Industrial Bank Explores Green Finance, Three Areas Make “Carbon Finance” Roadmap

The corporate sustainable development financial service plans we provide aim to perfectly combine “low carbon economy” and “green finance” instead of just regarding the support of corporate energy-saving and emission reductions as a form of public welfare. On May 28, during the 2nd Pearl River Delta Business Leaders Summit and SMEs Service Day Green Economic Forum, Meng Shaoling, vice GM of the Industrial Bank Corporate Finance Department, stated that green finance is regarded as an important leverage for low carbon economic development. Supporting energy-saving and emissions reduction through financial means and exploring a green finance roadmap represent a significant strategic layout for the Industrial Bank’s future development.

As the low carbon economy continues to become a global concern, green finance has become an active area of sustainable finance instead of a mere social responsibility.

It has been reported that the Industrial Bank's Sustainable Finance Center is currently the only sustainable financial institution among domestic commercial banks. The center has four business teams, namely a project financing team, carbon finance team, technical service team and research team.

Exploring Three Areas of Sustainable Finance

21st Century: As the first bank in China to launch green credit products to support energy-saving and emissions reduction in China, and the first bank to publicly commit itself to the Equator Principles, how did the Industrial Bank connect with sustainable development?

Meng Shaoling: Well, the banking industry needs to take on the challenge of energy-saving and emissions reduction as well. Over the past five years, the Industrial Bank has committed itself to financial innovation, and has supported exploration and action in regard to energy saving and emissions reduction.

Since 2005, we have been first-movers in four areas of sustainable finance, which include the first to launch energy efficiency financing in China in May 2006; launching the first carbon finance transaction in 2007 to help boost pricing capability and maximize the utilization of environmental energy and resources; the first to publicly commit to the Equator Principles in October 2008 and the first Equator Bank in China; and the first to set up a Sustainable Finance Center, which we did in Beijing in January 2009 to provide professional services and centralized management for energy saving and emission reductions business nationwide.

In regard to sustainable finance, there still isn’t a universal definition in China or abroad. But we think that its core is to support clients’ sustainable development with financial methods and thereby improve the environment.

It has three major features: the first is sustainability, which includes clients’ sustainable development and the sustainability of financial institutions, business and products; the second is that its financial, which means that sustainable financial business also needs to comply with financial logic and operation rules; the third is the positive feedback that finance provides to society and the environment, which is reflected as the active action of financial institutions, supporting clients’ sustainable development with financial methods and improving social and environmental benefits, and not just considering avoiding social and environmental adverse factors when carrying out financial transactions.

So to speak, sustainable finance originates from green credit, but its connotations are far much deeper that those of green credit.

21st Century: low carbon economies are characterized by long investment cycles and high risk. Which industries constitute the Industrial Bank’s sustainable finance lending priorities?

Meng Shaoling: In practice, the Industrial Bank’s sustainable finance has three categories: energy efficiency finance, environmental finance and carbon finance.

Energy efficiency finance refers to a kind of financial service that aims to save primary energy like coal, oil and gas, and secondary energy like electric power and steam by means of updating equipment, optimizing design and recycling energy.

Environmental finance refers to a kind of financial activity that serves to improve environmental quality and reduce emissions. Currently, it aims to cut chemical oxygen demand emissions, sulfur dioxide emissions and treat solid waste.

Carbon finance is a kind of financial service that serves the reduction of greenhouse gas emission. Currently, it aims at CDM major participants and provides financial services for them.

The three areas just mentioned are mainly distributed in electric power, chemical industry, steel, cement, transport, water affairs and environmental protection, as well as the ten key national industries.

In addition, according to different client groups and project types, we have designed and are offering a “7+1” financing mode, which includes technological upgrade project financing mode to conserve energy and cut emissions, CDM project financing mode, energy saving service provider financing mode, buyer credit financing mode for energy saving and emission reduction equipment providers, yield increase financing mode for energy saving and emission reduction equipment manufacturers, financing mode for public utilities service providers, financing lease mode and non credit financing mode.

Green Finance is a New Kind of Profit Mode

21st Century: In the future, what will be the position of the Sustainable Finance Center in the Industrial Bank’s strategic layout?

Meng Shaoling: the Industrial Bank’s commitment to sustainable finance is not an impulse, but a rational choice based on market analysis. It is a new opportunity to actively pursue business development. We think the development of the green economy will bring about new business opportunities. Only if the bank chooses the right direction and seizes opportunity can it achieve renewed growth.

As a bank that has committed itself to the Equator Principles, we hope that our credit assets in sustainable finance business will be able to account for a rational proportion of the total credit assets of the bank.

21st Century: In 2006, due to the fact that green credit was rarely spoken of, when the Industrial Bank launched green credit, it came under a great deal of scrutiny. At that time, the Industrial Bank also indicated that green credit would only account for a small portion of business. Why is its position rising higher and higher today?

Meng Shaoling: In the first place, people may think that green finance is just a move a business takes to fulfill its social responsibilities. But we think that it also concerns a business’s sustainable development and its core competitiveness.

The Industrial Bank’s explorations over the past few years actually combine the fulfillment of social responsibilities with the improvement of financial products and service through innovation, and have created a new commercial mode and profit making mode. As of the end of this March, the Industrial Bank had issued total energy saving and emissions reduction loans of RMB 24.007 billion, with good credit quality all round. According to incomplete statistics, the energy saving and emissions reduction projects that the Industrial Bank has supported are expected to be able to reduce the consumption of coal by 13 million tons per year, emissions of carbon dioxide by 36 million tons, emissions of COD by 0.6 million tons, emissions of sulfur dioxide by 2,400 tons, comprehensive utilization of solid waste of 2.8 million tons and decreased water consumption of 18 million tons. Wherein, these greenhouse gas emissions reductions equal the shutting down of eighty-three 100 megawatt thermal power stations.

China Should Establish its Own Transaction Mechanism as Soon as Possible

21st Century: Energy Contract Management (EPC) faces technical challenges and financing difficulty as well in China. Does the Industrial Bank have any experience in this area?

Meng Shaoling: We have some cooperation cases in this field. For example, the energy saving service provider mode (EMC) aims to sign contracts for energy saving services with clients and provide a set of energy saving services like energy auditing, project design, project financing, equipment purchase, project construction, energy saving volume confirmation and guarantee for clients, and then recoup investment and gain profits from clients’ energy saving benefits after modification. While in practice, some EMC just want to sell equipment and hope to recover costs and gain profits in one go. Then, the bank lends to those enterprises which require technological renovation for the purpose of energy conservation. The profit gained after renovation is paid to the bank in several batches, so that relevant responsibilities are shouldered by the bank. This breaks away from EPC’s original concept.

21st Century: That is to say, the risk is shifted to the bank.

Meng Shaoling: This borrows the method of EMC contract energy management, which in fact is not EPC.

However, even if we adopt this mode, we also have relevant products – seller credit mode. For example, there is a business specialized in the manufacture of energy-saving boilers. The factory that applies boilers is its buyer. The bank loans to the factory, but the boiler manufacturer needs to offer repayment guarantee.

In regard to carbon finance, currently, the carbon transactions are operated mainly through the CDM mechanism. It is still not clear as to how to continue the carbon transaction system after 2012. So I think China should introduce similar a CDM mechanism and conduct carbon transactions domestically.

21st Century: That is to introduce the internationally common carbon transaction mechanism?

Meng Shaoling: Right. Domestically, there are differences in emission reduction costs in various areas and organizations. We can apply market transaction mechanisms to realize the minimization of overall emission reduction costs and form a domestic transaction mode and standard.

Suppose the emission reduction task is broken up locally every year. For example, some province’s GDP growth shall match the carbon emission volume. Then make a comparison at the end of the year. If the province completes the GDP's expected goal, and actual emissions are lower than the expected index, then this extra part can be sold on the market. If other provinces exceed their expected emission limit, they can purchase the difference from this province. Applied broadly, this mode could be applied to each enterprise. (source: Sohu)