coordination, and gradualimplementation o the Green Banking Policy.

3.5. KOREA

Korea has introduced a Framework Act on LowCarbon Green Growth and a Five-Year Plan to

implement the nations green growth strategy.These measures allow the government to regulatethe market with taxes, penalties and incentives,and encourage banks to provide low-cost loansto companies with green projects. They also covergreen nance and promote a carbon-trading systemand inrastructure or green nance.

Going orward, public unds will be allocatedto start-ups and SMEs, and private unds will be

targeted towards larger companies. Korea also aimsto increase the size o green loans by policy banks;to ease the listing criteria o its stock exchange,


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KOSDAQ, or green companies; to acilitate theissuance o green primary collateralized bondobligations (P-CBOs), thereby helping to nanceSMEs; and to improve the educational program

to train experts. A challenge cited is that somenancial institutions are hesitant to nance greenprojects. It is also dicult to evaluate greentechnology and products.

3.6. NIGERIA

The Central Bank and CEOs o all major nancialinstitutions signed a joint commitment statement.Two Nigerian banks have adopted the Equator

Principles: Access Bank PLC (2009) and AteriosCapital (2012).

Subsequent to the Forum, the Nigerian BankersCommittee, with support rom the Central Bank,introduced the voluntary Nigeria SustainableBanking Principles in July 2012, together withGuidance Notes2. Sector-specic guidelines havealso been developed or three key sectors: oiland gas, renewable energy, and agriculture. Theprinciples apply to all banks, discount houses anddevelopment nance institutions. The CentralBank has pledged to provide necessary incentivesto institutions taking concrete measures to embedthe provisions o these principles and guidelinesinto their operational, enterprise risk managementand other governance rameworks. Reportingrequirements with guidelines will also be madeavailable to the industry.

Going orward, Nigeria aims to develop lastinglocal capacity to manage emerging E&S risks and

opportunities within banks internal operations,as well as in relevant nancial-sector governmentagencies, learning institutions, and service providers.

3.7. THAILANDIn 2011 and 2012, IFC and the Thai Bankers' Associationorganized two E&S Risk Management Workshopsor Thai banks to raise awareness o sustainablebanking. The second one ocused on Lao hydropowerinvestments. IFC acilitated CBRC and China IndustrialBanks participation in the workshops to enable south-south knowledge sharing.

3.8. VIETNAM

In March 2009, State Bank o Vietnam (SBV),the Vietnam Bankers Association and IFC jointlyorganized the countrys rst sustainable nanceworkshop. The workshop eatured internationalgood practices in E&S risk management, includingIFCs Perormance Standards, the Equator Principles,and south-south knowledge shared by Chinas CBRC

and Industrial Bank.In August 2009, in partnership with the SBV andCBRC, IFC acilitated a study tour by seven Vietnamesegovernment agencies and our Vietnamese banks toChina to exchange views with Chinese banking andregulatory counterparts and review experiences inimplementing the Green Credit Policy.

In June 2012, ollowing a multi-ministry dialogue

process, SBV received conrmation to develop E&Srisk management guidelines, which are expected tobe launched in 2013.

2 Central Bank o Nigeria, Circular to all Banks, Discount Houses and development Finance Institutions in Nigeria, September 24, 2012www.cenbank.org/Out/2012/CCD/Circular-NSBP.pd


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4. Chinas Regulatory Experiencewith the Green Credit Policy

4.1. AN OVERARCHING NATIONALSTRATEGY

In China, the drive toward sustainable nanceis greatly infuenced by the need to balancecontinued economic growth against resourcesand environmental constraints. Sustainabledevelopment, or the green economy, is a coretheme o Chinas national strategy. This is refectedin Chinas 12th Five-Year Plan, under which the

government is determined to change the waythe economy grows, emphasizing greater energyeciency and emission reduction.

Bank nancing remains the main source ounding in China and thereore a powerul toolor stimulating the green economy. Sustainablebanking practices can help improve riskmanagement capability, while also helping to

establish an environmentally riendly society toachieve both societal and economic returns.

The introduction o green credit has happened inthree main stages:

1. Green Credit Policylaunched jointly in 2007 byCBRC, the Ministry o Environmental Protectionand the Peoples Bank o China.

2. Credit Guidance on Energy Efciency andEmission Reduction Lending published inDecember 2007 by CBRC.

Green and sustainable developmenthas become the trend in todays world.The nancial regulatory authorities andnancial institutions o emerging-marketcountries should promote social andeconomic green development along theollowing ve aspects:

1. Integrate green development policiesinto national policy and strategy.

2. Develop green credit policies or banks.

3. Use eective incentives and mechanismsto guide the allocation o nancialresources.

4. Incorporate social responsibility into agreen credit culture.

5. Set up a legal system and supervisionmechanism to oversee green creditmechanisms.

WANG Zhaoxing, Vice Chairman, China Banking

Regulatory Commission


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We have developed an inormation exchange channel with CBRC, underwhich CBRC provides inormation on environmental non-compliance andclean production inormation to banks to use as reerence in makingcredit decisions.

MEP will be supporting the Green Credit Policy in three ways:

Providing environmental inormation to support banksimplementation o the Green Credit Policy

Supporting CBRC in developing sector-specifc guidelines Developing a rating system on businesses environmental

perormances.

BIE Tao, Deputy Director-General, Department o Policies and Regulations, Ministry o

Environmental Protection


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3. Green Credit Guidelines introduced by CBRC inFebruary 2012, with technical support rom IFC.

4.2. INTERAGENCY COLLABORATION

An important characteristic o Chinas approachhas been extensive interagency collaboration. TheChinese banking regulator has taken the lead todevelop Green Credit Guidelines. These eortsincluded extensive engagement between bankingand environmental regulators, particularly theMinistry o Environmental Protection (MEP) andthe Ministry o Finance, to promote access to

businesses environmental compliance inormationand E&S management expertise.

The Green Credit Guidelines dene the GreenCredit Policy along three pillars:

1. Business Opportunities increased support orthe green, low-carbon and recycling economies

2. Risk Management mitigate and reduce

environmental and social risks3. Footprint management manage banks own

environmental and social ootprint

MEP has been a key player in devising the GreenCredit Guidelines as part o the agencys broaderpolicy to achieve positive environmental impactswhile supporting economic benets and outcomes.MEP has also been instrumental in contributingbest practices in managing E&S issues.

In 2008, MEP translated and introduced the WorldBank Group EHS Guidelines as international

best practice to support Green Credit Policyimplementation by banks. MEP also providestechnical expertise or continued developmento technical tools to support banks E&S risk

management, and shares inormation onbusinesses environmental compliance.

The Ministry o Finance and MEP urthercollaborated with our other government agenciesto establish the China Clean DevelopmentMechanism (CDM) Fund. In November 2007, theMinistry o Finance and the National Developmentand Reorm Commission jointly launched theCDM Fund, which oers grants and investmentsto support activities in climate-related capacitybuilding, as well as promotion o public awareness.

4.3. PROVINCIAL REGULATORYEXPERIENCES

CBRCs provincial branches have played an importantrole in implementing the Green Credit Policy. Four

local CBRC branches, rom Yunnan, Shanxi, ShandongandFujian provinces, shared their experiences at theInternational Green Credit Forum.

In order to ensure the Green Credit Policyseective implementation, CBRC branches neededto develop provincial work plans enabling andrequiring local banks to align with Chinas industrialstrategy and to do so in a way that would reinorcetheir business competitiveness. Implementation

also required better coordination within the localbranches to ensure eective monitoring andengagement with banks. Each branch developed


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mechanisms and strategies within three mainareas:

1. Promoting risk management

2. Promoting innovation

3. Establishing eective monitoring andenorcement

4.3.1. PROMOTING RISK MANAGEMENT

The rst major eort has ocused on promotinggreen credit and international standards amongbanks and society. CBRC branches motivated

banks to establish green credit strategies andrisk management systems so that environmentalconsiderations are considered by managementteams. For instance, guidelines are neededor dealing with high pollution, high energyconsumption, and high-emission businesses.Banks also needed to establish green thresholdsor lending and post-loan management toclassiy dierent types o green credit. There

has been a ocus on continuous improvement omanagement systems.

4.3.2. PROMOTING INNOVATION

Green credit enables and requires innovation andimprovement o nancial products and servicesto accommodate dierent needs. For instance,banks have been encouraged to initiate loans

or small and micro businesses and to ensurethat preerential treatment is given to energy-reducing projects. CBRC branches have ocused

on increasing green credit lending and optimizingthe banks lending structures, such as by supportingclean- and renewable-energy projects, biodiversityprotection and improvement in specic areas, and

supporting orest- and water-acilitation projects.

4.3.3. ESTABLISHING EFFECTIVE MONITORINGAND ENFORCEMENT

An important adjustment or the local CBRCbranches has been to establish systems ormonitoring banks practices, such as throughsurveys, inspections and reviews. Gate-keeping andwarning mechanisms have also been put in place

to ensure that businesses not in line with energy-reduction requirements wont be issued loans. Thisurther requires coordination between dierentagencies to ensure appropriate nes and penaltiesare being enorced.

Specic data systems have been established or

energy-emission reduction. Examples includemonitoring systems or key sectors. These eorts

have highlighted the need or environmentalinormation-sharing platorms to acilitate the

work and coordination among multiple agencies.

More ecient monitoring and assessmentmechanisms would in turn streamline the allocation

o green credit by local banks.

4.3.4. MAIN CHALLENGES

The local CBRC branches identied severalchallenges they currently ace in implementing theGreen Credit Policy, including:


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Accessing environmental inormation without

government support

Diculty launching voluntary emission-

reduction projects

Stopping lending to traditional high-pollution and high- emission sectors such

as coal power stations or the oil sector

immediately

Lack o evidence or the business case

4.4. INNOVATION BY BANKS

Chinese banks have taken the lead in innovationaround green lending products. Green credit isexpected to increasingly gain government policysupport in the uture. This is motivating manybanks to align themselves with the national policyand urther enhance their green credit oerings.

For instance, the investment volume duringthe Five-Year Plan or energy-eciency andemission-reduction projects will be almost 2.4

trillion yuan, and green credit can take up alarge portion o the investment. First movers willbe better prepared to oer services and gainclients in the green-credit sectors.

However, there is still a need and opportunityor regulators to provide more guidance tobanks on sustainable nance and help nancialinstitutions build up core capacity. Only Chinas

Industrial Bank has adopted the Equator Principlesto date. Some banks have already begun sel-reporting the size o their green credit lending,

but a standardized approach is need to accuratelycalculate the extent o green-credit adoption. Withthis in mind, CRBC is partnering with IFC on capacitybuilding or Chinese banks.

It is expected that banks will adopt green creditpractices according to the ollowing steps:

1. Adopt a vision and policy on environmentalprotection and social development. This shouldbe aligned with the banks own image andinclude implementation and accountability,targets, processes, and responsibilities. Banksshould identiy the major industries they arerestricting or supporting.

2. Build internal capacity.

3. Integrate process management, due diligence,and support rom qualied independent thirdparties when necessary.

Green credit opens huge marketopportunities. It would transorm anddene the uture banking industry.

LI Renjie, President, China Industrial Bank


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The ollowing Chinese banks shared theirexperiences at the International Green CreditForum in Beijing:

4.4.1. CHINA DEVELOPMENT BANKChina Development Bank (CDB) is a state-ownedbank providing mid-to-long-term nancing to large-scale inrastructure projects in and outside China. Bythe end o 2011, CDB reported that it has disbursed228.1 billion yuan o lending (US$ 36.2 billion) insupport o energy-conservation, emission-reductionand environment-protection, with an outstandingbalance o RMB 658.3 billion yuan (US$104.5

billion), up by 33% year-on-year. Priority businessocuses are urban waste and urban-waste-watertreatment, industrial waste water, clean production,energy eciency, and clean energy.

CDB set up an internal task orce on the EquatorPrinciples (EP) in 2008 and introduced EP practicesinto business processes. The bank has deepenedits relationship with government departments,

including an agreement with MEP to support keyenvironmental projects. The bank will also planproject strategy in line with the 12th Five-Year Plan.

With support rom MEP, perormance evaluationsystems have been set up to monitor environmentalbenets and quantiy the emission reductions in 13categories o environmentally riendly lending.

4.4.2. AGRICULTURAL BANK OF CHINA (ABC)

Developed rom one o Chinas our wholly state-owned banks, ABC ocuses on rural nancing. As o

end o 2011, ABC reported that its environmentallyriendly and energy- eciency lending portolioexceeded 88.168 billion yuan ($14 billion). Accordingto ABCs 2011 Corporate Social Responsibility

Report, the bank also reportedly rejected 106 creditapplications totaling 4.157 billion yuan.

ABC has developed more than 20 sector-specicguidelines covering all major polluting and energy-intensive industries. Environmental governancehas been integrated into the managementsystem and responsibilities allocated to therelevant departments: The credit department hasresponsibility or policy development and oversight;

the operational department or green productsinnovation; and the risk management department isresponsible or E&S perormance ratings.

In order to control exposure to sectors with highenvironmental impacts, high energy consumption,and surplus capacity, all new borrowers in thesesectors need approval by the ABC head oce.There is a credit ceiling given to heavy industries

like iron, steel, and paper producers. ABC alsoprovides consulting services to customers on cleanenergy innovation.

4.4.3. SHANGHAI PUDONG DEVELOPMENTBANK (SPDB)

A joint-stock bank headquartered in Shanghai,

SPDB is a leader in green-nance products and

services innovation. Green credit has becomepart o SPDBs business strategy and is viewed asbringing in green-lending business opportunities


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rather than simply a corporate socialresponsibility. SPDB has extended more than 100billion yuan ($ 16 billion) to the green sector.

Five product lines have been developed as part o

business innovation in response to the Green CreditPolicy. These include energy-eciency nancing,clean energy nancing, environmental nancing,carbon nance, and environmental-equipmentsupply chain nancing. SPDBs Green CreditProducts also have a special ocus on supportingSMEs, such as through energy-eciency nancing,emissions trading, and providing new orms onancing to small businesses.

In order to build capacity o sta around greencredit, two annual bank-wide trainings have beendeveloped specically ocusing on green creditpolicy and implementation.

4.4.4. CHINA INDUSTRIAL BANK (IB)

A joint-stock bank headquartered in Fuzhou, IBbegan partnering with IFC to pioneer energy-

eciency lending in 2006. In October 2008,IB adopted the Equator Principles, becomingthe rst Equator Bank in China and amongAsias emerging markets. As o August 2012, IBreported it has accumulatively extended lendingo almost 200 billion yuan ($32 billion) to nearly4,000 green nance projects. As o Q1 2012,37 loans applying the Equator Principles weredisbursed by 18 branches.

IB has identied two main benets o greencredit. Implementation has optimized credit

processes and improved overall risk management.It has driven business innovation in new areassuch as energy eciency, carbon nance andenvironmental nance, resulting in the launch o aseries o green-nance products and services undera specic green-nance brand.

IB has developed a corporate policy on sustainablenance and integrated it into its operations. Aproessional team was established to deal withgreen-nance operations and the bank improved itsinternal E&S risk management system drawing rominternational experiences.

Several important shits have occurred. IB shitedrom passively ollowing lending restrictions toproactively seeking business opportunities. Emission-reduction services and implementation o theEquator Principles have been recognized as tools orachieving competitive advantage and new businessopportunities. IBs business goals have also alignedwith Chinas national goals and societal needs.

4.4.5. EXPORT-IMPORT BANK OF CHINA(EXIM BANK)

China Exim Bank is the countrys state-ownedexport credit agency. The bank has developed E&SRisk Assessment Guidelines to cover both domesticand international nancing, with reerence tointernational good practices.

Green credit has been ully integrated into Exim

banks lending processes, including due diligence,credit review and portolio management. Borrowersenvironmental compliance records are ully


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reviewed. Any environmental non-complianceleads to vetoing o the loan application.

4.4.6. INDUSTRIAL AND COMMERCIAL BANK

OF CHINA (ICBC)ICBC is the worlds largest bank by marketcapitalization and has the largest green creditportolio in China. As o June 2012, ICBCreported that its total outstanding loans to greencompanies stood at 590 billion yuan ($94 billion).

ICBC has 43 industrial credit-granting policies,including steel and cement industrial standards.

It has developed an E&S risk rating system withour levels and 12 sub-categories. The our levelsare Friendly, Pass, Observation, and Correction.The 12 categories include Friendly I (ecologicalprotection), Friendly II (clean energy), Friendly III(energy-savings, emission-reduction), Friendly IV(resource utilization), Pass I-III, Observation I-III,and Correction I-III.

4.4.7. BANK OF BEIJING

Bank o Beijing is a commercial bankheadquartered in Beijing with a business ocuson SME lending. Green credit generates newopportunities or SME lending, such as throughthe development o an energy-eciency lendingplatorm or SMEs. Bank o Beijing is one o IFCspartner banks in China or energy-eciency loans.

Bank o Beijing has also beneted rominternational expertise. It has worked withIFC and international investors to establish anunderstanding o green credit, including tools and

management, which urther promote SME green-nancing business. IFCs cooperation has helped laya solid oundation with uture SME borrowers.

Green concepts take time to shape, but we need to be dedicated topromoting green credit. ICBC has done this by establishing procedures andprocesses. But most importantly, we have to establish a green culture top-down. Education and communication o green concepts rom the top willallow every employee to incorporate green culture into their lives.

YIN Hong, ICBC


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5. Equator Bank Experiences

There are several stakeholders who can impairyour project, cash fow and reputation i youdont manage E&S issues eectively. These includeNGOs, other commercial and development banks,and the media.

Investment in E&S issues should be part oyour business plan rom an early stage. This is

undamentally about credit enhancement.Roberto Dumas Damas, Head o Social and Environment Risk,

Itau BBA

Speakers rom three emerging-marketEquator Banks shared practical experiences onimplementing sustainable nance. They wereBanco Itau BBA (Brazil), Standard Bank (South

Arica) and China Industrial Bank (IB), East Asiasonly signatory to the Equator Principles.

5.1. ABOUT THE EQUATOR PRINCIPLES

The Equator Principles are a voluntary credit-risk management ramework or determining,assessing and managing environmental andsocial risk in project nance transactions. They

are adopted by nancial institutions and appliedwhere total project capital costs exceed $10 million.

Since 2006, the Equator Principles have beenbased on the IFC Perormance Standards orEnvironmental and Social Sustainability and onthe World Bank Group Environmental, Health,and Saety Guidelines. Equator PrinciplesFinancial Institutions (EPFIs) commit to notproviding loans to projects where the borrower isunable to or will not comply with their respectiveE&S policies and procedures.

The Equator Principles have become theindustry standard or E&S risk management.Currently, 77 nancial institutions (74 EPFIs andthree associates) in 32 countries have ociallyadopted the principles, covering more than 70percent o international project nance debt in

emerging markets.

5.2. ITAU BBA BANK, BRAZIL

Roberto Dumas Damas, Head o Social andEnvironment Risk at Itau BBA, presented his banksexperience in implementing the Equator Principles.He also represented the EPFI Steering Committeeand explained how the principles add value tobanks doing business in emerging markets.

He emphasized that the principles are a matter omonitoring and leveraging strengths rather thanoverhauling how banks do business. The principlesare a ramework or enhanced credit analysis,which becomes a core part o an institutions way

o operating. E&S actors are incorporated into thecredit analysis and decision ramework throughoutthe Itau-Unibanco group.

According to Damas, the ollowing are some keysuccess actors when implementing the EquatorPrinciples and managing E&S issues:

1. It must be a top-down approach: Topmanagement must be aware o how important


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KYC /On-Boarding

Pre-CreditCommittee Credit

LegalDocumentation Monitoring

E&S Risk

Screening Tools

Considerationo E&S risk

E&S covenanting(as appropriate)

Monitoring o

compliance

these issues are or cash fow, credit analysis,reputation and image

2. You need to have an interdisciplinary team:engineers, lawyers, managers, E&S experts,bankers, etc.

3. Build sustainability with your client

4. Train your ront and back oce

5. Learn how to deal with client resistance

Damas emphasized the need to raise awarenessamong nancial institutions and clients that greencredit is a business and nancial opportunity andis a measure to protect against risk. The EquatorPrinciples add value by providing one languageor classiying and describing projects. He pointedout the power o stakeholders communities,civil society, nongovernmental organizations,and governments who can block a project i it

is not up to par with environmental, social andgovernance standards.

Using a uniorm language helps acilitate and speedup the issuing o loans. The Equator Principlesare used by banks clients to help them addressand manage E&S issues eectively. The principles

enhance a nancial institutions reputation amongits peers, clients, central banks, and stakeholders.Analysts that evaluate EPFI stocks know there is acomprehensive system to evaluate risk.

Lack o consistency in applying the EquatorPrinciples is more oten due to lack o capacityin applying standards. The principles aredesigned to be applied in emerging markets,thereore the earlier the emerging markets

adopt these principles, the stronger theoutcome. More experiences and lessons romemerging-market nancial institutions will helpurther develop an eective ramework that canbe used internationally.

5.2. STANDARD BANK, SOUTH AFRICA

Nigel Beck, Head o Environment at Standard Bank

Group in South Arica, described the integratedmanagement system the bank has developed toimplement the Equator Principles.

Beore granting a loan, Standard Bank evaluatesthe E&S risks o the project using E&S RiskScreening Tools. The bank identies the extent o


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the risks, and communicates with the clients to seei they have the capabilities o risk control.

During the loan-approval process, the banksenvironmental team will conduct a technicalassessment o the project, and carry out internaland external due diligence based on the risk.

E&S risk management is integrated throughoutthe ve phases o the banks loan process: i) on-

boarding, ii) re-credit committee, iii) credit, iv) legaldocumentation, and v) monitoring.

5.3. CHINA INDUSTRIAL BANK

LU Biying, Deputy Manager o Sustainable FinanceDivision, Compliance Department, China IndustrialBank, shared some o the success actors that hisbank has identied to ensure eective adoption o

sustainable banking principles.Industrial Bank adopted the Equator Principles in2008, as the rst Equator Bank in China. One o thepreliminary steps to ensure compliance with theprinciples was the creation o an internal EquatorPrinciples Working Group. Eight departments othe bank have been involved in this working group,including the planning and nancial departmentand the risk management department.

Collaboration has enabled access to new businessopportunities. Industrial Bank and IFC signed twocooperative agreements related to the ChinaUtility-Based Energy Eciency Finance Programin 2006 and 2008 respectively. By the end oSeptember 2008, Industrial Bank had extendedapproximately 2.8 billion yuan energy-eciencyloans in China.

Environmental and social risk evaluationand management has improved Standard

Banks business practices and loanportolios. It also improves the banksreputation, and clients recognize theirrisk management capabilities and entrustthem with more business.

Nigel Beck, Head o Environment, Standard Bank Group

We integrate social riskmanagement into the existing creditprocess. We help clients comply withthe Equator Principles and nd newopportunities. A top-down model

is very important, as well as a ull-time team to implement policies. Wemust continue to promote awarenessamong our sta.

LU Biying, Deputy Manager o Sustainable

Finance Division, Compliance Department, China

Industrial Bank

in 2006 and 2008 respectively. By the end oSeptember 2008, Industrial Bank had extendedapproximately 2.8 billion yuan energy-eciencyloans in China.


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6. Perspectives o InternationalOrganizationsOne o the panel sessions during the Green CreditForum ocused on the perspectives o international

institutions. The panelists gave their views on whatthey thought are major themes or sustainablenance. IFC, the United Nations EnvironmentProgramme Finance Initiative, WWF, the EquatorPrinciples Financial Institutions Steering Committeeand AFD (French Development Agency) wererepresented at this panel.

i. Corporate sustainability disclosure needsto improve:

According to Mengqi Cai o the United NationsEnvironment Programme Finance Initiative,one o the biggest challenges or sustainablenance going orward is that many corporatesustainability reports still dont disclose sucientinormation on E&S perormance to enable banksto make eective green-credit decisions. Forinstance, ew companies disclose what proportion

o their investments will be spent on clean energyand energy reduction.

ii. Integration o green practices into manage-ment systems still needs to improve:

Banking proessionals and lending departmentsstill lack sucient capacity and expertise to assessenvironmental, social and governance impactswhen issuing loans. I the banking sector does not

have the ability to assess ESG impacts, they willprobably ignore the related risks when making

decisions. There is also a lack o capacity when itcomes to eectively implementing the current

international standards and principles. How cansustainable nance be incorporated rom the topdown so that every level in the banking system isinvolved?

iii. Green credit should be expanded in terms oits coverage:

Green credit is meant to prepare businesses andbanks or emerging environmental and social risks.

It is a strategy or competitiveness rather than justa community outreach or public-relations eort. Itis also about protecting banks lending portoliosrom unsustainable consumption o naturalresources. Water, agriculture, and animal protectionshould thereore also be covered.

iv. More active engagement with stakeholdersis needed:

In its outreach to nancial institutions, WWF hasidentied many challenges and opportunities.Among these is the need to engage stakeholders:How can the banking industry better communicatewith international media and NGOs about theexact nature o a banks ESG practices and showit is embedded in its strategy? For instance,international branches o Chinese banks mustimprove their communication with dierent

stakeholders, including NGOs, local communitiesand the media.


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v. How can banks eectively reach smallbusinesses with green credit?

Many o the approaches to green credit andsustainable nance discussed at the Forum, such

as the Equator Principles, ocus on large projectsand corporate nance. Participants in the sessionhighlighted the need to serve small businesses, asthese businesses can make a signicant impact inachieving the goals o green credit, particularly inareas such as renewable energy. The panelists said

this is an important rontier. The United NationsEnvironment Programme Finance Initiative andIFC provide a range o tools and resources to assistbanks in aligning their green-credit lending withSMEs. Reaching SMEs also requires support romthe other partner institutions involved in greencredit, namely central banks and governments,which can help create the right policies andregulatory incentives, and be willing to share riskwith banks.


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SUSTAINABLE BANKINGNETWORK FOR REGULATORS

At the International Green Credit Forum,initiated by China Banking Regulatory

Commission and IFC, banking regulatorrepresentatives rom 10 countries collectivelyendorsed that IFC guide and contributeto an international network o bankingregulators to support their collective learningand acilitate exchanges o experiencesand lessons. IFC will continue to conveneand support the Sustainable BankingNetwork or Regulators, which is hosted

on IFCs eCollaborate platorm: https://icecollaborate.ic.org/groups/sustainable-banking-network.

IFCs Sustainability Framework www.ic.org/envsocstandards.

IFCs Sustainability Framework articulatesa strategic commitment to sustainabledevelopment and states IFCs approach to risk

management. IFCs Perormance Standardsare an integral part o the ramework.Together with the World Bank Group EHSGuidelines, they have become a globalbenchmark or E&S risk management inemerging-market investments and are usedas a basis or the Equator Principles.

Importantly, IFCs approach is revisedperiodically in consultation with stakeholdersaround the world. Eective on January 1,2012, the latest updates refect evolving

good practices or sustainability and risk mitigation

over the past ve years. They incorporate

modications on challenging issues, including

supply-chain management, resource eciency and

climate change, ecosystem services, labor practicesand human rights. The ramework consists o:

The Policy on Environmental and Social

Sustainability, which denes IFCs commitment

to environmental and social sustainability.

The Perormance Standards, which dene

clients responsibilities or managing their

environmental and social risks. The Access-to-Inormation Policy, which

articulates IFCs commitment to transparency.

FIRST Portal www.rstorsustainability.org.

FIRST (Financial Institutions: Resources, Solutions

and Tools) or Sustainability is a one-stop shop or

nancial institutions to get inormation and learn

about the benets o environmental and socialrisk management, and how to identiy and take

advantage o environmental business opportunities.

The Equator Principles www.equator-principles.com.

The Equator Principles are a credit-risk management

ramework or determining, assessing and

managing environmental and social risk in project

nance transactions. Project nance is oten used

to und the development and construction o major

inrastructure and industrial projects.

7. Useul Resources


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The principles are adopted by nancialinstitutions and applied where total projectcapital costs exceed $10 million. They arebased on IFCs Sustainability PerormanceStandards and the World Bank Group EHSGuidelines. The principles provide a minimumstandard or due diligence to supportresponsible risk decision-making.

UNEP Finance Initiative www.unep.org.

United Nations Environment ProgrammeFinance Initiative is a global partnershipbetween UNEP and the nancial sector.

More than 200 institutions, includingbanks, insurers and und managers, workwith UNEP to understand the impacts oenvironmental and social considerations onnancial perormance.


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CREDITS

Produced by

IFC East Asia and Pacic Environmental and Social Risk Management Program or Financial Institutions, a joint program o IFCsAccess to Finance Advisory and Sustainable Business Advisory, with technical support rom IFC Environment, Social and GovernanceDepartment.

Thank Rong Zhang, Wei Yuan, Louise Gardiner, Hannried von Hindenburg, and Jing Yu or their contributions to this ebook.

Disclaimer

The ndings, interpretations, views, and conclusions expressed herein are those o the author and interviewees and do notnecessarily refect the views o the Executive Directors o the International Finance Corporation or o the International Bank orReconstruction and Development (the World Bank) or the governments they represent.

Copyrights

IFC encourages use and distribution o its publications. Content rom this document may be used reely and copied into otherormats without prior permission, provided that clear attribution is given to the original source and that the content is not used orcommercial purposes.

CONTACT US

Rong Zhang

Program Manager, Asia Environmental and Social Standards

[email protected]

Atiyah Curmally

Global Product Specialist

[email protected]

Quyen Thuc Nguyen

Program Manager

Access to Finance Advisory Services

[email protected]
mailto:Rzhang%40ifc.org?subject=mailto:ACurmally%40ifc.org?subject=mailto:NQuyen%40ifc.org?subject=mailto:NQuyen%40ifc.org?subject=mailto:ACurmally%40ifc.org?subject=mailto:Rzhang%40ifc.org?subject=


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OUR PURPOSETo create opportunity or people to escape poverty and improve theirlives by catalyzing the means or inclusive and sustainable growth,through:

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Greening Banks