On October 31, 2018, China’s first EPFI, the Industrial Bank (IB), celebrated the 10th anniversary of its adoption of the Equator Principles and, as one of the representatives of emerging market countries, participated in the new round of revising the Equator Principles, the global self-regulatory code on CSR, contributing to the fourth edition of the Equator Principles to be released next year. As one of the representatives of emerging market countries, IB is participating in the new round of revising the Equator Principles, a global CSR code, and contributing “Chinese wisdom” to the fourth edition of the Equator Principles which is to be released next year.
As the “golden standard” for environmental and social risk management in international project finance, the Equator Principles have been adopted by 94 financial institutions worldwide, including the Citibank, HSBC and Barclays Bank, since their inception in 2003, covering more than 100 countries and regions worldwide. The amount of project financing following the Equator Principles has accounted for 70% of the total project financing in emerging market countries.
As a pioneer in mainland China, IB’s data since its adoption of the Equator Principles is also impressive. As of September 2018, IB has judged 1,048 projects on the applicability of the Equator Principles, of which 376 projects have applied the Equator Principles, with a total investment of RMB 1,578.246 billion, and provided a continuous injection of “new source” for the construction of ecological civilization and beautiful China.
In the past ten years, by following the Equator Principles, IB has also developed a differentiated sustainable development path of “from Green to Gold”, achieving both economic and social benefits, and ranking among the top 30 global banks, which has attracted the attention of the public.
Making changes first and acting first
Born in 2003, the Equator Principles are the gold standard for judging, assessing and managing environmental and social risks in loan projects, established by the world's leading financial institutions in accordance with the policy guidelines of the World Bank and the International Finance Corporation (IFC). In recent 15 years, the Equator Principles projects have grown from an initial market share of less than one-third to over 50% in the global project finance market, and even more than 70% of the market share of project finance in emerging markets.
IB’s practice of the Equator Principles also started in 2003, when it took the opportunity of introducing foreign strategic investors and fully borrowed the advanced management concept and practical experience of International Finance Corporation (IFC), one of the strategic investors, to make a number of important attempts in the practice of sustainable finance. In 2006, it signed the first-phase cooperation agreement on energy efficiency financing with IFC in Beijing, becoming the first bank in China to launch energy efficiency loans. In 2007, IB signed the UNEP FI, which strengthened the bank’s commitment to sustainable development.
However, when IB adopted the Equator Principles, there was no precedent in China at that time, and the Equator Principles required banks and financing enterprises to fulfill the environmental and social responsibility clauses stipulated in the Principles, which seemed to limit the banks to expand their business, and at that time, some financial institutions and IB internally had doubts on whether the Equator Principles could take root and blossom in China.
“As the first institution of undertaking to adopt the Equator Principles in China, it is not without pressure for IB. But pressure is often the driving force, and IB must first change itself.” Facing new challenges, Gao Jianping, the IB Chairman of the Board of Directors, said.
Therefore, IB assigned Hua Bing, General Manager of the Law and Compliance Department, to lead a team to conduct extensive exchanges with domestic and foreign institutions such as the Ministry of Environmental Protection, China Banking Regulatory Commission (CBRC), China Development Bank, Industrial and Commercial Bank of China, Export-Import Bank of China, Citibank of the United States, and the Ministry of Environmental Protection of the United States for a feasibility research. The door to understanding was opened by a coincidental visit.
In that year, IB participated in a Chinese green credit delegation jointly organized by the Ministry of Environmental Protection, the Ministry of Finance, the People’s Bank of China and the CBRC, visited and exchanged with such institutions as the US Treasury Department, the Environmental Protection Agency, the World Bank and the International Finance Corporation. During this period, Hua Bing learned the existence of the US Superfund Act. in which the EPA is empowered to investigate unlimited liability against polluting enterprises and all related parties of projects, including banks. Unless the banks can prove that there is no causation between the existence of force majeure or a war, or their own financing for enterprises and the pollution result, they must bear joint and several liability for the pollution of enterprises.
The Equator Principles are a set of systematic, operable and advanced management concepts and tools that can be embedded in the existing credit process, which may effectively reduce the environmental and social risks of financial institutions in the process of project financing. Hua Bing realized that while the bank is responsible for the environment and the society, it may also get benign business returns by applying proper professional management means, which made substantial progress in demonstrating and exploring the feasibility of the Equator Principles.
On October 31, 2008, after careful consideration and due to multi-dimensional needs such as transforming the business model, fulfilling social responsibility and realizing sustainable development, IB officially announced to adopt the Equator Principles and became the first EPFI in China, taking an important step in green and sustainable development.
Phoenix Nirvana: An indomitable fighting spirit and a strong will after experiencing the pain
Practice and time have proved that the process of realizing the localization of Equator Principles is also the IB’s process of “Phoenix Nirvana”.
During the one-year adoption transition period, IB comprehensively constructed its Equator Principles management system from six aspects, namely, corporate governance, system construction, capacity building, project review, customer awareness fostering and exchanges and cooperation, and completed the integration of the Equator Principles with its core business system. Through the bank-wide project financing survey, the dialogues with the top ten core clients, the “Green Treasure Book” printed and distributed within the bank after popularizing the Equator Principles, the customer communication at each project site and nearly 100 professional training and publicity events, IB finally gained the internal support, affirmation from regulatory authorities, understanding of clients and recognition of the public. In June 2008, the IB Board of Directors unanimously approved the proposal of adopting the Equator Principles.
In the past ten years, IB has held more than 400 trainings on the Equator Principles, environmental and social risk management, with employees of nearly 50,000 persons/times participating in the training. After ten years of persistent pursuit and experience accumulation and as opposed to the traditional environmental and social risk management methods, IB has comprehensively reconstructed its environmental and social risk management system and transformed its business process by applying the concept and method of the Equator Principles, thus improving the systematization, specialization and operability of management and forming a matching operation model and business process.
More importantly, based on the endogenous power generated by the implementation of the Equator Principles, IB has gradually promoted its innovation in the concept of sustainable development: By combining social responsibility with its own business, the strategy of “sustainable development” and the practice mode of social responsibility of “integrating righteousness and profitability” have been implemented in all links and fields of IB corporate operation and management, such as product innovation, directions of credit investment and inter-bank cooperation, and its governance concept has experienced three-level evolutions and leaps: from giving priority to shareholders’ interests to taking into account stakeholders’ interests, and then to advocating sustainable development.
Traveling with companions: Working together with corporate customers in applying the Equator Principles in their projects
As an international standard and golden tool for project environmental and social risk management, the Equator Principles plays a prominent role in the IB’s completion of environmental financing projects together with corporate customers.
Compared with the traditional environmental assessment and management mode, the Equator Principles emphasizes the process-based project life-cycle management, and its systematic assessment mode has become an important supplement to the current environmental impact assessment mode.
As the EPFI, IB not only provides funds for enterprises, but more importantly, it may notice the environmental and social risk management problems existing in the project, adhere to the green business philosophy of “people-oriented and harmonious development”, and achieve a win-win situation for banks and enterprises.
Take the Gaoyushan Wind Farm Project in Nan’an of Fujian Province as an example. Facing the environmental and social risk management requirements of Equator Principles put forward by IB, the first reaction of the project enterprise was the confusion, and they thought that the wind power project is an environment-friendly industry without any environmental risks. In this regard, IB professionals communicated with the enterprise deeply around the successful cases of Equator Principles in the application of domestic and foreign banking industry, and the improvement of project environment and social performance by the Equator Principles, so as to gradually help the enterprise get out of confusion. “After the explanation of the IB business manager on the Equator Principles, there is a feeling of sudden enlightenment and release from the confusion.”
Duan Guofeng, Chairman of the Board of Directors of Fujian Nan’an Gaoyushan Wind Power Co., Ltd., said, “As far as the traditional three wastes are concerned, although the wind power project generates relatively little or even no waste, the location of the wind power project is very important. If it is close to the residential area, the impact on the community is still huge, especially the impact of noise on the residential area. Moreover, in the process of project construction, we need pay attention to and solve such issues as the personnel safety, soil and water conservation, and ecological protection.” Therefore, IB put forward 20 action plans, covering such aspects as energy conservation, environmental protection, ecological protection, soil and water conservation, which helped improve the comprehensive project management ability, reduced the environmental and social risks, and received the heartfelt praise of the enterprise.
Focusing on the green transformation and development needs of China’s real economy, IB has formed a group-based green finance product and service system covering such areas as green credit, green trust, green lease, green fund, and innovations have emerged one after another over the years: IB issued China’s first mortgage loan for emission rights, the first carbon asset pledge loan, the first low-carbon-themed credit card, the first green credit asset-backed securities, the first green finance bond, the first Green Prosperity Index (GPI)...
By the end of September 2018, IB has provided 16,435 enterprises with the financing of green finance for a total of RMB 1,645 billion , which can save 29.59 million tons of standard coal and 409.2272 million tons of water, and reduce 83.9931 million tons of carbon dioxide emissions in China.
Ten years have passed, and the Equator Principles is no longer a constraint on IB’s business expansion, but an entry point for its sustainable development and a powerful tool for creating differentiated advantages, opening up the “Blue Ocean” business, and improving the capability of customer service. It has successfully achieved the result from “Green” to “Gold” and continuously enhanced the energy efficiency of supporting entities.
At the same time, IB has grown from developing a single green finance product to building a group-based green finance product system, and from a green bank to a comprehensive green finance group, which has become a vivid “sample” of practicing and developing the green finance system.
Dissemination of IB’s practice in the application of Equator Principles
Practice produces true knowledge, and the good methods should be widely spread.
IB’s dissemination of its practice in the application of Equator Principles did not only target corporate customers, but also other banks in China. The “Polyamide Integration Project” of a domestic enterprise belonged to Class A identified by an IB branch according to the Equator Principles financing requirements, which adopted the syndicated loan model and the leading bank was another bank. The responsible branch of IB specially organized a team to publicize the Equator Principles to the syndicate members and especially pointed out the fact that, since the project construction involved such matters as land expropriation and use, environmental impact assessment and approval, pollution discharge permit, water intake permit, social stability risk assessment, geological hazard disasters assessment and occupational disease prevention fell within the authorities of different government functional departments, the evaluation systems are different and the processing progress is inconsistent. However, the performance standards of the Equator Principles environmental and social risk assessment could well cover the above-mentioned assessment work, and completely and systematically describe the legal and regulatory basis, progress status, existing problems and target time of each assessment work, which would be not only conducive to the comprehensive evaluation of project risks by enterprises, but also contribute to the overall project risk management of all syndicate members, and effectively reduces the credit risk of syndicated loans.
After negotiations, all the syndicate members accepted the IB’s suggestions, and unanimously agreed to include the binding clauses of the Equator Principles into the syndicated loan contract. This project also became the first financing project of other syndicated members that applied the Equator Principles in China.
At the end of 2017, based on ten years of theoretical exploration and practical experience, IB compiled and published the monograph From Green to Gold: Empirical Study of Sustainable Banking Based on the Equator Principles to further promote the advanced concept of the Equator Principles, and deepen the theoretical research level of green finance in the financial industry. It demonstrated the positive promotion of the Equator Principles to the sustainable development of banks with data models and typical cases, and expanded the frontier research in this field.
Over the years, IB has not only actively participated in the formulation of domestic green credit statistics, implementation plans of green credit evaluation, energy efficiency loan guidelines, green finance debt and other green credit system policies, but also signed green finance agreements with such financial institutions as the Bank of Jiujiang, Anji Rural Commercial Bank, and Bank of Huzhou. The inter-industry cooperation agreement provides its “intelligence” support for the construction of China’s green finance system and the better and faster development of green finance through the “export” of green finance technology and experience. Now the leader is no longer alone. Following the IB, the Bank of Jiangsu announced to adopt the Equator Principles in 2017, and the Bank of Huzhou started to apply for the adoption of the Equator Principles in 2018.
In the mewanwhile, as the first EPFI in China, IB has actively participated in the review and revision of international banking industry standards such as the new Equator Principles and the Performance Standards of International Finance Corporation (IFC), and continued to voice the China’s banking industry on the international green finance stage. It also “publicized the experience on the application of the Equator Principles” abroad, covering Vietnam, Thailand, Mongolia and other emerging market countries, who shared experiences and exchanged insights with multinational banks so as to establish a sustained and in-depth but positive interaction, and jointly contributed to the global green and sustainable development.
After practicing the Equator Principles for ten years, IB has received numerous honors. For example, it won the China’s Banking Industry Social Responsibility Award for eight consecutive years, was selected as a component stock of the “Hang Seng Sustainable Development Enterprise Exponential Index Series” for eight consecutive years, and was awarded the “Outstanding Nature Conservation Supporter of the Year” by the World Wide Fund for Nature (WWF), and won the “Asian Sustainable Bank Gold Award of the Year” jointly issued by the Financial Times (FT) and the International Finance Corporation (IFC) and the “Carbon Gold Social Citizenship Award” at the 5th World Environmental Protection Conference.