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China’s Green Credit Policy under scrutiny

Beijing is trying to give teeth to its environmental policies by enlisting the help of the banking sector. Can it work? Rey Edward reports

China faces a unique set of environmental challenges, and Beijing is developing an equally unique range of policy responses – including, 12 months ago, its Green Credit Directive.

The directive, from China’s Central Banking and Regulatory Commission, is a landmark in the field of sustainable finance, designed to integrate environmental and social safeguards into bank lending. It provides a detailed set of guidelines to help banks implement the groundbreaking Green Credit Policy (GCP), which was first rolled out in 2007. At its core, the GCP puts the responsibility on banks to ensure that corporate borrowers comply with environmental regulations.

Beijing smog

Beijing smog: can the Green Credit Policy make a difference?

China’s environmental problems are well known, and Beijing’s appalling air quality has recently made headlines around the world. Data collected this year by the US Embassy showed that the PM 2.5 air quality index, which runs to 500, literally shot off the charts past 700. The hazardous air has quickly prompted Beijing authorities to take immediate emergency measures, including shutting down factories and limiting the number of cars on the road, but a full clean up will take years and a serious commitment to consistently enforce environmental laws and standards.

The Green Credit Policy was developed as a way to enlist the power of the banking sector to help China implement its environmental regulations, which are often strong on paper, but have been notoriously difficult to enforce. Clearly, as evidenced by Beijing’s current air pollution problems, five years of the Green Credit Policy have not been enough to help the country bridge its compliance gap.

Nonetheless, China deserves recognition for establishing this new and innovative policy. Few countries, if any, have similar policies to integrate environmental quality into banking regulation.

Last year’s directive was issued as an attempt to inspire GCP implementation by providing much more detailed guidance to banks. The directive is striking for its comprehensiveness and requirement for banks to make certain that their clients develop environmental and social risk assessment criteria, take mitigation actions, implement risk response plans, and ensure that international environmental and social standards are upheld.

The second striking aspect of the directive is its new and explicit instruction that Chinese banks, in their overseas lending, require clients to uphold international environmental and social best practice. Many Chinese overseas investments have already run into – or created – a host of environmental and social risks.

For instance, in Burma last year, a copper mine jointly owned by a Chinese company allegedly instigated a wave of land grabs, severe water pollution, and violent protests; monks and activists were beaten and burned by Burmese military usingwhite phosphorus, a munition typically only used in warfare. In Ecuador, local communities criticised a Chinese financed copper mine over the lack of an environmental impact study and failure to address pollution concerns. Even in Afghanistan, concerns have been raised over risks posed by Chinese state-owned mining companies to an ancient Buddhist monastery and to the major water source for the region, from efforts to extract copper and other potential natural resources.

China’s swift action in managing Beijing’s air pollution disaster demonstrates that it can act against worsening environmental degradation when necessary

It is clear that such Chinese bank-backed investments are tarnishing China’s image abroad, just as the harmful actions of US multinational corporations have detracted from America’s reputation overseas. With the Green Credit Directive, China, perhaps more than any other country, is establishing a new, financial regulatory framework to govern its swelling number of overseas investments. The same cannot be said for the US or Europe in reining in the actions of its corporations abroad.

But like the pollution clouding Beijing, cases in Burma, Ecuador, and Afghanistan, among others, suggest that one year on, the Green Credit Directive has yet to be taken seriously by China’s regulators or by the country’s banks. As Beijing seeks to improve compliance with the directive, it should take particular care to ensure adherence to international environmental and social safeguards for overseas investments. Otherwise, a perception of a double standard may result: one in which China shows a commitment to hold banks accountable to toxic investments only when they are in its own backyard, a perception that will hardly improve its overseas image.

Fortunately, China’s swift action in managing Beijing’s air pollution disaster demonstrates that it can act against worsening environmental degradation when necessary. Without strong and urgent government enforcement, the Green Credit Policy, and its associated directive, may come to represent a squandered opportunity for China to act on its commitment to sustainable development, not only in China but around the world.

Fonte: Environmental Finance


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