An Interview with IB Chairman Mr. Gao Jianping
May 26, 2010 Source: CBN Daily
As China's first Equator Bank, in recent years IB has stirred-up a frenzy of innovation in green finance, becoming an industry pioneer in this area.
The good thing is that green finance has become a new source of income for the bank instead of holding it down in a profit-oriented market. As a stepping stone to greater things, green finance has also helped the bank to enhance its operating philosophies.
Gao Jianping, chairman of the Industrial Bank, shared with us IB's experience in developing green finance.
Implantation of “green genes” into corporate governance
Q: We have seen how enhancements in management philosophy have driven the stable and rapid growth of the Industrial Bank since it was established 21 years ago. Can you tell us about the evolution of IB's management philosophy?
Gao Jianping: our management philosophy has evolved through three basic stages, from putting shareholder interests first, to placing equal emphasis on the interests of various related parties and finally to emphasizing harmony between the environment, society and economy and the sustainable development of the bank. This basically reflects the bank's changing perception of the value it creates at various different stages of its development.
The first stage was from IB's incorporation in 1988 until the mid-late 1990s. In response to calls at the time develop the economy and reform finance, the bank was founded with capital from the initiating party and followed to increase its capital standing by means of equity participation and bringing in new investors. This laid down solid foundations for the early development of the Industrial Bank. At that time, the main goal of corporate governance was the maximization of shareholder interests and distribution of earnings to the shareholders. For that reason, dividends at that time were very high.
The second stage was from 2000 to 2005, when IB gradually came to recognize that a commercial bank was a special kind of public-oriented company that not only relied on the support of shareholders, clients, staff and other parties, but also that its achievements were closely related to their interests. Therefore, our corporate governance goals began to cover the interests of clients, staff, the public and other interested parties as well as shareholders.
The third stage is from 2006 until today: as the world turns to face global warming and other increasingly prominent environmental problems, IB further probed into the relationship between social responsibilities and sustainable development after it went public. It proposed the notion of “performing social responsibilities while making profit” and sought to perform social responsibilities by means of innovating its modes of doing business, thereby contributing to the harmonious development of people, nature, environment and society. It also established a management philosophy of sustainable development.
Q: IB formally started giving loans to energy-saving and emissions-reduction projects by seizing on an initiative with the IFC in 2006. In October 2008, IB formally committed itself to the adoption of the “equator principles”. In recent years, IB has adopted green finance as one of its essential philosophies. How does the bank interpret the notion of green governance?
Gao Jianping: we developed our green philosophy from the concept of green loans, but it has gone much further than this. It represents the bank's philosophy of sustainable development, and covers all aspects of our operations.
In recent years, particularly against the backdrop of global warming and increasingly serious environmental pollution, the Industrial Bank has been further probing into the relationship between interested parties and the bank's sustainable development, and has proposed a new corporate governance philosophy of “actively exploring to perform our social responsibilities and contributing to the harmonious development of people, nature, environment and society through multiple measures”. Following years of probing, our corporate governance philosophy has evolved from shareholder interests and stakeholder interests first to emphasis on the uniform and harmonious development of environment, society and economy of explorations. In this way, we have managed to reinforce the foundations of our sustainable development on a conceptual level.
A modern enterprise is an organization that pursues economic, social and environmental benefits and a body that optimizes the distribution of material, human and environmental resources. This notion requires banks to reestablish their philosophies in regard to needs, resources, environment and benefits, probe into the nature of green philosophy from multiple facets and operate in a manner that promotes the sustainable development of the economy, environment and society without adversely interfering with the relationships between people and nature.
As a special public-oriented company, a commercial bank not only relies on shareholders' initial contributions, but also the support of its clients, staff and other stakeholders. In this sense, a commercial bank needs to voluntarily incorporate the harmonious development of economy, society and environment into its development goals and earnestly promote the sustainable development of various interested parties. Meanwhile, a bank must be committed to the sustainable development of economy, environment and society if it is to prosper on a long-term basis and realize its own sustainable development.
The rules and boundaries of competition have undergone deep changes. The essence of competition has evolved from pure market-based competition to highly complicated responsibility-based competition. The competitiveness of an enterprise is no longer an exclusive matter of material resources, market scale, product quality and other such “hard” capabilities, but depends more on its corporate tenets, philosophy, innovating mechanisms, market credit, awareness of social responsibility and the social standing, brand image and other “soft” capabilities arising therefrom. Purposeful, planned and voluntary undertaking of social responsibilities towards staff, consumers and communities, and incorporating this into a company's operational development strategies will not only give full rein to the company's professional advantages and specific resource advantages, but also can better serve society, establish the company's soft competitiveness, enhance its competitive edge and establish a mutually beneficial relationship between the company and society.
Q: How are IB's values and the realization thereof embodied in the framework of green philosophies?
Gao Jianping: as an operational guideline for a commercial bank, green philosophy is not only a principle for the destinations of bank loans; it penetrates all aspects of bank operations, including corporate governance, risk control, credit approval, supply chain management, human resource management and office administration. This has led to the creation of IB's green values.
In summary, such a value philosophy is reflected as follows: firstly, the bank is obliged to secure stable returns for its shareholders by operating shareholder investments with due diligence and hence satisfying shareholders' fundamental interests by increasing value. Secondly, the bank shall regard customer service as its top operational priority, accurately identify customer needs and their changes and try its best help customers increase their value and realize sustainable development. In regard to employees, the bank not only needs to improve to the basic pay of staff, but should also guarantee their career development, respect their value and contributions, always try to increase the sense of achievement among staff and help them to grow. Thirdly, the bank needs to establish a sound concept of competition and partnerships. Competition isn't about throat-cutting fighting. Instead, it should lead to mutually beneficial partnerships. Finally, green philosophy also requires that the bank observes laws, regulations and the highest level of commercial ethics, pays attention to public welfare undertakings and promotes the harmonious development of society.
How do we realize our value philosophies and corporate values? Our understanding is that our social responsibilities are not limited to profit-making and tax contributions, but call on us to operate our business in the right way, be aware of the concerns of stakeholders, and fully utilize our unique advantages and influence in social and economic development with an aim to encourage other companies and even whole industries to focus on their social responsibilities, hence maximizing the performance of social responsibilities.
For that reason, IB has proposed the concept of “performing social responsibilities while making profits” as its mode to fulfill social responsibilities, i.e. combining social responsibilities and banking services together, looking for business opportunities in the process of fulfilling social responsibilities and looking for a sustainable and developable business mode and social responsibility implementation mode that allows for the mutually beneficial relationships between the bank and society”. That establishes the intrinsic logic for value realization in IB's green philosophy.
Localization of the Equator Principles
Q: How has IB managed to incorporate green philosophy into its corporate culture?
Gao Jianping: green banking is not just a profit-making mode under the guidance of a green philosophy; it is a form of corporate culture and an impartial, transparent and harmonious operational philosophy that is accountable to interested parties.
It is only with unanimous agreement with green philosophy among employees that sustainable financial undertaking can be reinforced, developed and grown. We are pleased to see that green philosophy has taken root in the hearts of our employees and has worked to promote the stable realization of our sustainable development strategy through our persistent efforts.
We also try to demonstrate this sense of responsibility during all aspects of our operations. For instance, we hoped to introduce to more potential investors and look for new opportunities of cooperation in addition to conducting exchanges with and soliciting proposals from the regulatory commission and our current shareholders regarding our recent share placements.
During the discussions on refinancing scale and mode, IB always placed shareholder interests and capital market stability as its top priority. Compared with ordinary companies, banks usually involve a higher scale of fundraising, and therefore public placements may generate significant impacts on the market. For that reason, IB finally opted to raise funds through placements among the existing shareholders instead of employing the methods that some other banks have used, including private placements and the issue of H shares. This fundraising mode not only reduces the impacts on the market, but also enables all our investors to retain the returns from our rapid development and urges our existing shareholders to undertake their obligations in refinancing.
According to the latest communications between IB and its shareholders, the main legal persons and institutional shareholders have all guaranteed to fully subscribe to the new shares within their scope of responsibility. Our Top 20 legal person and institutional shareholders account for more than 70% of our total share capital, and their support can already guarantee the success of the refinancing. However, IB still insists on carrying out road shows in order to respect each and every investor.
Q: To varying degrees, many domestic banks have embraced the concept of green finance and developed an environmental awareness in recent years. However, few have established a sound environment risk management system covering organization, staffing, operational measures, data and knowledge storage, etc. As the first domestic bank to adopt the Equator Principles, how has IB made explorations in this regard?
Gao Jianping: as a matter of fact, being the first domestic bank to adopt the Equator Principles, IB is under a lot of pressure. But pressure is often a driving force. IB has had to change itself, and these changes have started from institutions and management procedures. In other words, the implementation of the Equator Principles is a process of localization
Firstly, IB has established an organizational structure that features effective division of labor and includes all of the management and operational departments relating to sustainable development. The board is responsible for making decisions on environment and social risk management strategies as well as development goals and plans; the senior management is responsible for collectively formulating environment and social policies and reviewing and approving relevant environmental and social goals, indexes and plans according to the authorization and according to the requirements of the board; the credit departments shall perform relevant environment and social responsibilities according to relevant rules and policies regarding environment and social risk management. Meanwhile, an Equator Principles leadership team has been established for the collective management of work relating to the equator principles.
Secondly, IB has formulated the Policy on Environment and Social Risk Management as a guideline to the implementation of the Equator Principles. We have fully restructured our project financing system, including establishing risk classification standards, screening the sectors for trial implementation of the Equator Principles, formulating detailed implementation rules for the trial sectors, formulating due diligence management guidelines, establishing an expert review mechanism, improving project list management system, and maintaining close contacts and relationships with the regulatory commission, domestic peers, financial institutions that adopt the Equator Principles, NGOs and other institutions.
Thirdly, IB has improved the conformity and operability of credit procedures, including establishing the environmental and social risk reviews for projects to which the Equator Principles are applicable, increasing the effectiveness and of post-loan supervision to control risks, incorporating the environment and social risk conditions of the foregoing projects into the scope of risk alarms and appropriately adjusting the loan risk classification and borrower credit rating
Following such overall restructuring, IB is also required to disclose its implementation of the Equator Principles through a reporting system, accept third-party certification and NGO supervision and establish a comprehensive internal implementation system on this basis. Although we are still at the beginning, we believe that it is feasible to realize sustainable finance through rational arrangements and collective implementation on the basis of a wide perspective.
Q: Has IB encountered any difficulties during the localization process of the Equator Principles, and if so, how have you overcome them?
Gao Jianping: from our perspective, establishing the concept of sustainable finance requires greater attention than guaranteeing conformity in terms of rules. The service provider has to accept this concept before clients can be expected to accept it.
Understanding is the prerequisite to acceptance. As a matter of fact, the Equator Principles are a set of voluntary fundamental principles for the financial industry as established by major global financial institutions with reference to the sustainable development policies and guidelines of the International Finance Corporation, and they are applied to judge, assess and manage environmental and social risks in project financing. The Equator Principles are a set of environmental principles that should be observed by financial institutions, primarily banks, during project financing. The principles call on financial institutions to fulfill due diligence obligations regarding the environment and social issues associated with project financing. A financial institution is only allowed to provide funds when the loan applicant can prove that it will fulfill relevant environmental and social obligations during project implementation.
Heads of many IB branches didn't understand the Equator Principles very much at the beginning, because they would call for procedures and ways of thinking to be changed and result in the loss of profits of some projects.
Therefore, our Legal and Conformity Department invited some of our branch heads to discuss the development of business. Commercial banks prefer short-term loans instead of medium and long-term loans. However, statutory capitals are eroded whenever a loan encounters risks. For that reason, a bank needs to ensure a high capability in risk management. The Equator Principles are not restrictive. Instead, they teach a bank how to achieve sustainable development better and that it is necessary to properly manage risks during development. It is an effective mode that helps the bank and the clients to resolve problems in a practical manner. The bank may also regard it as a tool to market its sense of responsibility and a trump card. These discussions were met with a high level of interests from the regional banks, who realized that the principles were not what they had originally expected.
In order to strengthen our internal capabilities, we have also carried out systematic training, including multi-level and comprehensive internal training for various positions. We have also gradually established a long-term training mechanism. Regarding the Equator Principles and sustainable finance, we also issue an internal magazine in which essays and research articles are publicized, compile reading material and publicize relevant concepts and cultures through various channels.
We also need to establish the necessary assessment and incentive measures in order to fully embed our values and philosophy. Our Legal and Conformity Department has proposed increasing the expenses and assessments of marketing of projects relating to the “Equator Bank” and our chairman and senior management have agreed in principle. The Department believes that IB does not grant a huge amount in project loans, just some tens of billions of Yuan each year. Therefore, increasing such expenses in this regard will not involve huge costs, but will be able to reflect the values of headquarters.
Q: Are you trying to persuade clients to accept the principles now that the bank has accepted them?
Gao Jianping: in order to implement the Equator Principles, it is extremely important that we improve our clients' understanding of the Equator Principles and their recognition of environmental and social risk management. For that purpose, IB has organized for our major clients to participate in discussions about the Equator Principles. These discussions worked to popularize the role of the Equator Principles in helping borrowers to manage environmental and social risks and introduced the success stories of domestic and overseas multinationals in environmental and social risk management. Meanwhile, we have also visited the projects of our clients to ascertain the environmental and social benefits of projects, impart knowledge about the Equator Principles and make clients aware that the Equator Principles are a means that can help them to improve their capacity in the management of environmental and social risks.
What matters the most is to urge our clients to implement the Equator Principles. In practice, IB has found that many enterprises in many industries, regardless of SMEs, large-size state-owned enterprises, the cement industry, coal chemical industry or even the chemical raw material industry, are not actually that far away from conforming to The Equator Principles. However, what they lack is institutionalization. Some clients do not fully appreciate the nature of the Equator Principles, and think that they merely add to their obligations. But repeated contacts and exchanges with them have helped them to gradually recognize that the equator principles can help them eliminate potential risks relating to pollution, biodiversity, land requisition, relic protection and staff rights and interests, and hence guarantee the genuine sustainable development of the project.
The Equator Principles are a profit-making mode that helps to increase value and brings about development opportunities. For that reason, the localization process involves innovations to adapt to the local national conditions in China. For instance, we would design different credit loan procedures to review environmental and social risks according to our clients' different preferences regarding capital costs and time costs, and our clients can make the choice according to their circumstances. This fits in with the tenet of the Equator Principles and makes the principles more approachable and acceptable to clients.
On December 22, 2009, the 2x300MW expansion project of Fujian Huadian YongAn Power Project, the first project to which the Equator Principles are applied, was formally launched. This is also the first project in the Chinese banking sector to apply the Equator Principles.
Green innovations in business modes
Q: You mentioned just now that pursuing the sustainable development of economy, environment and society is an essential approach if a bank is to achieve sustainable development and prosper on a long-term basis. I agree with you. But responsibility and interest are often in contrast with one another. How do you bridge the gap between responsibility and interests?
Gao Jianping: social value and corporate value are fundamentally the same. An enterprise can only realize its own sustainable development by pursuing undertakings that are valuable to society. This is our belief and the corner stone of green finance. No doubt, responsibility and interest are not equivalents. In order to bridge the gap between responsibility and interest, certain conditions must be satisfied. The external conditions include a well-established legal system and cultural re cognition in society, while the internal conditions include commitment to the innovation of business modes so as to identify a bridge between responsibility and interests.
IB has constantly probed into the green remodeling of its business modes in recent years and the partnership with IFC regarding energy efficiency project financing is a typical example of this.
Q: Can you talk about IB's leading position among domestic banks in terms of energy efficiency project financing?
Gao Jianping: IB and IFC signed a partnership agreement in Shanghai on May 17, 2006. The two parties agreed to launch energy efficacy project financing in China for the first time in order to provide credit support for projects that improve the energy efficiency of Chinese enterprises and develop and utilize clean energies and recyclable energies.
IB would provide loans to qualified energy-efficient and environment-friendly enterprises and projects according to the IFC's approval and IB's credit approval procedures, while IFC would provide relevant technical assistance to for the loans. A loss sharing mechanism was been developed and the sales-based cash flows of the funded projects were identified as the source of repayment. The secondary source payments such as mortgages and collaterals no longer played a key role and this effectively made it easier for SMEs to secure finance so that many highly profitable SMEs that involve enormous potential and distinctive operational advantages but lack mortgage and collateral can receive support in the form of loans. In this way, commercial interests and environmental interests are very well combined.
Through this unique and market-oriented operational mode, IB successfully entered China's energy-conservation financing market. This presented huge prospects for the development of new markets and clients. The role of the assisting loans and technologies provided by IFC was also magnified, as these things effectively worked to promote energy efficiency and environmental protection in China.
Significant achievements have been made in the energy efficiency financing projects of IB so far. As of 2009, IB had issued 223 loans for energy-efficiency and emission-reduction projects with a total value of RMB 16.583 billion, hence fulfilling its promise to grant RMB 10 billion in loans within three years (from 2008 to 2010) in advance. The foregoing loan projects are expected to help conserve 10.3974 million tons of equivalent coals, reduce carbon dioxide emissions by 31.7804 million tons, reduce CODs emissions by 439,100 tons and utilize 472,500 tons of solid waste in China each year.
In addition, the loans themselves can also bring in considerable profits. Ever since IB launched this service, no energy-efficient and emission-reduction loans have encountered asset quality problems, and the bad loan ratio is still zero. The loan interest rate is a slight markup over the benchmark interest rate of the period in question. Therefore, these projects have a comparatively higher level of profit among medium and long-term loan projects. IB has sowed “green” social responsibilities and consequently harvested “golden” profits.
Moreover, IB is also committed to the use of diversified financial instruments to support the development of an “energy-efficient and environmentally-friendly” society and to promote the development of a recyclable economy, energy-efficiency, emissions-reduction, environmental protection and a low-carbon economy. In July 2009, IB issued the first carbon delivery bond in China. In August, IB acted as the account managing bank and provided clearing and capital deposit and custodian services for the first voluntary emissions reduction transaction in China.
Q: Mortgages and pledges play an important role in traditional loan projects. However, this isn't the case with green loans, as the enterprises applying for the loans tend to be technology-intensive startups that lack collateral. How has the IB acted in this case?
Gao Jianping: banks primarily make money from interest margins in traditional loan projects, and mortgages and pledges play an important role. In the field of green loans, however, the applicants are mostly startups and technology-intensive enterprises that lack sufficient mortgages. Despite generally having sound future cash flows, the risks are high and the returns are uncertain.
In order to adapt to the demand for energy-efficiency financing, IB has conducted a series of reforms and innovations in terms of risk control, organizational management, credit procedure and team development.
In terms of credit procedures, field surveys tend to play a more important role in energy-efficiency and emissions-reduction loan projects compared with standard loan projects. External experts also need to be brought in to assist with the technical elements of the project and allow us to ascertain how much coal equivalents can be saved and carbon dioxide emissions reduced and guarantee that relevant social and environmental laws and regulations are understood and observed. In operations, both social and environmental interests and economic benefits are emphasized. All loan projects are required to undergo a professional review of project type before they can be approved, including conformity of the projects to relevant national policies, estimation of the projects' efficacies in energy saving and emission reduction and the technical maturity of the project.
In terms of risk control, new risk management tools shall be adopted to assess the borrower and the project's cash flows for energy-efficiency and emission-reduction loan projects. Emphasis is placed on the effectiveness of the first source of repayment and the credit enhancement method is applied.
In terms of teams, IB's sales and marketing team has gradually enhanced its professional capabilities. A team of professional sales and marketing personnel for energy-efficiency and emissions-reduction projects has been established in both our headquarters and branches. We have also gained a deal of experience in risk management and control for energy-efficiency and emissions-reduction projects
In order to improve our staffs' awareness and capability, IB has also established a diversified training mechanism that covers self-study, departmental training, external expert training and internal seminars with an aim to strengthen our staffs' understanding and command of knowledge in this field.
Q: As you mentioned, a green philosophy goes beyond green loans. Can you introduce some other examples of the green innovations made for business modes in other fields, e.g. SME loans?
Gao Jianping: although SME loans involve higher risks and costs from a short-term perspective, offering financial support to SMEs in production, purchasing and sales and promoting the sustainable development of SMEs is essential if a commercial bank is to maintain a long-term competitive edge and achieve sustainable development in the long-run. Such initiatives can also promote social harmony and increase employment. For that purpose, it is necessary to make innovations in regard to business modes. In 2009, IB established an SME Department. So far, IB has established an SME Centers and relevant operational organs in its Guangzhou, Hangzhou, Shenzhen, Nanjing, Fuzhou, Chengdu, Wuhan, Xiamen, Quanzhou and Ningbo Branches. According to the scale processing mode for credit, IB has designed innovative and independent SME credit loan procedures. We have also launched the “Golden Sesame – SME Financial Service Plan” to provide one-stop convenient services to grant capital support to SMEs in their production, purchasing and sales.
In addition, we also have many examples how we have promoted the sustainable development of society through innovative loan projects. For instance, our Beijing Branch has actively developed individual business loan services to support mini-size enterprises and SMEs. Our Kunming Branch supports the intra-city village requisition and renovation projects of Kunming by formulating a detailed requisition service plan, i.e. Xingjialiye Financial Service Plan. With this Plan, IB has assisted in the release of 1.4 billion Yuan of requisition compensations and won universal praise from the local government and the relocated residents. Our Harbin Branch has actively provided loan support to the slum renovation projects of Harbin, with total loans granted standing at RMB 990 million. As a result, we become the first bank to provide bridge loan services to the slum renovation projects of Harbin.
These measures benefit local communities in addition to offering bright prospects for the development of the Industrial Bank.
Q: As a unique service of the IB, one with excellent prospects, the “Interbank Platform” has played an important role in promoting mutually beneficial partnerships in the financial sector. Can you tell us something about this initiative?
Gao Jianping: with the deepening of the reforms and development of China's financial market and the increasing level of application of science and technology, consumers of financial services are demanding comprehensive services from financial institutions. Against such a backdrop, IB has establishing the “Bank-bank Platform” on the basis of on the experience it has gained in multiple years of partnerships with securities companies, insurance companies and fund companies. The bank is dedicated to becoming a professional provider of banking services for small and medium-size financial institutions.
The Bank-bank Platform is a brand name under which IB offers general services to domestic banking institutions and the goal is to complement advantages, share resources and form a strategic alliance.
The Bank-bank Platform is primarily oriented towards municipal commercial banks, municipal and rural credit cooperatives, rural commercial banks, rural cooperative banks as well as township and village banks. Through the Platform, cooperation is carried out with industrial peers in eight major service sectors, i.e. payment and clearing, wealth management, science and technology output, financing service, foreign exchange agency, capital and asset liability structure optimization, capital operation as well as training and exchanges.
As a matter of fact, interbank partnerships have diversified the channels of cooperation among domestic financial institutions. The Platform offers a brand-new service sector and service mode for IB and its domestic peers. Generally, the Bank-bank Platform has played an effective role in extending IB's service network, promoting service innovations, enhancing competitiveness and increasing overall returns. It is an important measure that IB has adopted to find a niche amidst homogenization in the banking sector.
Meanwhile, the Bank-bank Platform has also established a mode of mutually beneficial partnerships that transcend competition. It aims to improve the operational management standard of small and medium-size banks, diversify their product lines, enhance their competitiveness and drive them onto the path towards modernization of operational management. It has also become an important means by which IB can undertake its social responsibilities.
As of 2009, the Bank-bank Platform had 211 contracted clients and 151 online clients with over 10,000 counter-linked outlets distributed across most 2nd and 3rd-tier cities across China.
Q: Finally, can you talk about the significance that the green innovation of business modes has on the development of the banking sector at present?
Gao Jianping: of all corporate innovations, innovations of the modes under which business is done are the most fundamental, and form a basis for other management and technical innovations. An excellent business mode can integrate various internal and external aspects of a company in an innovative manner and hence establish a highly efficient operating system with unique core competitiveness. It can also achieve the goal of continuous profitability through product and service supplies. This is the case for both hi-tech industries and the modern financial service industry, including the banking industry.
Chinese commercial banks are currently facing such major challenges as the expected marketization of interest rates, homogeneity of products and services and a chaotic risk management system. Adjustments of and innovations to business modes to adapt to the current economic and financial development trends is a major issue of development strategy that commercial banks need to address. Brighter prospects for the development of banks in a new era may be found by incorporating green philosophy into business modes of banks and by redefining and innovating traditional business modes.