GREENING . BANKS = =Foreword Over the course ¢# 2012, IFC joined hands with bank regulators from Asia, Aivics and Latin America te launch 3 powerful new platform for tha davelopmentof national environmental and social risk-manageman: guidlines for fina institutions. The Sustainable Banking Networ facilitating innovetion and teguletery edvences by sharing knowledge and technical resources. ‘The momentum for this important initiative cema from the first International Grean Credit Forum hosted by IFC and the China Banking Regulatory Commission (CBRO in Beijing in May 2012. Regulators from ten emerging markets, supported by senior banking executives from China and clsawhora, confirmed a growing consensus that sustainable banking practicas are sound businass practices. Asthe largest multilateral source of debt and equity finance for private enterprises in emerging markets, IFC, part of the World Bank Group, is also @ leader in applying environmental, seciel and govetnance {ESG) sustainability standards so ansura tha pro‘isability and intagrity of our invostmants, Through our sustainabla finance journey aver almast two decades, IFC hes worked, actively with financial institutions in emerging markets to create business opportuni strengthen landing portfolios through sust: banking practigs. ‘We have found time and again that sustainable banking protects banks assets and opens up naw financial product araas and markets. It alsoimproves resi times nce during tough economic on the envitonmant ata just some of the stiatagies that also yiold financial raturns. However, banks require 2 level playing fisld before they can make the leap to new practicas and managamant syscams. H dor sight, the retuins to banks a nificantly anhance the compatitiven: narging metket acon jety could sof A few bank regulators have tl crezte appropti to support adoption by local banks. China and Bangladesh have isued groundbreaking nthe lead to frameworks ant austainable finance polices in recent years Brazil has ich array of policiesin place and ‘many lessons to shara, is very clear from the aatky pioncars that thar is no one-size. fits all approach. But thers is much to ba lzamed fom a community of paers, sharing their axpetiances end offering tools and strategies thet have worked. that in mind, IF sharing what w the exchange of knowledge committed to va laarnad and v2 facilitate id innevative approaches among emerging market bank Fegulators, We are proud to play a coordinating tole and suppert the Sustainable Banking Notwark te help build capacity and partnerships. This eBaek provides an exciting snap shatp ot how tegulators are already engaging with the new ftonticr of sustainable banking and developing nationally appropriate modal. tis among the first of many tools to fadlizate knowledge sharing, and collaberative learn Karin Finkalston Aria Pacific Vice Presictent, (FC Video: Highlights of the Ist Intemational it Forum, Baljing, 2012 Gran Towat the video on YouTuba, dick hers,Table of Contents 1. About this eBook 6 4, China's Regulatory Experience with the Green Credit Palicy 2 Context and Key Messages 8 4), Aa Overarching National 2:1 The Business case For strategy sustainable Finance 8 42. Interagency Collaboration 22 ARolefor Banking Regulators @ 4.3, Provincial Regulatory 22 OutcomesAnd Next Steps 10 Experiences 44, Innovatfon By Banks 3. Overview of Emerging Market Regulatory initiatives 2 5. Equator Bank Experiences 2.1, Bangladesh 2 el, About the Equator Pringles 2, araall 2 5.2, tau Ble Bank, Brazil 3.3, china 14 5.2. Standard Bank, South Atco 24, Indonests ‘a 5.2, Chine mcustrel Bank 28, Korea “ 36 Nigeds i 6. Perspectives of international a> thelbnd ‘s Grganizations 28, Vietnam 5 7. Useful Resources Sustalnable Banking Network for Regulators 6 16 8 1 20 Ey 2a 24 35 28 28 a0 a01. About this eBook (On May 16-17, 2012, the Chinese Banking. Regulatory Commission (CBR) and IFC, a member of the World Bonk Group, jointly hosted the first Incetnational Grean Cradit Forum in Beijing, I: was the first time high-loval reprasancatives of banking ragulators from emerging markats had gathered to discuss gond practices in sustainable finance Tha avant attractad around 300 participants from 16 countrias, including Bangladesh, Brazil, China, Canade, India, Indonesia, Japan, Korea, Lacs, Malaysia, Mong: South Attica, Russia, Thoilond, end Vietnam. Among them were senior representatives of banking regulators from 10 countries, senior executives from tha top 25 Chinasc banks, haads of 36 local branches cf the CBRC, and 13 banks from 10 counttias outside China. Through this eBook, IFC and CBRC aim to provida an cverviow of the prasontations and discussions that comprised tha two-day avant and to share thoughts on the next steps for banking regulators. We have abo included some notable highlights of natianel regulatory inti subsequent 0 the Forum. sivas With more than a decade of exparianca providing technicel assistance to emerging market banks and regulators. FC addresses sustainability issues through a dual approach: i} seeking investment opportunities, and ii) creating robust risk managament systams. IFC's support to CBRC and China’s Minisity of Envitonmental Protection was the first exampla where IFC's Performance Standards and the World Bank Group Environmental, Health, and Safety Guidelines served as intarnational refsrences for national policy developmont in an emerging market. “Sustainable finance and “green banking” are terms that describe the integration of environmental and social (£85) considerations into mainstraam bani intagration reduces beth reput: risk in banks' lending portfelios. It else opsns up naw lending opportunities that benefit the environment and society. ‘The first lnzzrnational Grasn Credit Forum explored efforts by China and other emerging markers to promote "green economies through banking policies, regulations and capacity building for banks. Participants agreed that sustainability is both a business challenge and opportunity for the financial saccor, Through this eBook, we hope to support ‘ongoing sustainable banking efforts by emerging market regulators and inspire initiatives in other countries. This publication is ‘ong of the first knowledge products to support the nawly establishad Sustainable Banking Network for Regulators, (See “Resources” section for more informa ion}2. Context and Key Messages 2.1. THE BUSINESS CASE FOR SUSTAINABLE FINANCE A.growing number of financial insitetions ‘worldwide ate adopting policies, systems and landing practices to raduce negative private sector impacts on the environment and ciety. They are doing so to cnsura that econamic developmant dogsnot come at the cest of human wellbeing, natural resources and vital ecosyssms. They are ‘so protacting their landing portfolics from business risks and identifying new business opportunities offerad by the graan economy. A.numbar of global challlangas have rainforcad ‘the urgency for the financial secter 42 play 2 proactive role. As each of the conference Kaynote speakers pointed out, the effects of climate change, natural resaurce constraints, sevara pollution, growing populations, and shreats 4a food security are just some ef ‘the converging pressures affecting national economigs. These challangas require a change in howe the private sector plans and collaborates to davalop solutions for the coming decades. As copital providers, banks are ideally placed te help the private sector respond to sustainal risks sooner and mora effectively. This in-tuen reduces losses in banks’ own lending portfolios dus to failure of businesses 0 adapt to naw sconamic tealities, manage stekshelder relstionships, and comply with regulations. Maintaining good environmental and social (E85) management systems con therefore help protect ‘she assets of financial institutions. It can also help ‘thom navigate difficult ecenomic conditions. IFC's 15-year engagement with emerging market # nancial institutions has identified the following key benefits when banks adopt E85 managamant systoms': + Lowar cost of capital + Improved quality of lean portfoli Naw business opporunitias(a.g. renewable energy, clean technology, underserved markets} Better teers Better ratings by analysts + attracting funds or intemational finance institutions that support E&S activities + Recognition and awards + Improved brand value 2.2. AROLE FOR BANKING REGULATORS. Banking regulators at the first International Green Credit Forum egreed susteinability is a global trend and sustainable finence a businass imperative. Susteinable nance was recognized as both risk management and business opportunity. Case studies and experiences shared by banks and regulators confirmed that: ‘+ suscainability adds measurable value to banks" porticlios "Fe arch 20071 “Banking” SstainabilyFnarcvg crvvcn mara aeacal Qopertuciesin Enesco Marker+ Sustainability protecis banks and economies ‘against risks and losses Yt finaneial institutions face numerous obstadas se adopting sustainable finance practices. Among, ‘shesa is tha naad for laval-playing field for bank compatition, Banking regulators therefore play @ vitel role in guiding and supporting, banks to adopt new and innovative practices. In collaboration with other regulatory agendas, they en cieats i) 2 sound policy context, anc cffactiva implantation framework to halp local ‘nancial institutions prepare for the tansition to sustainable banking practices, Several emerging markers have heen fiest- rovers in sustainable finance. China, Bra: Bangladash, in particular, provided detailed descriptions of their experiences and lexans foamed. vietnam, Indonasia and Nigaria ara abso in tha procass of establishing green cradit, Frameworks for their national economies. Subsequent to the Forum, Nigavia launched the Nigeria Sustainable Banking Principles, and ‘The partisipating regulators identified the Jellowing success factors 20 develop =Fective policies and implamentation frameworks for sustainability finance: ‘+ Establish a logal systam and supervision mechanism in coordinatien with other regulating agencies + Ovarsez tha implamantation of green ae: and provide capacity building for banks + Develop guidalinas or principles for grzen banking, including secter-specifie guidelines. + Establish monitoring and supervision machanisms to cnsura consistangy + Provide economic incentives te promote lending to sustainable projec:s end businesses © Geete en environment fer collective learning fameng stakeholders in the green financial sector ‘They oso identified challenges and opportunities going forward: + Improve availability and access to information about the E85 performance of bewewers Continue to build the capacity of banks around £85 management + Ensure ongaing regulatory drive to support = rational transition to sustainable finance + Develop technical resourcas 0 support banks = Agraa on definitions of typas of sustainable finance + Provide more information on opportunities and business models far sustainable finance =) Messue the impact af green credit ap in taims of banks’ portfolios and contributions tothe economy The participating regulators idemified a nced for common standaeds or thames that could guide them in policy davelopmant and implementation. Three thames ware explored in greatar depth: J) DATA COLLECTION (One of the main barriers or implementing green credit policy is that the bankshave little of no access 10 companics’ E&S parformanca information. Most countios hava not bull: tha necessary database ofcompanies envifonmental and social records, ‘thus the curcent information is too limited for banks to analyze the borrower's E&S risks oF rogulation violations. UW) MEASURING IMEACT ‘After implementing sustainable finance policies, itis necessary to measure the impact of implementation and strengthen Regulators should 258055 the influance and range of the policy, the experience learned during the implementation, and ways to improve. For the commertial banks adopting the green credit palig, requlaters should measure the extent, @pabillty and outcome of implamenzation, and analyze geod practices as well as problems exposed duning the process, ience Ui) PROVIDING MARKET INCENTIVES some commercial banks peinted cut that if they ‘eject polluting companies, they may lose certain “premier” customers in the short term and reduce revenue. Mereover, most companies in ‘the envitonmental-protection industiies are small end medium enterprises and startups with fewer assets to use as leverage. Banks usually do not drant Ioans to these businesses due to the high fisk and low yetum on investment. Therefore, governments should continue to discuss hove 10 encourage commercial banks 10 implement sustainable Finance practices through market incentives and mechenisins. 2.5. OUTCOMES AND NEXT STEPS ‘The fist International Green Credit Forum demonstrated the value of shared learning and the participating regulators rom emerging markets called for the creation of a Sustainable Banking Natwork for Regulators to assist chem i + sharing experiences = Building partnerships + Developing commen resources IFC supports the Network as a strategic and echnical partner. An initial Steering Committes for ‘the Network has been formed, consisting of IFC, BRC and Bangladesh Bank, with a view to rotating Steering Commitias members and involving othar emerging market regulators, The Nebwark's geal isto reduce the leemning curve fer regulators and halp them mare quickly design systems that work, It was also agreed that members of the Network would collaborate on developing knowledge products, with this eBook being the first of such products, Bangladesh Bank formally offered to host the next Intemational Forum. Other regulators wekomed ‘tha proposal and tha establishmant of an annual Yorurn, The next Forum will take place in Dhaka, ‘the capital of Bangladesh, in early 2013.3. Overview of Emerging Market Regulatory Initiatives Cu atae ae Peer ean aaa initiatives, induding some notable highlighis eee eos 3.1. BANGLADESH Bangladesh has developed a national Environmental Risk Management (ERM) Policy and Gree ee ee Car eee ey eaten ne Ee eae eae Dee ne ne oe eae fees een ee Ea enc} Eee eee en See ae es Se eee eet eee ea supporting taining marketing and reporting ectivities Phase (2072), which is being implemented, inckides developing secter-spe: Se ee eee ee setting up Graan Branches, and del program to educate bank clients end improve eee eee ee Core aie en ese) Se Re mee ae er ey Soe ete eee ere Se) eee ea eens Se ee eT Cee cee Perera aan ets We sae heey ean ene Cea re a et ee Seta agua Bee ete ens i ear acme ene ee cm cee ee? ee eg ees vill give permission for esteblishing a small ancl ee eee ee eee ee Pane Going forward, Bangladesh Bank hasidemtified PS eee et ees ee eed Pe he eee een er tganization based on environmental governance; See eee ate! oe ae Rene ue ed Petes eet aie ecu tects Ce ee eerie ey for Environmental Risk Rating, and £2 develep a pees eet 3.2. BRAZIL The regulatory framenack fer sustainable banking Eee eee eee ee a Peete eee eetby the Central Bank of Brazil (ACB) and relevant sectoral ministies, Since 2004, four Brazilian banks have signed the Equator Principles: rau Unibanco (2004), Banco Bradasco S.A. (2006), Banco de Brasil 5.8, (2006), and CAIXA Economica Fadaral (2009). In the mid-1990s, the first Green Protocol was launched. Through this framework, public banks comminad thamsalvas net te financa environmontally degrading under:akingsand 70 provide support to sustainable productive systams. To achiave this, the banks adapted their procaduras foranalysis and concession of credit. In 2009, Brazil's banking association (Fabraben) and tha stay fex Environment inticduced the second Green Protocol. which establishes sustzinability standards for commercial financial institutions, ‘The Ministry for Environmantand Brazilian Cencral Bank: alse established a technical cooperation agreement to menitor sacial and environmental ections ond practices in the financial system. Since 2008, savaral regulations have bacn operating in the differant natural biomes of Bras Resolution 3.545/2008 wos intvoduced for rural atedit and applies te the Amazon Biome. It requiresinancial institutions to request from borrowers, i} documentation te ensure compliance ‘with anvitonmantal laws and regulations, ani environmantal licansas and parmins Resolution 3.813/2009 aims*s avoid deforestation end prohibits the preduction af sugarcane cteps te produce ethanol and other biotuelsin new areas. ‘This resolution applies in the Pantanal and Amazon biomes ond Upper Paraguzy River Basin, mong, thar 21aas. Retolution 3.876/2010 pichibits he concession of tural cfedit to people or companies that maintai ‘workersin slavery conditions according to a published by the Ministy of Laber. The resolution applias to tha whole county. Resolution 3.896/2010 cs:ablishos2 program to reduce emissions of greenhouse gasesin agriculture, and is supported by tesources from the National Bank of Economic and Social Development. In 2011, the Central Bank of Brazil introduced a tegulation establishing procedures er the internal cepital adequacy assessment pracess. Circular 3.547 ICAAP applies ta financial institutions with, otal assets greater than 100 billion Reais. Banks Also need t6 explain how they consider the social and envircnmental damagesin their business activities when they evaluate and calculate their required capital. Geing forward, Bracil sims e establish minimum standards of sustainability theough peoposed tales oF guidelines and apply them te all financial institutions. The mein challenges ae to determine 1) to what extent should social and environmental issues be incorporated into financial institutions policies and strategies risk management and daily operations and id the apnfopriat: combination of rules ond guidelines,3.3. CHINA In July 2007, the Chine Banking Regulatory Commision (BRO, the Ministy of Ervicaraental Protzction and the People’s Bank of ching jointly launchad the @reen Credit Poliy. This high-avel policy declaration demonstrates political will to ‘encourage Chinese banks to reduce lending ta ‘anterprses with high lavas of pollution and energy ensumnption and te incraasa landing wo thoso that promote eneray efficiangy and emissions reduction, In December 2007, CBRC introduced the Credit Guidance on Energy Efficiency and Emission Reduction Lending, This guicence nate was CBRC’s immediate followup ta the Green Credit Policy to translate high-level pol bank-level implementation, In Februaty 2012, CBRC introduced the Green Gredit Guidelines, outlining the three pillats for banks implementation as G) envifonmental and social risk management, {i identifying velated business opportunities; and ti) managing banks’ own footprints, Going forward, CBRC plans to develop 2 robust monitating and evaluation system to improve darity and consistangy in policy implemantation. Spacificaly, a sot of key performance indicators ‘ill ba developed and launched, Sactor specific sechnical quidslinas ara also vaquirad to assist banks in undarstanding E4S risks, particularly for 3.4. INDONESIA In 2070, the Govemor of Bank Indonesia and she Stata Minister of Environmant signad a joint agreement on “Cosrdinating the Increased Role of Banking in Environmental Conservation and Managamant,” In July 2011, Bank Indonasiz, Gracn Radio and IFC jointly organized the first Groen Banking Conference in Indonesia, Going forward, Bank: Indonesia plans Inunch 1 Graen Banking Policy in 2072 to improve the ‘competitiveness of banks asseciated with grasn jinance; enable a level-playing field; increase the loan porvielio of green sectors; enhance banking regulation and supanision ralatad 10 environmental protection; and to develop effective incentive schemes, coordination, and gradual implamemtation of tha Graan Banking Policy. 3.5. KOREA, Kores has inivaduced a Framawark Act en Low Carbon Gresn Growth and a Five-Year Pian to implament the nation’s green growth stregy. ‘These measures allow the govemment to regulate ‘tha matkot with taxes, penaltis and incamtives, and encourege banks Yo provide low-ce! loans +6 companies with gieen projects They also cover green finance and pronicte s catbon-trading system and infrastructute for gteen finance Going forward, public funds will he allocated to startups and SMEs, and privata funds will bo targeted towards larget companies, Karea alsa ims to increase the size of green loans by policy banks socesethe Of its steck exchange,swell as in relevant ‘tutions signed joint “Twa Nigarizn banks have a 1S4. China’s Regulatory Experience with the Green Credit Policy 4.1. AN OVERARCHING NATIONAL STRATEGY Ih China, the drive toward sustzinable fin continued economic growth against resourns 2 economy grows, emphasizing greater en effici sion reduction, sank source of funding in Chi thereforea powerful tool for stimulating the green economy. Sustainable honking practices con help improve tsk management capability, while also helping to h an environmentally friendly society to hiave both societal and economic yetumns. The intveduction three main stages gtesn cradit has happaned in Greon Credit Policy la jointly in 2007 by CBRG, the Minisity of Envircnmental Protection and the People's Bank of China, 2. Credit Guidance on Energy Efficiency and Emission Reduction Lending published in Detember 2007 by CBRC Green and sustainable development has become the trend in today’s world. The financial regulatory authorities and financial institutions of emerging-market countries should promote social and economic ‘green’ development along the following five aspects: integrate green development policies ‘© national policy and strategy. 2. Develop green credit policies for banks. 3. Use effective incentives and mechanisms to guide the allocation of financial resources. 4. Incorporate social responsi green credit culture. mechanisms. WANG Zhacsing, View Chairman, China Banting Regutatary CommissionBa eer Ea a ke which CBRC provides information on environmental non-compli Cer ee ace uc aL ae eT) eer ears DS a uke ace sg Se eeu Cee ne implementation of the Green Credit Policy Benicar ih peatese sscitaers gee Be Centar innate ene tee ae ete oe a Sena Lo ae Fig et a " ( : a i3. Green Credit Guidelines introduced by CBRC in February 2012, with technical support item IFC. 4,2. INTERAGENCY COLLABORATION An important characteristic of China's approach hes been extunsive inturegency collaboration. The Chinese banking regulator has taken the lead to develop Green Credit Guidelines. These efforts included extensive engagement between bank and environmental regulators, particularly che \Miniszty of Environmental Protaction (KEP) and tha Ministry of Finance, to promote access to businasey environmental compliance infermation and ERS management expertise Tha Gracn Credit Guidelinas defina the Grean Policy along thras pillars: 1. Business Opportunities - increased support for the green, low carbon and recycling economics 2, Risk Managament ~ mitigate and veduca environmental and social risks 3. Footprint management ~ manage banks’ own environmental and social footprin MEPhas been o key player in devising the Green edit Guidelines as part of the agency's broader policy to achicve positive environmental impacts while supporting economic benefits and outcomes. MEP has also boon instrumental in contributing best practices in managing EAS iste In 2008, MEP standlated and introduced the World Bank Group EHS Guidalines as intamaticnal best praciice to support Green Credit Policy implementation by banks. MEP also provides ‘echnical expertise for continued development of technical tools to support banks’ E&S risk managament, and shares information en businses' environmental compliance. The Ministy of Finance and MEP further collaborated with four othar government agencies sh the China Clean Davelopment Machanism (CDM) Fund. In Novernber 2007, the Ministry of Finence end the Natignal Development and Reform Cammissian jointly launched the CDM Fund, which offers grants and investments 40 support activites in climate-related capacity 19, a5 wall as promotion of public awaranass. 4.3, PROVINCIAL REGULATORY EXPERIENCES: (CBRCs provincial branches have played an important tole in implementing the Green Credit Policy. Four focal CBRC branches, “tom Yunnan, Shari, Shandong and Fujian provincas, shared thair exparioncas 2t the Intameticnal Graon Cradit Forum, th order to ensure the Green Credit Policy’ offectiva implemamiation, CBRC branches naaded 10 develop provincial work plans anzbling and roquiting local banks te align with China's industrial strategy and to do win away that would reinfexce their business competitiveness Implementation ale required better coordination within the local branches to ensune effective monitoring and engagement with banks. Each branch developedmechanisms and strategies within three main pres: 1. Promating tsk management 2. Promoting innovation 3. Establishing effective monitoring and enforcement 4.3.1. PROMOTING RISK MANAGEMENT The fitst major effort has focused on promoting araan cradi: and inzernational standards among banks and sociaty. CBRC branches motivated banks to establish graun credit strategias and Fisk management systems 39 thet environmental ransidevations ats considered by management teams. For instance, guidalines ars needed for dealing with high pollution, high cnergy consumption, and high-emission businesses. Banks also needed to establish green thresholds for lending and post-loan management to dassify differant types of green credit. There has been a focus on continuous impreverent of management systems, 43. PROMOTING INNOVATION Green credit enables and tequires innevation and improvarient of financial products and services ‘te accommedate different needs. For instance, bankshave been encoutaged teinitiate loans for smnall and mire businessas and to ensure ‘hat praferential weatmant is given to eneray- reducing projects. CBRC branches have focused fon increasing green credit lending and optimizing ‘the banks’ lending structures, such 2s by supporting dean- and renewable-eneray projects, biediversity protaction and improvermant in spacifc avaas, and supporting forest. and water facilitation projects 4.3.3, ESTABLISHING EFFECTIVE MONITORING AND ENFORCEMENT An important adjustment for tha local CBRE branches has been to esieblish systems for monitoring bank practices, such as through surveys, inspactionsand reviews. Gate-keeping and swaming mechanisms have also been put in place ‘to ensure that businessas.nct in lina with enargy: taduction requitamionts went ba isucd loons. Th further requires coordination baween diffarant agencigs to ensure appropriate fines end penclties are being emicxced. Spactic data systems hava been ostablished for ‘onaray omission reduction. Examples include monitoring systams for kay sactors, Thase afforts have highlighted the ned for environmental information-sharing platforms to facilitate the werk and coordination among multiple agendas, More efficient monitoring and assessment mechanisms would in tum stizeraline the allecetion of gfeen credit by lacal banks, 4.3.4, MAIN CHALLENGES ‘The lacel CBRC brariches ides challenges they currently face in implementing the Green Credit Policy, including:“+ Accessing envircnmental information without government suppor + Difficulty launching voluntary emission: reduction projacts ‘+ topping lending te traditional high. pollution and high: emission sectors such as coal powver stations of ly + Lack of evidence fer the business case il secon immedi 4.4, INNOVATION BY BANKS Chinese banks hava takan tha lead in innovation und gruen lending products di expected to increasingly gain govarnment policy suippart in the Furuse, Th banks to align themselves with the natianal policy and further enhance their green credit offerings. For instence, the i rt volume during, the Five-Yeer Plan for energy-efficiency and emission-reduction projects will be almast 24 ‘villign yuan, and green eredit can take up a large portion of the investment. Fitst mo be better prepared to offer services and gi dionts in the graen-credit sactors, still a need and opportunity Yor regulators to provide move guidance to ssainabla financa and halp financial 4 Only China’s jusuial Bank: hes adopted the Equator Principles wo date ne henks have already begun ss: feporting the size of their graan credit lending, buta sienderdized approach is calculate the extent of grzen-credit adoption. With this in mind, CRC ispartnering with IFC on c2pi building for Chinese banks. to ecaurately thot banks will adopt green credit ding to the following steps jsion and policy on environmental -elopmen: be aligned with the bank's evn image and include implementation and accountability, 25, and responsbilitics, Banks should idantiy the major industiias thay are rostiicing or supporting, 2. Build internal copacity. 3. Integrate pracess management, dus diligence, and support fram qualified independent third parties whenThe following Chinese banks shared their experiences 2¢ the International Green Credit 4.4.1. CHINA DEVELOPMENT BANK 12 Development Bank {CDB) is 2 stats owned bank providing mid-to long tarm financing 70 larae scale infresiucure projacsin and cuside China. By the end of 2011, CDB reported that thas disbursed 726. Lillon yuan of lending (USS 36.2 billion} in support of snaray-conservation, emissicn-taduction and cevifonment protecien vith on outstanding balance of FMB 658.3 bilion yuan (USS104.5 billion), up by 33% yest-on-year Preity business focuses are utbon waste and urbancniastacwvaten treatment, industrial waste wate clean preduction, anargy oicioney, and dean anergy. DB setup an internal task fatce on the Equator inciples (EP) in 2508 and introduced EP practices inte businass processes. Tha bank has daopanad its rlationship with government departments, including an agtsement with MEP ta support key envitonmental projects, The bank will also plen project strategy in line with the 12th Five-Year Plan. With support tom WER; performance evaluation systems have been set up to monitor environmental benefits and quamify the emission reductions in 3 ‘atagoriss of environmentally friandly landing. 4.4.2. AGRICULTURAL BANK OF CHINA (ABC) Develeped from ene of China's four whey state owned banks, ABC focuses on rural financing. As of end of 2011, ABC reported that itsenvitonmentally friendly and eneray- efficiency lending portfolio exceeded 88.168 billion yuan (S14billion). According 10 ABC's 2011 Cotporata Social Responsibility Roport, cha bank also raportedly rojected 105 ere applications totaling 4.157 billion yuan, ABC has developed more than 20 sector-specific {idalinas covering all major polluting and anaray- intensive indusisias. Environmantal governance hasbeen integrated into the menagement system and respomibilities allocated to the televant departments. The ctedit departmenthas fesponsbility ‘cr policy development and oversight the opetational deparimem fer green products innovation; and the risk managemon departmant is esponsibla for E&S performance ratings. In order to conttel exposure to sectors with high environmental impacts, high eneray consumption, and surplus capacity all naw bewtowers in these sactersngad approval by tha ABC head office. Thera is a adit ceiling givan 10 heavy induswies fike iran, steel, and paper producers. ABC alse provides consulting setvices te customerson deen energy innovation. 4.4.3. SHANGHAI PUDONG DEVELOPMENT BANK (SPDB) A joint-stock bank headquartered in Shanghai, ateen-finance products and yn. Green credit has become part of SPDB's business stiategy and is viewed as bringing in gvcen-lending business oppertunities‘other than simply a comporate social esponsibility, SPDB has extended more than 100 billion yuan ($ 16 billion) to the green sector. Five productlines have been developed as part of business innovation in fesponse to the Green Credit Policy. These include energy: efficiency financing, dean energy financing, environmental financing, cetbon finance, and cmivenment|-equipment supply chain financing. SPDB's Grean Cred Products alse have 2 spadiel focus on supporting, SMEs, such as through eneray-afficiency financing, missions trading, and providing new tors of nancing to small business. in order to build pacity of staff around green credit, he annual bank-wide trainings have been developed specifically focusing on green credit policy and implementation. 4.4.4. CHINA INDUSTRIAL BANK (iB) A joint-stock bank hezdquartared in Fuzhou, IB bagn partnaring with IFC to pionacr enaray: Hlicizncy lending in 2006. In October 2008, 1B adopted the Equator Principles, becoming ‘he first Equator Bank in China and mong Asiz’s emarging markets. As of August 202, 1B feported it hes accumulatively extended Len CHatmost 200 billion aan (832 billion to mevly 4,000 green finance projects. As of Q1 2012, 37 loans applying tha Equator Principles ware disbursed by 18 branches, IB has identified two main benefits of green edit, Implementation has optimized edit pocesses and improved overell rik management. thas driven business innovation in new areas such as energy afficiancy, catkon finance end environmental finance, resulting in the launch of a seties of green-finsnce products and services under a specific green-finance brand. 1B hes developed a comporate policy on sustainable ‘finance and integrated it into its operations. & ptofessional team was establishad to daal with gtacn-finance opztations and the bank improvad its imternal EAS visk management system drawing fam international experiences. Several important shifts have occuned. I8 shifted tom pasively follwing lending ¢esifictions to proactively seeking business opparunities. Emisian: eduction services and implementation of the Equator Principlos have baan racognizad as tools for achieving compatitiva advantage and naw business fepperiunities. 18° business goals have abs swith China'snational goels ane ial reads 4.4.5, EXPORT-IMPORT BANK OF CHINA (EXIM BANK) China Exim Bank is the country’s state-owned export ctedit agency. The bank has developed E&s Risk Assassmant Guidelines to cover both domestic and international financing, with referanca te imternetionel gaed practices. Graan credit has bagn fully imicgrated into Exim bank's lending processes, including due diligence, credit review and portfolio management. Bonowers" environmental compliance records are fullyreviewed, Any environmental non-compliance leads to vetoing 67 the loan application. 44.6. INDUSTRIAL AND COMMERCIAL BANK OF CHINA (CBC) KBC is the word's largest bank by matket pitalization and has the laraes: groan credit jon China, As of June 2012, ICBC reported that its total outstanding loans to graen companies stood at 581 billion yuan ($34 billion) KEBC has 43 industial credit-granting policies, including staal and comant industrial standards. Whas developed on ERS risk feting system with Sour levels and 12 sub-categories. The four levels eve Finally, Pass, Observation, and Comection, ‘The 12 categories include Friandly | (ecological protection}, Friendly Il (clean enetay), Friendly ‘eneray-s2vings, emission-teduciion), Friendly IV Wesource uiilization), Pass LN, Observation Ll, and Corvaction Ll “Green concepts take ti promoting green credii 4.2.7. BANK OF BELING is a commercial bank haadquarcetad in Beijing with a businoss focus con SME landing, Graan credit generates naw epportunities for SME lending, such as through, the developmentef an energy-efficiency lending platform for SMEs. Bank of Beijing is one of IFC's ppartacr banks in China for snergy- efficiency loans. Bank of Baijing has also benatited from international expertise. It has worked with IFC and international investors to establish an understanding of green credit, induding took and managcmant, which furthar promots SIME gracn- ‘financing business. IFC's coeparaticn hes helpad lay a solid foundation with futura SME borrowars. ie to shape, but we need to be dedicated to ICBC has done this by establishing procedures and processes. But most importantly, we have to establi down. Education and communication of green concepts from the top w' h a green culture top- q allow every employee to incorporate green culture into their lives.” YIN Hong, ICBC5. Equator Bank Experiences Speakers étom three emerging-market Equator Banks shared prectical experiences on implememting sustainable finance. They were Banco hau BBA (Brazil), Standard Bank (South Africa) and Ghina Industrial Bank (1B). East Asia's only signatory to tha Equator Principles. 5.1. ABOUT THE EQUATOR PRINCIPLES ‘The Equator Principles ate voluntary aed visk managomant framework for determi assossing and managing amvironmemial and social risk in project finance wansactions. Thay fare adopied by financial institutions andl applied ‘where ‘otal project capital costs exceed §10 mills. 1a, Since 2006, the Equator Principlas have bean asad on the IFC Performance Standards for Environmental end Sacial Sustainability and on she Werld Bank Group Environmental, Heelth, end Safety Guidelines, Equator Principles Financial Institutions (EPFs} commit to net providing loans to projects where the borrower is ‘unabla to or will not comply with their respective 45 policies and pracadures. ‘The Equator Principles have become the industry standard for E&S risk management. Currently, 77 financial institutions (74 EPFis and ly percent af international project finance debt in emerging markets, 5.2. ITAU BBA BANK, BRAZIL Roberto Dumas Damas, H2ad of Secial and Environment Risk at Hau BBA, presented his bank's experience in implementing the Equator Principles. He also represented the EPFI Sreering Committee and axplainad how the principles add valua to banks doing business in emerging markets. He emphasized that the principles are 2 matter of ‘monitoring end leveraging stiengths rather than ceverhauling how banks do businass. The principles ara a framawork for enhanced credit analysis, ‘which bacomes 2 core part cf an institution's way. of operating, E&S factors are incorporated into the credit analysis and decision framework throughout. ‘he [tou Unibanco group. According ta Damas, the following ate some key success factars when implementing the Equater Principles and managing E&s issues: 1, Htmust be 2 top-down approech: Top. management must be aware of how important “There are several stakeholders who can impair your project, cash flow and reputation if you don't manage E&s issues effectively. These include NGOs, other commercial and development banks, and the media. Investment in E&5 issues should be part of your business plan from an early stage. This Is fundamentally about credit enhancement.” Roberto Dumas Oamas, Head of Socia! and Environment Risk, tau 8BAthese issues are for cash flow, credit analysis, foputation and image 2. Youneed to havean interdisciplinary tam: engineers, lawyers, managers, E&S experts, bankers ete. 3. Build sustainability with your dient 4. ‘Train your front and back office 5. Leam how to deal with eliant resistance Damas emphasized the need 12 raise awareness ‘mong financial institutions and diants that green edit isa business and financial epportunity and is a mazsura to protect against risk, The Equator Principles add value by providing ane language for classlying and deseibing projects. He pointed ‘out the power of stakeholders communities, Guil sociaty, nongovarnmemtal crganizations, and governments - who can blod: a projact iff is not up to pat with environmental, social and governance standards. Using uniform languag= helps faslitats and speed up the issuing o* loans. The Equator Principles ‘1a used by banks’ dionts to halp tham addres and managa E&S issues effectively. The principles E45 Risk Scraaning Tools Consideration Bf EAS risk enhance ainancial insitution’s reputation among its pears clionts, contal banks, and stakoholdars, ‘Analysts that avaluata EPH scocks know thera isa comprehensive ystem te evaluate dak Lack of consistancy in applying the Equator Principles is more often dus ta lack of capacity in applying standards. The principles are designed to be applicd in emerging markets, therefore the earlier tha emerging markets adapt these principles, the strange, the outcome, More experiences and lessons from ‘omarging market financial inscitutions will help further develop 2n affactive framework that can be used internationally. 5.2. STANDARD BANK, SOUTH AFRICA. Nigel Bock, Heed of Environment at Standard Bank Group in South Afiica, described the integrated management systam the Bank hasdaveloped to implement the Equator Peinciples, Bafota granting 2 loan, Standard Bank aveluates the E85 risks of the projec: using E&S Risk Scrsening Took. The bank identifies the extent of FAS covenenting {os eppropricte) 25‘the risks, and communicates with the cliems 10 see if thay have the cpabilitas of risk contol. During the Iaan-approval process, the bank's environmental team will conduc: a technical assassment of the projact, and carry out intemal and external dus difigonce basad on the 45 risk management is integrated throughout sha fiva phasas of tha bank's loan process. .on. boarding, if) ra-cradit commmiztze i) cdi, iv) legal documentation, and v) monitoring. 5.3. CHINA INDUSTRIAL BANK UW Biying, Deputy Manager of Sustainable Fi Division, Cemplianca Dapartmant, China Indus Bank, shared some of the success factors that his bank hes idantified 10 ensure effective edoption of sustainable banking principles. Industial Bank adopted the Equetor Principles in 2008, as the first Equatex Bank in China. One cf the preliminary steps te ensure compliance with the principles was the creation cf an internal Equator Piinciples Working Group. Eight departments of sha bank hava baon involved in this working group, including the planning and financial department end the tisk management department. Collaboration has enabled accass to new business ‘opportunities, Industial Bank and IFC signed wo operative agreements related ‘2 the China Usilty-Based Energy Efficiency Finance Program in 2006 and 2008 respectively. By the end of September 2008, Industrial Bank had extended approximately 2.8 billion yuan eneray-efficiency loansin china, 26 in 2006 and 2008 respactivaly. By tha and of Soptamber 2008, Industial Bank had axtanded mn yuesn ensigy-efficiency Bere Ee ee Pca and management has improved Standard Bank’s business practices and loan eg eee a ee ad Dae eeu eet ees Dee eat cul eat eas Reel eens Dee ae eee ae kee) Seer eet eg Ce eu a eu ear Rete is process. We help clients comply with a ee Rint ey Cea ee ent eR ea ae ere a ccs eee Cee eS aera Pe etna er eae Ree aa eee ae mer eee ek een esF 81007939 Sg SeteOrganizations One of the panel sssions during the Grasn Credit Forum focused an the perspectives of international institutions. The panelists gave their views on what they thought are major themes for sustainable ‘nance. FC, the United Netions Environment Programme Finance Inititive, WWF, the Equator Principles Financia Institutions Staaring Commiziaa and AFD (Franch Development Agung) wore raprasented at this panel. Corporate sustainability disclosure needs toimprove: According to Mengqi Cai of the United Nations Environment Programa Finance Initiative, fone cf the biggest challenges or sustainable nance going forward is that meny corporate sustainebility reports still don’t disclose surticient information on E&S parfarmancs te anable banks so make effective qraon-cradit dacisions. For instance, faw companies disclosa what proportion (of their investments will be spant on deen enetgy end enctgy reduction, Integration of green practices into manage- ment systems still needs ta improve: Banking profesianals and lending departments ssl Lack sufficient cepacity and sexyurtise to assess environmental, secial and govemance impacts ‘when issuing loans. If the banking sector does not hava tho ability to assass E5G impacts they will probabl 6. Perspectives of International decisions. There is also a lack of capacity when it comes te effectively implementing the curtent international standards and principles. How can sustainable financa ba incorporated from tha op) down sa that every level in the banking systern is involved? Green credit should be expanded in terms of. its coverage: Green credit is meant te prepare businesses anid banks fov emerging environmental and sacial visks. tis a stategy for competitivensss rather than just a community ourfeach of public relations effort. tt is also about protecting banks’ lending portfolios from unsusizinable consumption of netural resources. Water, agriculiure, and animal provection should therefore alse be covered, Agagement with stakeholders In its sertsach ta Financial institutions, WWF hes identified many chellenges and opportunities Among these is the need to engage stakeholders: Hew con the banking industy better communicate swith intemational media and NGOs about the exact nature of 2 bank's EG practices and show itis embedded in is sategy? For instance, intemational branches of Chinase banks must improve their communication with diterent stakeholders, induding NGOs lacs! communities and tha madia.