Key Points:

  •  Creates financial incentive to obey environmental regulations
  • Banks encouraged to deny extension of new loans to enterprises that fail environmental assessments
  • Loans and credit increases to be tied to environmental disclosure requirements

In a move to strengthen environmental protection, China recently adopted new guidelines to create financial incentives for firms to obey environmental regulations. The Opinion on Implementing Financial Risk in Environmental Policy and Regulation, jointly issued by the State Environmental Protection Administration (SEPA), People’s Bank of China (PBOC) and China Banking Regulatory Commission (CBRC) on July 12, urges commercial banks to use environmental compliance as a key factor in pre-loan risk assessment and discourages the extension of new loans to enterprises that fail environmental assessments.

Information disclosure requirements are a key point of the guidelines. Local environmental protection departments are authorized to investigate and punish liable parties if newly initiated construction projects are begun illegally, before approval by the appropriate authority, if their sanitary facilities are not completed simultaneously with the principal components, or if buildings are put into production before environmental inspection and approval. Relevant information will be disclosed to the public and reported to the local branches of PBOC, CBRC and financial institutions. Credit increases in any form for illegal projects will not be allowed. The opinion includes similar requirements for management and supervision of existing enterprises.

Environmental protection departments are also required to provide financial institutions with the following information:

  • Evaluation reports that document the environmental impact of loan projects before and after the loan;
  • A list of firms whose pollution emissions exceed benchmarks set by national and local government agencies;
  • A list of firms responsible for major environmental incidents;
  • A list of firms that fail to comply with, and have been punished for, violating effective environmental laws and regulations;
  • A list of environmentally friendly firms; and
  • Assessment information of firms’ environmental efforts.

Regular joint meetings among environmental protection departments, financial management and supervision departments, and financial institutions are encouraged to facilitate information sharing, designate department contacts and organize environmental policy training.

To ensure implementation of the policy, the guidelines urge financial institutions to consider companies’ adherence to environmental protection laws a prerequisite for granting loans, stating that any financial institutions that fail to do so will be penalized.

The new guidelines will allow SEPA to move from relying solely on administrative measures toward a more comprehensive set of tools including economic incentives. Earlier this year, SEPA issued a policy, “Restrictions of Approval in Some Areas and River Valleys,” which banned any construction projects other than recycling projects, in some cities in Shanxi, Guizhou and Hebei provinces until the local environmental conditions are improved to a level recognized by SEPA as acceptable. This policy has been regarded as the most effective pollution control measure SEPA has yet taken. Some PRC media reports, however, have questioned whether commercial banks will incorporate environmental assessments into their loan decisions as prescribed by the new guidelines in the face of political and economic pressure.