August 29, 2013 Author: Qi Yuan Source: News China
The terms “Equator Bank” and “Sustainable Finance” are still not familiar to the common audience in China. But internationally, the Equator Principles have become the guidelines observed universally by the mainstream financial institutions in carrying out financing for large projects. In China, nonetheless, Industrial Bank is the first and only “Equator Bank” in China.
The terms “Equator Bank” and “Sustainable Finance” are still not familiar to the common audience in China. But internationally, the Equator Principles have become the guidelines observed universally by the mainstream financial institutions in carrying out financing for large projects. There are altogether 79 financial institutions adopting the Equator Principles around the globe. In China, IB officially announced to the public to adopt the Equator Principles in October 31, 2008, becoming the first and only “Equator Bank” in the country. Since then, the Bank has put all of its operation and management activities under the concepts and methods of the Equator Principles.
As the first Equator Bank in China, IB has not only taken the lead to practice the energy conservation and emission reduction financing business among all Chinese financial institutions, but also incorporated the pursuit of harmonious unification of economy, society and environment into its own development objectives on its own initiative and established the corporate governance philosophy of sustainable development to “explore different ways to promote the bank to practice social responsibilities and build a good relationship where human being coexists with the nature, environment and society harmoniously”. Moreover, it has incorporated the philosophy into its business management concept and innovatively put forward the social responsibility outlook of “obtaining reasonable profits while bringing benefits to the stakeholders” to transmit and implant the concept of sustainable finance into such aspects as regulations and rules, organizational structure, business flow and product innovation.
What stories and influences are behind these concepts? Recently, the reporter of News China had an interview with Liang Pingrui, General Manager of the Environment Finance Department of IB, who described the performance of responsibilities and performance of banks against the general backdrop of energy conservation and low carbon in the “12 th Five-year Planning” period.
Sustainable Finance – the Reflection of “Obtaining Reasonable Profits while Bringing Benefits to the Stakeholders”
News China: The term “sustainable development” has been mentioned for many years. In your opinion, what unique features does the sustainability of financial enterprises have? How do you understand and position the concept of “sustainability”?
Liang Pingrui: As the core of modern economy, financial institutions, especially banking institutions are an important pivot for the distribution of social and economic resources. To support the “sustainable development” of the whole society is both a responsibility that they cannot relinquish and a great opportunity that they cannot afford to lose. Specifically, the pivot role of banks in distributing resources should be brought into full play. We should vigorously develop green finance, guide and actuate social capital to flow and assemble toward the areas featuring low energy consumption, low emission, low pollution and high efficiency, and by improving the distribution of social resources, actively push the transformation of social and economic development model and industrial conversion and upgrading with market-oriented measures, so as to achieve the social and economic sustainability.
I understand and position “sustainability” generally in three layers: First, with market-oriented approaches, commercial banks support corporate customers to carry out energy conservation, emission reduction, and low-carbon transformation, and assist corporate customers to achieve sustainable development; second, commercial banks develop new business fields therein to realize new business growth so as to gain more business opportunities and benefits and achieve their own sustainable development; third, in the interaction of banks and enterprises, commercial banks perform their social responsibilities via market-based means, thus representing desired social and environmental benefits and pushing the sustainable development of the entire society and economy.
News China: In your opinion, what difficulties and problems are there still for the promotion of green finance in China? What market prospect will there be in the future? How can a win-win result with both commercial and environmental effects be achieved?
Liang Pingrui: Now it has been generally agreed to develop green finance in the banking industry. Nonetheless, the green finance of most banks remains at the initial stage at present, and there are some restrictive problems: First, at the level of macroeconomic policy, it is a systemic project to develop green finance, and the government should construct a good policy environment to encourage financial institutions to get involved in investment and financing activities in the fields of energy conservation and emission reduction. Next, at the level of regulations and supervision, to develop green finance requires the regulatory authorities to lend vigorous support and further issue differentiated regulatory and incentive policies. For instance, to list the green finance loan separately (namely the green finance projects are not subject to the restriction of current credit scale); to encourage banks to issue special financial bonds for the business of green finance; to make discount for green finance project loans granted by banks. At the level of technologies and talents, as an emerging market area, banks only have a limited understanding currently, and in general, are not be familiar with the process, technical specifications and commercial models for energy conservation and emission reduction, lacking reserves of relevant professionals.
Energy conservation, emission reduction, low carbon and environmental protection are the general directions and trends for China's social and economic development. In the process of transformation toward low-carbon economy, a large group of conventional industries face rebuilding and upgrading and a large number of emerging industries grow flourishing, containing massive financing demands. It is estimated that to fulfill the development objectives for energy conservation and environmental protection proposed in the “12 th Five-year Planning”, China at least needs to invest trillions of RMB in energy conservation, emission reduction, and development of renewable energy, which provide a historic opportunities for the development of green finance. Therefore, we believe that, boasting a broad prospect, green finance is not only an unavoidable trend, but also a big market.
As far as a bank is concerned, it should follow the trend of economic and financial development, adapt to the development tide of green economy, accept the concept of green finance, grasp the opportunities that traditional industries carry out upgrading and transformation of energy conservation and emission reduction and development of the strategic emerging industries, establish its long- and medium-term strategy for the development of green finance, balance the benefits to develop short-term businesses and those of long-term strategic development, and keep intensifying its support to low-carbon economy, recycling economy and ecological economy.
“Input” and “Returns” under Equator Principles
News China: IB is the only “Equator Bank” in China till now. What were the motives for IB to become an “Equator Bank” originally?
Liang Pingrui: For IB, there are profound internal and external motives to adopt the Equator Principles.
At a very early time, IB began to think and study how a bank can facilitate the social sustainability with its own business behaviors and achieve its own sustainable development. In 2003, IB introduced the International Finance Corporation (IFC) as a strategic investor to study, learn from and absorb the philosophy of sustainable finance advocated by IFC step by step and combine it with our own practice. In 2005, IB and IFC worked together to design the energy efficiency financing project and (upgraded into energy efficiency and emission reduction project later), innovatively introduced the loss-sharing mechanism, and took the lead to release energy conservation and emission reduction project financing, making the first “green” step of the Bank.
The successful practice of energy efficiency financing project made us realize that this market-oriented business operation model could not only perform the corporate social responsibilities effectively and promote the development of the energy conservation and environmental protection cause, but also has successfully tapped the emerging energy conservation and emission reduction financing market and opened new rooms for the Bank to explore new market opportunities and develop and foster new core customers. Sustainable finance is not merely a concept nor a flubdub, but a new blue sea of business.
During the process of exploring the practice of sustainable finance, we get to know the Equator Principles, the framework and tool generally adopted around the world for managing environmental and social risks. Such framework and tool are needed in the domestic finance field. Although it will increase some costs in the short run to adopt the Equator Principles, we judge that the returns brought by the principles in the long run will far outrun the costs. In addition, the brand building both at home and abroad is quite essential.
From the adoption of the Equator Principles in 2008 till now, the environmental problem has become increasingly protruding and it has increasingly become a focal point both domestically and internationally to pay attention to climate changes and achieve sustainable development. The state pays more and more attention to the social responsibilities of the banking industry and the management of environmental and social risks, which further reinforce the confidence of IB in implementing the Equator Principles, developing green finance vigorously, and serving the development of green economy.
News China : What difficulties and obstacles did IB encounter during the implementation of the Equator Principles?
Liang Pingrui: As the first and only “Equator Bank” in China, we indeed encountered some difficulties at the early days in promoting the Equator Principles.
Inside the Bank, the “Equator Principles” were not a concept familiar to the employees of IB at the beginning of adopting the principles, and in particular, the front-line employees at branches knew very little about the principles. Misunderstanding existed across the entire bank. Quite a number of employees regarded the Equator Principles as secondary environmental impact assessment or stricter environmental protection requirements put forward to customers, and they were worried about that the Equator Principles would impair the business development. In order to relieve the doubt inside the Bank, the Head Office organized dozens of internal training to popularize and publicize business knowledge, stressing that to adopt the Equator Principles was not to restrict business development, but to improve the risk management level of the Bank and achieve better sustainable development. Meanwhile, the Head Office carried out all-round guidance during project proceeding at branches, and finally arrived at a consensus across the entire bank.
Externally, after all the Equator Principles put forward higher requirements for borrowers and resulted in the increase of customer cost, so some customers found it hard to accept and understand the principles. As a result, our customer resources got lost to some extent. For this reason, IB called together large customers particularly to organize special workshop on the Equator Principles, so as to popularize the function of the principles in assisting borrowers to manage the environmental and social risks and introduce the successful experience of multinationals both from home and abroad in the management of environmental and social risks. Meanwhile, we visited the project sites of customers to learn about environmental and social performance of relevant projects, popularize the knowledge of the principles, and correctly promote among customers that the principles are the ideas, tools and methods to help them improve their management of environmental and social risks in their projects. With full exchange and communication, an increasing number of customer have understood and accepted the Equator Principles. In December 2011, the first project following the Equator Principles voluntarily in China (Jingbian Xilan Liquefied Natural Gas (LNG) Integrated Utilization Project in Shaanxi) was implemented successfully in Xi'an. The success serves as a sign that the Equator Principles which are widely recognized in the world now gain more extensive recognition in China, and it also signifies that Chinese enterprises are shifting from following the Equator Principles in a passive way to seeking risk management based on the principles in an active way and the practice of sustainable finance makes further progress in China.
News China: If we say that the price of promoting the Equator Principles is increase in cost and obstacle in business promotion, then what are the returns?
Liang Pingrui: In my opinion, I think that the returns are mainly seen in the following aspects:
First, we have established a unique green banking brand. As the first Equator Bank, IB is the first bank developing the business of green finance in China. Equator Bank has become one of the most eye-catching business card of IB, helping the Bank to establish a corporate image that protects ecological environment proactively and dares to assume social responsibilities.
Second, we have opened a brand-new blue sea of business. In recent years, taking it as a favorable tool for creating differentiated advantages and developing new business opportunities to serve energy conservation and emission reduction and observe the Equator Principles, IB has kept innovating in green finance products and services and developing green finance vigorously.
Third, we have prevent environmental and social risks in an effective way. IB has screened out superior projects with the Equator Principles, the risk control tool widely adopted by international financial institutions to improve our capacity to control the environmental and social risks and alleviate or mitigate the environmental and social risks in projects, thus refining the Bank's system for controlling environmental and social risks and relevant business process, and forming a well-established environmental and social risk management system.
Fourth, we have won the high recognition of China's financial regulatory authorities. With years of exploration, IB has accumulated a great deal of precious experience. We have invited by the China Banking Regulatory Commission (CBRC) to join the formulation of relevant administration rules regarding green credit statistics, really becoming an industrial forerunner and rule formulator.
News China: If some enterprises of high pollution, high energy consumption and high water consumption are screened off due to the adoption of the Equator Principles, would it restrict the business expansion of IB?
Liang Pingrui: First, the Equator Principles are not a simple screening mechanism, but a kind of proactive management and service behaviors of banks against the potential environmental and social risks in project financing. By examining the environmental and social risks, carrying out classified management over projects, and laying down corresponding action plans and embedded commitment clauses, banks may improve the awareness and management level of enterprises for environmental and social risks, urge and assist them to prevent and avoid environmental and social risks in a proactive way. Next, IB has accumulated rich financial service experience in the field of energy conservation and emission reduction, and formulated a range of energy conservation and emission reduction financing products and services targeting at the energy conservation and emission reduction needs of those enterprises characterized by high pollution, high energy consumption and high water consumption. We will lend active support for the enterprises mentioned above to implement their technical transformation projects for energy conservation and emission reduction, and help them fulfill their energy conservation and emission reduction objectives, eliminate backward production capacities and achieve industrial transformation and upgrading. Last, IB has, adhering to the guidance of national industrial policies, gradually compressed and exited from those projects involving out-of-date production capacities that have been restricted and eliminated explicitly in the national industrial policies, prohibited itself from getting involved in those projects characterized by high pollution, high energy consumption and high water consumption, which fail to meet the national policies, reach the environmental protection standards and go through all examination and approval formalities.
As proved by our years of practice, not only wouldn‘t it become an obstacle for the business development of IB to adopt the Equator Principles, but it has driven and boosted the sustainable development of businesses of the Bank. In the process, there are quite a number of cases passing the Equator Principles that serve as tangible examples that IB helps customers practically to identify, manage and prevent environmental and social risks. For instance, in a paper-making project, IB put forward the requirement to build an accident emergency lagoon in the process of examining the project in light of the Equator Principles, and took it as an important clause in the action plan. After the enterprise built the accident capacity pool as required in the action plan, it avoided the losses due to shutdown for rectification in the subsequent environmental protection inspection, so its production was not affected. The enterprise thus has a deeper understanding to the Equator Principles.