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11 Nov ESG Developments in Chinese Banking Industry
With the deepening of China’s financial reform, ESG has been gaining the attention of Chinese government authorities, and policymakers and they are gradually releasing rules to promote ESG among financial institutions.
Mainland ESG Disclosure Rules for Banks
The former CBRC in 2007 issued guidance demanding that major banking institutions regularly publish corporate social responsibility reports, including elements such as their CSR strategy, disclosure on the protection of rights and interests of stakeholders, the environment, etc. Later, in 2009, the China Banking Association (CBA) put forward guidelines and specified content that should be included in the social and environmental reports of banks and encouraged them to deploy appropriate internal and external corporate evaluation mechanisms and social and environmental responsibility disclosure systems. In 2013, the guidance on corporate governance of commercial banks published by CBRC pointed out that good corporate governance of banks would reflect on scientific development strategy, fulfillment of social responsibility, and well-developed information disclosure systems.
Most recently, this January, CBIRC published regulatory planning to improve development of the country’s banking industry. It explicitly required Chinese banks to set up and boost their environmental and social risk management mechanisms, incorporate ESG considerations into the credit granting process, and strengthen ESG disclosure and communication with relevant stakeholders. It represented the first time that a Chinese regulatory body required banking institutions to extend ESG management from a factor of risk management to the operation of their business.
Hong Kong’s Approach to ESG Disclosure
In comparison, as opposed to voluntary ESG information disclosures in the Mainland, Hong Kong takes a stricter approach to prompt listed companies as a whole to raise their ESG performance. For instance, the Stock Exchange of Hong Kong (SEHK) in December 2015 launched its ESG reporting guide, upgrading certain ESG disclosures from voluntary to “comply or explain”. In the latest SEHK announcements, the bourse upgraded the disclosure of all its 28 indicators in the “social” category to “comply or explain”, taking effect from January 1, 2020. Moreover, it added several key performance indicators under the “social” category, such as ESG risk management regarding the supply chain, anti-corruption training for the board of directors and staff, etc.
From a broader perspective, currently, the mainland’s CSRC and the SEHK have adopted similar ESG information disclosure frameworks, though the SEHK has detailed provisions on the specific content of various ESG indicators. Differences also exist between the mainland and Hong Kong’s ESG rules. For example, with environmental performance, CSRC only requires key polluting companies to disclose environmental-related quantitative and qualitative information, while the SEHK stipulates that such disclosures are compulsory for all listed companies. Nevertheless, CSRC takes into account more localized ESG indicators, such as poverty alleviation and disaster relief, whereas the Hong Kong bourse does not.
ESG Outlook for Mainland Banks
At a time when the SEHK has been tightening ESG disclosure standards, posing challenges to H-share commercial banks, domestic stock exchanges like the SSE and SZSE will also move toward setting up rules to make ESG disclosures compulsory for A-share listed banks. Thus, for commercial banks listed on both the Mainland and Hong Kong, they will be subject to both exchanges monitoring their ESG performance, thus prompting them to create a more comprehensive disclosure system. On the other hand, commercial banks, as important participants in the capital market, will also be motivated to level up their ESG transparency as a growing number of investors are incorporating ESG factors into their decision-making process.
As one of the most essential qualitative indicators of ESG performance, green finance will be the major focus for banks to improve their corporate sustainability and social responsibility image. Currently, compared to large-sized banks and joint-stock commercial banks, rural commercial banks’ investment in green finance is relatively insufficient. In the future, under the guidance of national financial regulators, the banking industry will develop more green finance products, such as green loans, bonds, notes, etc. While a large number of commercial banks still give ex-post green credit statistics, some Chinese banks have started adding ESG criteria to their project evaluation system as part of their internal risk control mechanism, and this will become a trend for the rest of banking institutions.