The 5th Anniversary of the First Equator Bank in China
On October 31, 2013, Industrial Bank (IB), China's first Equator Bank, saw the 5th anniversary for the adoption of the Equator Principles. Without any commemoration, the whole bank was busy improving the management system for the Equator Principles and revising relevant regulations. Two months later, namely February 1, 2014, the third edition of the Equator Principles, which serve as the benchmark criteria for assessing environmental and social risks in the management projects of the finance industry around the world, will be formally implemented in an all-sided manner.
The Equator Principles apply to the financing of all new projects with a total project capital cost reaching USD 10 million or more, or existing projects which have substantial impact to the environment or society due to expansion or reconstruction, with a view to guiding financial institutions to carry out overall assessment over possible impact of projects to the environment and society in providing financing and promoting projects to play a positive role in environmental protection and harmonious development of surrounding community with the help of financial leverage.
Since June 2003, the voluntary principles have been adopted officially by 78 financial institutions including Citibank, HSBC Bank, and Barclays Bank, with businesses covering more than 100 countries and regions. The financing volume of projects observing the principles has accounted for 70% of the total project financing volume in the emerging market economies around the world.
As a pioneer of the Equator Principles in China, over the past five years, IB has left to the outsiders a perseverant and steadfast profile that is daring to a trailblazer.
A Chance Leading to the “Equator Principles”
IB's adoption of the Equator Principles can be traced to International Finance Corporation (IFC), an oversea strategic investor introduced by the Bank in 2003. In 2005, when IB learnt that IFC was looking from a partner to carry out energy efficiency financing in China, it presented an “olive branch” on its own initiative. During the cooperation between the two parties, IB was gradually attracted by the world advanced concept for the management of environmental and social risks, realizing the responsibilities of a bank in the harmonious development of environment and society. In addition, it also appointed two environmental protection officers especially in the bank, responsible for the compliance management of environmental risks across the bank.
In May 2006, IB and IFC entered into the Loss Sharing Agreement (Phase I), jointly releasing energy conservation and emission reduction loan in China. Under the cooperation framework in the first phase, IB, drawing on the technical standards for environmental protection recognized by IFC, granted loans to enterprises and projects carrying out technical transformation for energy conservation that met the given requirements. IFC was responsible for determining the compliance of projects and providing principal loss sharing and technical assistance for loan projects. After the completion of the first phase of cooperation, IB provided the financing of RMB 890 million to a total of 50 energy conservation and emission reduction projects, not only witnessing good loan quality but also significant economic and environmental benefits. In February 2008, both parties signed the second phase of Loss Sharing Agreement, extending the cooperation to project financing in the areas including energy efficiency, new energy and renewable energy, and CDM.
The launch of the first energy efficiency financing project has built an image of forerunner in China's “green credit” for IB. With these successful attempts, IB was determined to continue exploring the green finance deeper, thus launching systemic research into the feasibility of the Equator Principles. In the process of exploration, IB carried out in-depth discussion with relevant agencies both at home and abroad such as the Ministry of Environmental Protection of China (MEP), the China Banking Regulatory Commission (CBRC) and the Environmental Protection Agency of US (EPA), and financial institutions that had already adopted the “Equator Principles” including Citibank, former ItaúBBA of Brazil, Mizuho Corporate Bank of Japan.
After carrying out in-depth research into and assessment over the opportunities, challenges, and difficulties that it might be confronted with in adopting the “Equator Principles”, the management team of IB firmly believed: although it may restrict the business scale in the short run to adopt the “Equator Principles”, it would be propitious to improve the project structure; although the stricter requirements for the social and environmental responsibilities of borrowers may lead to decrease in the customer size in a short term, it would attract more customers of high quality; although the bank may have to face to the difficulty in implementation brought by the gap between the environmental protection related specifications and social norms at home and abroad, it would be beneficial for the bank to learn from advanced experience extensively; although the bank would be subject to strict supervision of a multi-party monitoring system, it would be in favor of the bank's standardized operation; although it would increase the banking business procedures to some extent, it would be helpful to improving the bank's corporate governance.
By the end of 2007, Mr. Zoellick, President of the World Bank, asked Gao Jianping, Board Chairman of IB: “If green finance could bring profits, why don't other banks in China do it? If it cannot bring profits, why do you engage in it?” Chairman Gao answered, “It cannot bring profits in a short run and we should even run some risks, but the cause of environmental protection needs support. Banks may exert their own strong suits and make use of the credit leverage to support the cause of environmental protection. With the joint cultivation of all parties concerned, market and profits will come forth finally.” In his opinion, a bank can, no doubt, both take its environmental and social responsibilities and obtain desired commercial returns with its professional capabilities, thus realizing sustainable development. In addition, the adoption of the Equator Principles is a breakthrough for a commercial bank's performance of its social responsibilities both in terms of depth and scope.
In June 2008, the 5 th session of the 6 th board of directors of IB approved the proposal of joining the Equator Principles unanimously. On October 31, 2008, IB officially announced to adopt the Equator Principles, becoming the 63 rd “Equator bank” around the world and the first one in China.
Practicing the Equator Principles in an Earnest Manner
The Equator Principles now have been recognized by an increasing number of financial institutions as a set of scientific and reasonable principles. Requirements and methods consistent to the concept of sustainable development advocated by the Equator Principles are put forward in the regulatory codes issued by the CBRC including Guiding Opinions on the Credit Extension for Energy Conservation and Emission Reduction and the Green Credit Guidelines . China Development Bank has introduced the concepts of the Equator Principles into its businesses, and some commercial banks also indicated one after another to “keep up with the Equator Principles actively”.
While looking back, quite a number of insiders held a wait-and-see attitude when IB announcing to adopt the Equator Principles as the first Chinese bank. As the first one trying “tomato”, IB indeed has amazing strategic insight and courage.
Taking the Equator Principles as a breakthrough point, over the past five years IB has integrated models for the management of environmental and social risks into its business management system by fully streamlining its internal management system, building organizational framework, improving internal capacity, establishing internal institutional system, operating process and implementation rules, and refined some models to enriching and improving the corporate governance concept and practice model of sustainable development continuously. Just as what Chairman Gao has summarized, “ IB has developed a “green-to-gold” road of sustainability with completely reforged process from innovation in single products to reform of business model and from corporate governance philosophy to enterprise system”.
Absorbing the advanced ideas and models of the Equator Principles, IB has registered great prosperity in developing the business of green finance, which has now covered three major fields: low-carbon economy, recycling economy and ecological economy, and involved a variety of projects such as improvement of energy efficiency, development and utilization of new energy and renewable energy, carbon emission reduction, sewage treatment and water area control, reduction of sulfur dioxide emission, and recycling of solid wastes in the mainstream sectors, including energy, construction, transport and industry, etc. IB has become the bank with the broadest green finance product family and the most diversified products at home, and achieved large-scale development in the area.
By the end of September 2013, IB has accumulatively provided 2,350 enterprises with green finance based financing totaling more than RMB 320 billion, with a balance approaching RMB 170 billion. According to estimation, the projects supported by green finance could save more than 23 million tons of coal equivalents within China each year, reduce more than 67 million tons of carbon dioxide, utilize more than 15 million tons of solid waste in an integrated manner, and save more than 255 million tons of water. The emission reduced is equivalent to shutting off 154 thermal power plants of 100 MW or stopping running100,000 taxis for 32 years.
Producing Flowers after Settling Down
As a kind of soft international economic law, the Equator Principles are not enacted under the compulsion of national force, nor guaranteed by collective restrictive mechanisms of the international community like United Nations Security Council. At the initial stage of adopting the Equator Principles, IB was confronted with the misunderstanding of enterprises, and they worried that adopting these principles would increase the financing cost of projects and elevating the financing threshold. A customer once raised the question -- “We have reached the national standard for environmental evaluation, but why do you carry out relevant examinations in line with the Equator Principles? Should the environmental examinations of a bank be higher than the national standard?”
IB realized that to settle down the exotic in China and enable it to blossom, it is essential to improve the understanding of customers to the Equator Principles and to the management of environmental and social risks. Hence, it then called together large customers particularly to organize special workshops 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, the bank visited the project sites of customers to learn about environmental and social performance of relevant projects, popularize the knowledge of the principles, and 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. In addition, IB has carried out innovation in localization in a constant manner. For instance, in terms of credit procedure, it designed different flows for the examination of environmental and social risks according to the different appetites of customers for financial cost and time cost; it established an electronic system for project examination and approval to improve the efficiency of examination and approval. This also made the “highbrow” Equator Principles more accessible and easier to be accepted by customers. In their contact with IB, an increasing number of enterprises gradually realized that the Equator Principles could help them to eliminate potential risk points in projects regarding pollution, bio-diversity, land use, protection of heritage, and rights and benefits of employees, bring opportunities of development, and really realize sustainable development.
In January 2012, the first project following the Equator Principles voluntarily in China was implemented in Shaanxi. It is an integrated natural gas utilization project located in Jingbian County, Yulin, Shaanxi, and the investment in the first phase amounts to RMB 300 million. The plant area is formerly a plot of barren sand land, covering 100,000 square meters. The main process of the project is to liquefy the natural gas after purification, and key equipment is introduced from abroad. With advanced technology, the project boasts lower energy consumption and less emission of three wastes (waste gas, waste water, and industrial residue). The borrowing enterprise's parent company, Xilan Natural Gas Liquefaction Co., Ltd., is an enterprise listed in Nasdaq, with a high international vision and standardized development model. As learnt by the reporter, originally the project did not fall into the category applicable to the Equator Principles. As a self-conscious act to promoting the Equator Principles, IB Xi'an Branch mentioned the principles when planning the special financial service solution for the enterprise. Little did the branch think that it would excite the interest of Xilan. “We thought it was a good thing when knowing the Equator Principles for the first time,” Board Chairman Ji Qin'an of Xilan Natural Gas, Inc. said, “The principles advocate green development. If all of us do this way, our environment will become better, and we can leave our descendants some rooms. Therefore, we are willing to make bold attempt.” Pursuant to the Equator Principles, IB helped Xilan to formulate nearly 30 suggestions on the improvement of environmental and social performance in many aspects including occupational health and safety, pollution control, salvaged materials, community engagement, and emission of greenhouse gas. In addition, drawing on good practices in the world, it provided a range of construction schemes. Finally, the project achieved both economic and environmental benefits in the areas of improving the city's ecological and environmental quality, increasing the city's economic strength and employment, adjusting product structure, and optimizing the supply methods.
Just as what President Li Renjie of IB said, by promoting the Equator Principles, IB has, on the one hand, achieved overall self improvement in the areas including corporate governance, risk management, business process, and technical system, and taken a more scientific and sustainable development road. On the other hand, the principles have also thrown influence to business concepts and models of the market and customers, helped the social and environmental rules to get further popularized at the corporate layer, and thus promoted the sustainable functioning of the entire social economy.
Maybe some figures may explain how far IB has gone on the road. By the end of September 2013, IB has examined the applicability of 774 projects to the “Equator Principles”, 180 of which were approved as projects applicable to the financing based on the “Equator Principles”, involving 176 customers with a total project investment of RMB 270.9 billion.
Voice of China
2013 is the 10th anniversary for the birth of the Equator Principles. In November 2013, the Global Equator Banks Conference will be moved to Tokyo, Japan from Washington, US where the conference has been held for nine years. The suggestion to move from the continent of America to the continent of Asia was put forward in a strategic development proposal jointly submitted by IB and other Equator Banks from Asia and the Oceania.
As learnt by the reporter, other suggestions are also put forward in the proposal, e.g. to pay attention to and facilitate the participation of Equator Principles Financial Institutions in different market economies in affairs related to the principles and to appeal for promoting financial institutions in the emerging economies to adopt the Equator Principles and exercise their discourse power. This is also a basic principle that IB has always advocated and practiced constantly. Since 2008, besides “preaching the principles” at home in a persistent way, IB also actively got involved in the international community upon the invitation of IFC, leaving footprint in the emerging market economies including Vietnam, Thailand, and Mongolia. Through sharing experience and exchanging learning, the bank has established a standing and in-depth interaction with other banking institutions. In August 2009, the green credit delegation of Vietnam consisting of six commissions and ministries (including the State Bank of Vietnam, the Ministry of Natural Resources and Environment and the Ministry of Finance) and main commercial banks paid a special return visit to IB, attesting its demonstrative effect of IB by adopting the Equator Principles among emerging market economies.
In this June, the Equator Principles accomplished the second revision. The new version extends the coverage of the principles to corporate loans and bridge loans related to project, adopts more well-established standards and tools for the management of environmental and social risks, and puts forward new requirements for borrowers. For instance, all projects must report their levels of greenhouse gas emission, and must get the consent of original residents which may be under influence. Meanwhile, the new version further improves the practicability and authoritativeness of the Equator Principles as the “gold rules” for the financial industry to manage environmental and social risks. As the only Chinese Equator Bank, IB participated in the formulation of this international sustainable standard in an active manner, got involved in discussions and voting on revision in the whole course in various ways, and proposed reasonable suggestions on the revisions of the Equator Principles considering different market situations. Not only did the bank express the voices of financial institutions in emerging market economies including China, but demonstrated its global vision and leading social responsibility consciousness as a mainstream bank of China.
Relying on its steadfast implementation process of the Equator Principles and all-sided innovation in concept and practice, as well as the active boost lent to the sustainable development of emerging market economies, IB has gained the attention and recognition of the international community and all circles at home. It is the only bank at home that has been nominated for the “Sustainable Banking Award” jointly sponsored by the British Financial Times and IFC for four years consecutively and the bank that has won the runner-up prize of the “2007 Sustainable Deal Award” and the champion of “2009 Sustainable Banking Award”. It ranked No. 105 among the Global Top 500 Green Enterprises released by Newsweek of US, and No. 1 in the “Annual Report on China Green Credit” announced by the Policy Research Center for Environment and Economy of the Ministry of Environmental Protection and the “Green Credit Performance Ranking of Listed Chinese-funded Banks (2008-2011)” issued by the ten non-governmental organizations including Green Watershed. Meanwhile, it also received a number of other honors in succession, such as the “Best Green Bank Prize”, the “Outstanding Nature Protection Supporter Award”, the “China Baosteel Environmental Excellence Prize”, the “Best Corporate Social Responsibility Institution Award”, the “Carbon-value Social Citizen Award” at the Fifth World Economic and Environmental Conference, and the “National Collective Role Model for Emission Reduction during the 11 th Five-year Planning Period”.