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Industrial Bank: A Pathfinder for the “Equator Principles” in China

The "Equator Principles" refer to the industry standards adopted by global major financial institutions for judging, assessing and managing the environmental and social risks involved in international project finance. These principles regulate standards and solutions in the respects of environment, health and safety in 62 industries including manufacturing, chemical engineering, energy and infrastructure. Globally, there are already over 60 banks which have declared their entry to the "equator principles". However, in China, the number of members is still zero.

The Industrial Bank is aiming to become the first Chinese Bank to enter the principles. On July 1, a public notice released by the Bank declared that its BOD had passed the Motion on Application for Admission into the Equator Principles, giving the green light to senior management to proceed with preparations for entry into the “Equator Principles" so as to better fulfill its environmental and social responsibilities. Hence, the Bank has become the first Chinese-funded bank to publicly declare its intent to enter the principles.

The move made by the Bank has landmark significance. The Bank has sent out a positive signal on behalf of China's banking industry: commercial banks, which occupy an overwhelming position of control in the whole industry, are gradually realizing that they should shoulder many more social responsibilities, and these responsibilities will have an exercisable path to fulfillment. This path is embarked on by controlling high consumption and high pollution through the use of advanced financial means so that the sustainable growth of society is attained.

It can be seen that the Industrial Bank is now taking itself deep into the field of green finance after it successfully established itself as a pioneer and advocate of “green credit” in China by launching financial services for energy conservation and emission reduction projects, the first of their kind in China .

Green Credit Leading the Industry

The Industrial Bank, cooperating with the International Finance Corporation (IFC), did what no other had done before in China by launching financing services for energy conservation and emission reduction projects, a form of “green credit”, in May 2006. When launched, the product was met with a far more positive reaction than was originally anticipated. The credit line of RMB 460 million Yuan for the first phase of cooperation was expended within just 11 months. The Industrial Bank signed the second phase cooperation agreement with the IFC in Beijing on February 25, 2008. The agreement saw the increase of the credit line and the expansion of the scope of financing application.

By the end of June this year, the Bank has issued loans for energy saving and emission reduction projects in 14 provinces and Municipalities and supported 69 projects altogether with a financing capital of RMB 2.15 billion in total. These projects can save 2,364,700 tons of standard coal and reduce the emission of 6,569,700 tons of greenhouse gases, including carbon dioxide, a year in China. This is the equivalent to closing thirteen 100 megawatt heat power stations.

Ms. Rachel Kyte, the vice president of IFC Worldwide believes that green credit is the key element in realizing the sustainable development of Chinese banking, and the results gained by the Industrial Bank in energy conservation and emission reduction will have a very positive effect on the improvement of energy efficiency and the reduction of both pollution and greenhouse gas emissions.

“Enterprises should be known that exhaust gasses can be changed into US dollars”, Zhu Liyong, the general manager of corporate banking department in Industrial Bank, spared no efforts in promoting the concepts of energy conservation and emission reduction. “Our great number of successful cases are making make more and more enterprises realize that investment in technological upgrade to conserve energy and cut emissions is not only able to save energy and improve the environment but can also yield substantial economic benefits.”

In the field of green credit, the Industrial Bank took fast yet steady steps. When asked about the non-performing rate of the loans, Zhu gave a straight answer, “I can proudly tell you, that figure is zero. According to our tracking of these enterprises, we have not found any adverse trends.” Seen from loan balance, the issuance of loans in first half of this year has doubled compared with the total for the previous year. In fact, the Bank has already announced that a total loan amount of RMB 10 billion Yuan for energy conservation and emission reduction will be issued during the “11th Five-year Plan” period.

These green credit loans are primarily granted to SMEs, which often lack of pledges and find it difficult to meet guarantee requirements. The loans for energy conservation and emission reduction place emphasis on the validity of first repayment source, conduct scientific analysis on cash flow of the project and make bold innovations and application of credit enhancements. Thus, they can solve the loan problems of SMEs in a better way. Take the Shenzhen Phase Technology Company for instance. This company is an enterprise specializing in methane recovery and energy utilization in refuse landfills. In the process of landfill treatment, a large amount of methane is produced. In the past, these gases were directly discharged into the atmosphere, which would affect air quality and contribute to the greenhouse effect. Through recycling and utilization, Shenzhen Phase is able to transform greenhouse gases into power. This project obtained the approval of the Clean Development Mechanism (CDM) and a considerable addition of profits through the transactions of Carbon Emission Reductions (CERs). This is genuinely “turning waste gasses into US dollars”. “Due to the lack of pledges, this project, which is beneficial to the government and people, could not obtain loans at the beginning from many banks until we came to the Industrial Bank, which discovered the multiple benefits that it would bring. So, we were granted with funds and thus won a rare opportunity for development”, said the Dr. Yu Yuanqi, the board chairman of the company.

The ability to assist these enterprises in creating economic and environmental benefits has been grounded on the enhancement of professionalism in the bank, “within cooperating with the IFC, what is most important is that we learn advanced concepts and techniques in risk management”, Zhu said, “for example, how is financial data, such as cash flow and internal rate of return, analyzed from the perspective of a bank? And how can it be evaluated in a more comprehensive and objective way? During cooperation, making learning an ongoing activity was paramount.”

After two years in this area of business, the Industrial Bank now boasts a highly specialized team and a sustainable and widely applicable financing mode for energy conservation and emission reduction. The Bank has established unique competitive edge in green finance. Furthermore, its efforts in green finance have been acknowledged in numerous social circles and even by international organizations. The Bank now enjoys an image as pioneer and advocate of sustained finance in China . Last June, in the “2007 FT Sustainable Banking Awards” jointly held by the Financial Times and the International Finance Corporation, the Bank was nominated for “Emerging Markets Sustainable Bank of the Year” & “Sustainable Deal of the Year”. It was eventually awarded the “Sustainable Deal of the Year”, becoming the first financial institution in China to win this honor.

Approaching the “Equator Principles”

The development and expansion of financing for energy conservation and emission reduction has brought the Industrial Bank not only product experience and risk control techniques, but also sustainable concepts on financing which are constantly deepening. “To earnestly implement scientific concepts of development and deepen the understanding of the relationship between the social responsibility assumed by a bank and its individual sustainable development, a variety of modes shall be actively sought to urge the bank to practice its social responsibilities and to achieve harmony among human beings, nature, environment and society.” This is the concept of corporate governance put forward by Gao Jianping, the Industrial Bank's board chairman. Better performing the responsibility for the environment and the society has become an important part of the development strategy carried out by the Bank.

In May 2006, the Industrial Bank, cooperating with the IFC, launched a scheme to finance energy conservation and emission reduction projects. It was the first of its kind in China.

In October 2007, the Industrial Bank formally joined the United Nations Environment Programme Finance Initiative (UNEP FI) and made a solemn commitment to abide by relevant environmental laws and regulations, declaring it would take environmental factors into its consideration for commercial decisions and would support sustainable development.

In November 2007, the Industrial Bank sponsored the 2007 China High-Level Forum on Energy-Saving & Green Credit Innovation Symposium in Beijing with the IFC, the Resources Conservation and Environmental Protection Department of the National Development and Reform Commission, the Energy Research Institute of the National Development and Reform Commission and the Financial Times, actively advocating green credit.

A little over a month ago, the BOD of the Industrial Bank passed A Motion on Application for Admission into the Equator Principles.

Looking back on the way that the Bank has practiced green finance, Hua Bing, the general manager of the Legal and Compliance Department stated: “In the process of developing and promoting financing products concerning energy conservation and emission reduction, we have deepened our understanding toward the interrelations between the social responsibility assumed by the Bank and its individual sustainable development. We gradually began to consider sustainable finance as a part of our banking strategies. Last year, when learning about the “equator principles”, we found that its tenet fit in well with our operating philosophies, and it was a matter of significant. At the time, we have thought about adopting the principles by integrating our green credit project.”

Opportunities and Challenges

One change makes all change.

According to usual practice, once a bank has announced its acceptance of the “equator principles” and became an equator bank, it will have to examine and verify environmental and social problems in its financing project and inspect clients' environment impact report, action project and environment management system.

Meanwhile, the equator principles also provide equator banks a common standard and framework for establishing an internal environment and system and carrying out the implementations. In other words, after the acceptance of the equator principles, the bank has to make correspondent adjustments to the system framework and business processed relevant to financing project. Under the existing provisions of the equator principles, an equator bank has to classify the applicable financing project into High (A), Medium (B) and Low (C) in accordance with potential risks to the environment and society and their impact degree. Then, based on the above classification, a management system of environmental and social risks has to be established, a sustainable supervision on project construction and operational implementation be conducted and the implementation of equator principles by the bank be disclosed regularly.

Since this March, the Industrial Bank has been actively in contact with financial institutions that have already joined the equator principles, such as IFC, Itau · Da Beibei Bank in Brazil and Mizuho Corporate Bank in Japan. It has made an-depth probe into the details concerning the adoption and practice of the equator principles.

After a comprehensive study and evaluation were made on the possible opportunities, challenges and difficulties of practicing the equator principles, the management of the Industrial Bank made the conclusion: after the equator principles were adopted, the business scope might be constrained within a short period, but the project structure would be optimized; although the strict control on a borrower's social and environmental responsibilities might cause a decline of clients in a short run, it would help to attract many more quality clients; though possibly confronted with implementation difficulties arising from differences between domestic environmental protection and social norms and international ones, it would be beneficial to draw on advanced experiences; though under strict supervision from many sides, it will help improve standardized operations; and though business processes may be increased to some extent, it would enhance corporate governance.

“To adopt the equator principles is a strategic decision made by the Bank's BOD in consideration of sustainable development. As a consequence, corporate governance and its own ability will be improved comprehensively.” Hua Bing, a principal in the leading group office for equator principle work in the Bank said with conviction.

“Joining the equator principles, in a way, not only means the improvement of the Bank's abilities in risk management, but also means that the Bank will help clients to improve their management abilities regarding environmental and social risks.” Through the evaluation and supervision of a project, the Bank will assist the client in establishing a management system for environmental risk in line with certain standards to strengthen their abilities to avoid environmental and social risks.

“Another important effect is that it will advance the business transformation of the Bank.” Although in the short run, entry into the equator principles may lead to the loss of some business opportunities, it will ultimately spur the optimization of client quality and business transformation in the long run. This is the macro thinking of the Industrial Bank, which is based on its strategic transformation.

We learned that the Bank has established an inter-departmental joint working group which will work together to draft a roadmap for adopting the equator principles in the Bank and then put it into operation step by step. The Industrial Bank's journey into the realm of green finance is just about to begin. (From Chinese Business News, by Wang Chunxia, Guo Ru, July 13, 2008)