an overview of the environmental finance policies in china: retrofitting an integrated mechanism for...

REVIEWARTICLE

An overview of the environmental finance policies in China:retrofitting an integrated mechanism for environmental

management

Wei LI (✉), Mengze HU

State Key Laboratory of Water Environment Simulation, School of Environment, Beijing Normal University, Beijing 100875, China

© Higher Education Press and Springer-Verlag Berlin Heidelberg 2014

Abstract Considering the significant roles of the policiesin developing environmental finance, an overview isconducted on the environmental finance policies (EFPs)in China. This paper analyzed the definition, scope,evolution and main instruments of EFPs. The implementa-tion progress of financial activities on each instrument areinvestigated respectively. Then the experiences learnedfrom and failures discovered in the development of theEFPs are discussed well recommendations for furtherimprovement of the EFPs and their implementation areprovided. Our study found that the EFPs have beenestablished in China after a four-phase evolution since theearly 1980s. The policies have played a critical role inleading to a rapid development in environmental financeby involving more financial instruments to accomplish theobjective-led environmental plans. Driven by the policies,the new green credit (GC), green security (GS), and greeninsurance (GI) instruments have been phased in assupplements to the conventional command and controlapproaches to improve the environmental governance offinancial activities and pollution sources. However, themarket mechanism of financial institution is limited due totheir defensive and incapable performance on implementa-tion some of EFP instruments. To further strengthen theeffectiveness of EFPs in facilitating environmental man-agement, recommendations are made mainly on theaspects including developing more specific policy guide-lines, enhancing information sharing and disclosure,providing sufficient economic incentives, establishingenvironmental liabilities with financial activities, andinvolving issues related to climate change, and biodiversityand ecosystem service.

Keywords environmental finance policy, integrated

mechanism, phased evolution, implementation progress,financial institution, environmental management

1 Introduction

Environmental finance encompasses all market-basedinstruments designed to deliver environmental qualityand transfer environmental risk [1]. Because it has distinctimplications on environmental protection and financialactivities, environmental finance has been attracting moreattention by both the government and financial institutions.In practice, environmental risk management and environ-mental responsibility have been incorporated into the mainfinancial activities worldwide [2–4]. Financial behaviorsthat consider environmental issues have been proven notundermine development goals such as economic returnsand poverty alleviation but instead to provide betterenvironmental returns [5–7].However, because financial institutions are “unseen

polluters”, their environmental behaviors are easilyneglected by policy-makers, while financiers tend toprotect themselves from strict environmental responsibilitywhen there are no clear requirements [8]. The financialsector in China has been blamed because of its preferencefor large-scaled enterprises and high-earning projects,regardless of the emissions levels or even for failing tokeep records of violating environmental regulations. Forexample, in the stock exchange, the pollution-intensiveindustries accounted for 30.10% of all listed companies,with 28.60% having a total of 615 illegal environmentalrecords during the period of 2004 to 2010 by the first halfof 2010 [9]. However, the potential of banks and othersources in terms of providing direct funding support andrelated products and services for environmental improve-ment and the development of green industries, whichusually require a large amount of funds and investments,

Received November 7, 2012; accepted June 13, 2013

E-mail: [email protected]

Front. Environ. Sci. Eng.DOI 10.1007/s11783-014-0625-5

have not been well developed. Therefore, to furthersupport the accomplishment of the higher environmentaltargets set by central government and facilitate greengrowth, the policies need to push and guide the develop-ment of environmental finance in China.During the past several decades, much more attention

has been paid to the regulation of environmental finance inthe developed world. Such regulations exert a spectrum ofcompulsory and incentive instruments on financial activ-ities, including lender liability for environmental damage,environmental information disclosure, liability insurancefor environmental pollution, and economic incentives[1,10,11]. Recently, the development and regulation ofenvironmental finance have been intensively studied andencouraged recently in the emerging markets and devel-oping countries, including China, as good instruments fortransforming the traditional economic structure andmoving toward green growth [12–14].Considering the increasingly important role of market-

based instruments in environmental improvement, Chinahas attempted to integrate environmental concerns intofinancial activities by issuing relevant policies or rulessince the early 1980s. From 2000 until now in particular,the policies for environmental finance have experienced anintensive development and implementation during theprocess of strengthening pollution control and ecologicalrestoration. As a milestone, the Green Market Initiativeswere launched by the State Environmental ProtectionAdministration (SEPA) in 2007 with a special focus onfinancial markets. Through those efforts, a system ofenvironmental finance policy (EFP) has been implementedfor the main financial activities categorised by green credit(GC), green security (GS), and green insurance (GI).Nevertheless, in contrast to the rapid development and

intensive use, there was no study focusing on ChineseEFPs but made a glance at piece of them [15]. Therefore,an overview is provided here to facilitate the understandingand improvement of the Chinese EFPs. An analysis of EFPdefinition, scope, evolution and its main instruments isdone in Section 2. Investigation on implementationprogress of financial sectors on development GC, GS,and GI respectively are proceed in Section 3. Theexperiences learned from and failures discovered in thedevelopment of the EFPs are discussed in Section 4.Finally, recommendations are provided for furtherimprovement of the EFPs and their implementation.

2 Definition and evolution of the EFPs

2.1 Definition and scope

Despite the growing interest in EFPs, there have been

remarkably few efforts to define the term. An EFP may bedefined as a policy or rule used for either improvingenvironmental management or financial operation byincorporating environmental principles or responsibilitiesinto the financial services and instruments. The phrase of“green finance policy” uses widely in China also indicatedthe same meaning.Essentially, the EFPs aimed to 1) promote environmen-

tally responsible financial decisions and 2) offer financialsupports for the development of green industries andcompanies. The implementation of the EFPs can deliverefficient financial solutions to environmental works as wellas prevent financial institutions from the potential lossescaused by the environmental risks associated withdiversified financial activities.The EFPs were developed either by multiple central

departments or by environmental or financial authority, indiversified forms of governmental decisions or orders,departmental circulars or opinions, and vocational guide-lines or standards. In the past three decades, more than 15policies can be regarded as the EFPs (Table 1).

2.2 Evolution and main instruments

Since the initiation of its opening-up and reform policy,China has endeavored to retrofit its environmentalmanagement approach to combat the anticipated chal-lenges and pressures created by the on-going process ofrapid economic growth. Meanwhile, the Chinese financialsector has experienced a progressive transformation from asingle structure dominated by state-owned banks toward adiverse market-based system composed of banking,securities, and insurance. With an in-depth reform of theChinese financial institutions and a better understanding ofthe relationship between environmental protection andfinancial operations, the policies for environmental financehave been introduced gradually into environmental worksand financial activities. The phased evolution of thesepolicies and corresponding instruments during the pastthree decades are shown in Fig. 1.The first phase began with the requirement of environ-

mental impact assessment (EIA) on bank loans issued bythe State Council in 1981. Although the requirement wasonly a clause of an environmental policy and not yet anindependent form, it initially set up a clear link, via theEIAs of construction projects, between environmentalmanagement and financial operations that were dominatedby state-owned banks. Given that both legal constructionand capacity building had not been well developed forenvironmental governance during this phase, the policywas definitely a great attempt at improving the effective-ness of the newly established environmental instruments,such as the EIA and “three simultaneities”1), by linking

1) The principle of “three simultaneities” requires that pollution facilities and the principal parts of a construction project be designed, constructed, and put intooperation in a coordinated manner, with special attention to environmental considerations

2 Front. Environ. Sci. Eng.

Table 1 Main environmental finance policies in China from 1980 to 2010

files No. policy names responsible agencies relevant provisions

SC [1981]27 decision on enhancing environmentalprotection works during the economic

adjustment period

State Council (SC) newly initiated large-and medium-sized building projects would not belisted in the official development plans and would not be given grants or

loans from financial institutions unless the environmental impactassessment (EIA) reports were completed and approved by the

environmental department

PBOC [1995]24 circular on implementing bank creditpolicies and strengthening environ-

mental protection works

The People’s Bankof China (PBOC)

during the process of loan approval and appropriation, banks shallconduct an environmental compliance review. For newly initiatedconstruction, alteration or expansion projects, bank loans would bereleased only after acquisition of EIA approval, and liquidity loanswould be disbursed only after meeting the requirements of the “threesimultaneities”. For enterprise liquidity loans, banks shall adopt the

“differentiated principle” in accordance with environmental regulationsand industrial policies. For enterprises or projects engaged in

environmental protection and treatment, banks shall provide supportingloans based on performance evaluation

SEPA [1995]105 circular on promoting environmentalprotection works through credit poli-

cies

State EnvironmentalProtection

Administration (SEPA)

environmental authorities at all levels shall strictly conduct environ-mental supervision and administration and actively cooperate with

financial departments to implement GC policies

SEPA [2001]156 circular on improving environmentalexamination and approval (EEA) on

listed companies

SEPA the EEA system was officially established for IPOs and refinancingactivities via the securities market, especially for those enterprises in

pollution-intensive industries

SEPA [2003]101 rules on EEA of Initial Public Offer-ings (IPO) and refinancing applica-

tions

PBOC [2006]450 circular on sharing enterprises’environmental information

PBOCSEPA

the policy asks for the input of environmental information into thePBOC’s Basic Database of Enterprise Credit Information

PBOC [2007]215 guiding opinions on improving andstrengthening financial services forenergy saving and environmental

protection (ESEP)

PBOC banks are encouraged to adapt to the needs of ESEP works by providingsyndicated loans or soft loans and innovating their financing manage-

ment and products, including direct financing

SEPA [2007]108 opinions on implementing environ-mental policies and regulations and

preventing credit risks

SEPAPBOC

China BankingRegulatory

Commission (CBRC)

the requirement of environmental review for the loan approval andappropriation process, which first appeared in the policy issued in 1995,is reiterated with an additional request for close collaboration with andthe supply of environmental information from environmental depart-ments. In addition, the financial authority shall improve its supervision

and examination of the policy’s implementation

CBRC [2007]161 circular on the prevention and controlof credit risks of “high pollutant

emission and high energy consump-tion (dual-high)” industries

CBRC banks are required to strictly control and continuously supervise loanvolume and use of “dual-high” industries and enterprises, improve the

credit structure, and compress or withdraw approved loans fromenterprises with obsolete productivity. It is recommended that banksintegrate environmental risk management into the credit management

processCBRC [2007]83 guiding opinions on the credit line for

energy saving and emission reduction(ESER) works

SEPA [2007]105 circular on further standardising theEEA of IPO and refinancing applica-tions involved in pollution-intensive

industries

SEPA the EEA system, which was first implemented in 2001, is furtherimproved in terms of its scale, scope, procedure and specifications for

IPOs and the refinancing applications of listed companies

guidelines on the EEA of IPO andrefinancing applications

SEPA [2007]189 guiding opinions on environmentalpollution liability insurance (EPLI)

SEPAChina Insurance

RegulatoryCommission (CIRC)

EPLI system was intended to establish the insurant catalog of industrialinstallations and the compensation criteria for pollution damage basedon the classifications of environmental risks by developing pilot and

demonstration projects in key economic industries and regions

CSRC [2008]6 circular on IPO application of com-panies in pollution-intensive indus-

tries

China SecuritiesRegulatory

Commission (CSRC)

the CSRC accepted the EEA as precondition of IPO application ofcompanies in pollution-intensive industries

Wei LI et al. An overview of the environmental finance policies in China 3

them with the financial tool of loan approvals.The second phase was devoted to further improvement

of the GC operations, mainly by the two policies issuedseparately by PBOC and the SEPA in 1995. The policiescalled for a stricter environmental compliance review onloan approval and appropriation in accordance withenvironmental regulations and industrial policies. Duringthis phase, the industrial pollution control had beenstrengthened by the so-called “three transformations” ofmoving toward a whole-process control, a concentrationand volume combined pollution control, and an integratedmode of centralised and in situ pollution treatment.Undoubtedly, the GC policies had contributed much tothe accomplishment of the “three transformations” in theprocess of reforming a commercialised competitive bank-ing system.The third phase was characterized by trying to exercise

strict environmental management on the initial publicoffering (IPO) and refinancing operations. Started in 2001,the system of environmental examination and approval(EEA) for IPOs and refinancing applications has beenemployed by the SEPA to limit capital expansions ofenvironmentally unfriendly enterprises through the stockmarket. To facilitate the greening of the stock markettogether with the EEA, the China Securities RegulatoryCommission (CSRC) requested that the issuers andsponsor of securities disclose necessary information onwhether the business or proposed projects would meet theenvironmental requirements.In addition, an industrial adjustment catalog was created

by the National Development and Reform Commission(NDRC) by evaluating the environmental impacts andresource consumptions of industrial activities. The indus-

trial projects listed in the prohibited or restricted catalogsshall be discouraged from seeking funds through thelending and the stock market to help upgrading Chineseindustrial structure to a more environmental friendly way.The fourth phase witnessed an initiation of the GI

policies and a remarkable development of the system ofEFPs. Since China’s economy stepped onto the stage ofheavy and petrochemical industries, the number ofenvironmental accidents has been rising with tremendousenvironmental losses and ecological damage. The well-known water pollution accident of the Songhuajiang Riverwas reported to result in 11 million U.S. dollar of directeconomic loss, and after the incident, 1.2 billion U.S.dollar had been invested by the government in pollutiontreatment and ecological restoration by the end of 2010.Thus, it is imperative to build up an insurance mechanismfor ecological compensation and restoration for theindustries and projects with high-level environmentalrisks. In 2007, the SEPA (now the MEP1)) and the ChinaInsurance Regulatory Commission (CIRC) jointly releaseda GI policy on developing the environmental pollutionliability insurance (EPLI) system. Although the EPLI isstill in a pilot and demonstration process, it has becomeone of the key components of the on-going reform anddevelopment of the Chinese insurance industry.During this phase, the important roles of EFPs have

acquired wide recognition in improving environmentalmanagement and greening financial operations. The toolsof GC and GS have received further development andconsolidation in the process of accomplishing thecompulsory energy saving and emission reduction(ESER) targets given in the 11th Five Year Plan (FYP).The China Banking Regulatory Commission (CBRC) has

(Continued)files No. policy names responsible agencies relevant provisions

SEPA[2008]24

guiding opinions on strengthening theenvironmental supervision of listed

companies

SEPA in addition to the EEA system, two more instruments, includingenvironmental information disclosure (EID) and environmental per-formance evaluation (EPE), were established for the environmental

supervision of listed companies and became integral parts of GS policy

SEPA [2009]77 circular on further improvement ofinformation sharing for GC imple-

mentation

PBOCSEPA

the policy presents specific guidance on the delivery procedure andspecifications for environmental information, bank feedback procedure,

dynamic information management, and dispute resolution

PBOC [2010]170 opinions on further improving finan-cial services for ESER and the

elimination of backward productivity

PBOCCBRC

for projects in the national catalog of key energy-saving technologiesand the ten-state key ESER engineering and key pollution source

treatment plan as well as enterprises with strong independent innovationcapacity and satisfactory market efficiency in the field of ESER,financial support is encouraged by providing bank loans or issuing

short-term bonds or medium-term notes (MTNs). Banks are also urgedto accelerate innovations of financial products and services to broadenthe financing sources for ESER and eliminate backward productivity by

pledging accounts receivable, or the expected clean developmentmechanism (CDM) incomes or stock rights, and factoring. In addition,the development of energy management contracting (EMC) and the

energy saving service industry shall be boosted

1) The State Environmental Protection Administration (SEPA) was converted to the Ministry of Environmental Protection (MEP) by the State Council inMarch 2008


become the head agency providing direct supervision ofthe banking institutions in the development and imple-mentation of GC policies. More importantly, a collabora-tive mechanism has been established betweenenvironmental departments and financial regulators pri-marily for developing environmental finance, as theCRBC, the CSRC, and the CIRC with the MEP hasbecome the joint or co-issuers of the EFPs.As a whole, the Chinese EFP has experienced a four-

phase evolution featured by the progressive involvement offinancial institutions into the objective-led environmentalplans since the early 1980s. A system of the EFPs coveringGC, GS, and GI has been formulated through inter-departmental cooperation, which revised environmentalsupervision of the main financial markets for credit,securities, and insurance.

3 Investigation on implementationprogress of the EFPs

The phased promulgation and enforcement of EFPs hasprovided a strong driving force for the development ofenvironmental finance in China. With data from govern-mental publications, financial institution self-disclosuresand relevant references, this section investigated theimplementation progress of each EFP instruments on therepresentative financial sectors in recent five years.

3.1 Progress of the GC policies

We investigated corporation social responsibility (CSR)reports of the largest ten sample banks ranked in the 2010annual report of CBRC possessing 63.50% of the total

Fig. 1 Phased evolution and chief instruments of the Chinese EFPs


assets of the Chinese bank sector. For the first GCinstrument, all of the ten banks indicated their efforts onenvironmental compliance review in the process of loanapproval and appropriation. They adjusted their manage-ment process actively by lifting loan admittance standards,lowering the ceiling of credit volume, and collecting loanapproval authority for certain “dual-high (high pollutionand high energy consumption)” industries in accordancewith state environmental or industrial policies. In parti-cular, the principle of “one ticket veto” was adopted bybanks on the credit applications of the clients who failed tofulfil the environmental requirements or standards. Forexample, the China Agriculture Bank rejected 792 loanapplications valued at 1.95 billion U.S. dollar in totalrelated to both “dual-high” and productivity-redundancyindustries in 2010.The second GC instrument is encouraging integration of

environmental risk assessment in the loan review andapproval process. Four of the ten banks make activeresponse to the suggestion. For example, the Industrial andCommercial Bank of China (ICBC) exerted dynamicenvironmental information about its clients, which wasgraded by environmental risks and labeled in the banks’client credit information systems. However, many Chinesebanks are still hesitation in the aspect. According to arecent survey in Jiangsu Province, 52.40% of those havenot built-up environmental risk management systems bywhich environmental factors may be evaluated in theprocess of credit appraisal and loan approval [15]. Asurvey on environmental risk management of the top 50Chinese banks in 2012 indicated that only one bank got thehighest grade of A, 12.00% of banks in the B grade, while42.00% of banks in the lowest E grade in the five gradesevaluation system [16].The third GC instrument is encouraging favorable loans

to companies or projects with environmental purposes. Forthe ten banks, their loan balance granted to green sectors

has increased from 48.19 to 248.33 billion U.S. dollar, withan averaged annual growth rate of 50.67%, and theproportion for green sectors has correspondingly increasedfrom 5.92% to 6.95% in the total balance of corporateloans from 2007 to 2010 (Fig. 2)1). Obviously, the creditstructure of Chinese banks has become greener with anenlarged proportion for green sectors in the total volume ofcommercial loans during recent years. However, obtainingdetailed information about the investment direction andenvironmental performance of these green loans as well asthe environmental status of the bank’s clients is difficult[17]. It is hard to determine whether these loans weremaking real environmental benefits or just investment inthe so called green sector.

3.2 Progress of the GS policies

The GS policies have created three instruments, includingenvironmental examination and approval (EEA), environ-mental information disclosure (EID) and environmentalperformance evaluation (EPE), for exercising environ-mental management of the stock market. The system ofEEA requires a compulsory environmental review of theIPOs and refinances applications involving the 16 pollu-tion-intensive industries designated by MEP at theprovince and state levels. Based on the group of EEApolicies issued by MEP during 2007 to 2010, a standardprocedure of EEA is shown in Fig. 3.In 2007, among the first 37 EEA cases accomplished by

the MEP, 10 were rejected or suspended in the initialreview. In 2008, 20 of 38 cases failed to pass the initialreview from January to October. For those companies thatfailed the initial review, fund raising would be prohibitedin the stock market unless necessary remedy or treatmentrequired in the EEA was completed by the companiesapplying for listing within the deadline defined by theMEP. According to an investigation result released by

1) The exchange rate between RMB and U.S. dollar is 6.62 in Section 3.1

Fig. 2 Loan balance of the sample banks granted to green sectors from 2007 to 2010


MEP, 227 of the 274 pieces of remedies or treatments hadbeen completed within the postponed periods by 102companies listed on the stock market in 2007 and 2008. In2011, the EEA application of 50 companies was dealt by

MEP, among them, 3 are postponed, 2 are halted and 2 arefailed [18].As a compulsory requirement, a technical report of EEA

has to be publicised to show the applicant’s environmental

Fig. 3 EEA process for an IPO or refinancing application on the stock market


performance within three recent years. Furthermore, asrequested by the Measures on Information Disclosure forListed-companies (No. CSRC[2007]40) issued by theCSRC [19] and the related GS policies issued by the SEPAin 2008, any information that may have a significantinfluence on the decision making of the investors should bedisclosed in the form of a prospectus during the phase ofsecurity issuance, periodic report per semi-annually andannually, or temporary report after an incident. Currently,most of the listed companies adopt CSR report or annualreport to fulfil the requirement of periodic EID. Zeng et al.found that the listed companies with periodic EIDs hadincreased from 31.94% in 2006 to 42.73% in 2008 basedon the sampled manufacturing industry, which representsthe largest proportion of listed-companies on the Chinesestock market [20]. However, due to a lack of specificguidelines and necessary punishments, the factual status ofthe EIDs of the listed companies is not satisfactory. Theenvironmental information has not been disclosed in anobjective, sufficient, and timely manner, and some piecesof negative environmental information were deliberatelycovered. For example, the spilling accident of miningwastewater of the listed Zijin Mining Group in July 2010caused severe water pollution of the Ting River in FujianProvince and resulted in the deaths of thousands of tons offish and a drinking-water crisis in the downstream area[21]. The first report of this accident was not publiciseduntil 9 days after the incident, with unconvincingexplanations on such key issues as the potential con-sequences and established countermeasures.Due to a shortage of specific guidelines and reliable

sources of relevant information and data, the EPE of thelisted companies was in slow progress. Few pilot

researches have been done on listed companies inpollution-intensive industries. According to an evaluationresult of one pilot research done by the Chinese AcademyFor Environmental Planning, among the 161 sampledlisted companies, only 10 listed companies were ranked in“red list” which means well environmental performance,while 40 companies were ranked in “black list” whichmeans failed performance on environmental aspects. Theresult indicated the unsatisfied environmental situation ofthe listed companies and necessity of the EPE. However,no policy measures or public disclose has been done toeffect the evaluation results in the security market.

3.3 Progress of the GI policies

As the pilot areas of first group, the provinces of Jiangsu,Hunan, Hubei, and Henan and the municipalities ofChongqing, Shenzhen, Ningbo, and Shenyang havecome up with their own plans of developing EPLIseparately. In the pilot plans of the first group of areas,the selected objects of compulsory EPLI include compa-nies engaged in the production, operation, storage,transportation and usage of hazardous chemicals as wellas petrochemical plants, hazardous waste disposal andlandfill facilities, sewage treatment plants, and industrialparks with relatively higher-level environmental risks. Thelocal government was responsible for making a list of pilotcompanies or facilities and issuing supportive measures(Table 2).Driven by the pilot plans and policies, the policy holders

of EPLI had increased from less than 700 to approximately1700 from 2008 to 2009 based on a rough estimate by theMEP. Accordingly, the premium income increased from

Table 2 Supportive measures for developing the EPLI in some pilot areas

areas main supportive measures

Jiangsu Province a joint meeting mechanism is set up mainly by the Environmental Protection Department, Financial Administration Office and InsuranceRegulatory Bureau at the provincial level to coordinate and promote the EPLI pilot study

the enterprise’s participation in EPLI is employed by Wuxi City of this province as an indicator of the environmental performanceassessment, the result of which will be reported to the PBOC as important information in the process of reviewing the company’s loan

application

under the governmental guidance of Suzhou City of this province, a joint underwriter composed of four insurance companies insured 66local companies with higher environmental risks

Hunan Province the policyholders of EPLI may be rendered with a 5% or 10% discount on its premium if there is no report of an environmental accidentduring the past one or two years

Zhuzhou City of this province allows 50% insurance coverage to be offset by an equivalent pollution charge paid by the policyholder ofEPLI

Changsha City of this province graded local companies into A, B, and C by the levels of environmental risk. EPLI would be compulsoryfor the companies graded as A and B

NingboCity

the company’s participation of EPLI was regarded as a prerequisite for acquiring a pollution treatment subsidy, environmental honor, andenvironmental compliance certificate

the company insured by EPLI may acquire a governmental subsidy equivalent to a 30% to 50% premium from a special fiscal fund

Shenyang City the companies engaged in the collection, storage, and disposal of hazardous wastes are required to buy EPLI in the local Regulation onEnvironmental Pollution Prevention and Control of Hazardous Wastes


1.89 to 6.62 million U.S. dollar, and the coverage increasedfrom 305.77 to 886.50 million U.S. dollar, as revealed byan investigation of the CIRC. By the end of 2010, 9insurance companies submitted 27 EPLI products to theCIRC [22]. In Hunan, a pilot province, 10 EPLI claims hadbeen fulfilled by the end of 2009 since the first paymentmade by Ping An Property and Casualty InsuranceCompany of China to 120 villagers, whose crops weredamaged due to an accidental leakage of hydrogen chlorideat Haohua Company, a local pesticide producer.Nevertheless, the development of GI is still at a

preliminary stage. Currently, most of the insurancecompanies and related third parties are barely capable ofhandling the increasingly complicated cases of EPLI andothers. In addition, the products provided by the insurancecompanies are homogenized without differentiated pricingbased on a careful evaluation of the environmental risks.However, the tremendous demands are making the EPLIand related services become a key area of development ofthe EFPs.

4 Discussion on effectiveness of the EFPs

4.1 Experiences learned from the EFPs

After decades of development under strong policyguidance, environmental concerns of the main financialmarkets of credit, securities, and insurance have beenpreliminary developed from nothing. The development ofChinese EFPs proved an innovative route to promoteenvironmental finance on an integrated mechanism.First, the EPFs created efficient, environment-oriented

financial instruments that have improved environmentalmanagement in China. The typical instruments, includingthe environmental compliance review of loan applicationsintensively used by banks in the GC operations, the EEAemployed by environmental departments for supervisingthe IPOs and refinancing activities in the stock market, andthe pilot EPLI to fulfil the GI policies are implemented wellin the financial market. These instruments leveragefinancial market access as a penalty for environmentalinfringements. The safeguarding principle of the “oneticket veto on environment” has been exercised in financialoperations against companies who failed to fulfil theirenvironmental responsibilities, and the expansion ofpollution-intensive industries has been halted by suspend-ing or cutting off access to capital.These improved instruments may be used as supple-

ments to the conventional command and controlapproaches in improving environmental management. Asynergistic effect may be more easily realized in environ-mental governance using a mechanism that integratesadministration of governmental authorities and marketpower of financial institutions.Secondly, the development of Chinese EFPs may be

largely attributed to a dynamic combination of target-ledenvironmental governance and an improved financialsystem with more environmental responsibilities. Effectivecollaboration and communication between environmentalauthorities and financial regulators in policies design,information sharing and implementation supervision aretherefore critical to the development and implementationof EFPs.The development and implementation of Chinese EFPs

indicated that, it is essential to initiate and achieve the rapiddevelopment of environmental finance early on, which willrequire the development of relevant policies as strongdriving forces. Because a developing country, such asChina in the early 1980s, may lack a complete environ-mental regulation system and a financial system withsufficient environmental awareness, it is very difficult forthat country to spontaneously formulate a market-basedfinancial mechanism aimed at environmental protectionwithout appropriate guidance.

4.2 Failures discovered in the EFPs

The mechanism of government authorities integrated withmarket power of financial institutions stirred up thegeneration of environmental finance in China at earlystage. The awareness of the potential environmental risksand opportunities involved in financial activities has beengreatly improved. However, as indicated by Goodwin etal., the current EPFs may be regarded as quasi-market-based instruments because the criteria for punishmentdepend greatly on administrative requirements, but not amarket mechanism [23]. The unsatisfied implementation ofthe instruments, such as integration of environmental riskassessment in the loan review and approval process, theEID and the EPE of the listed companies, and insuranceproducts pricing based on the level environmental risks,reflected the defensive and incapable of financial institu-tion on environmental issues. There are some reasons maycause the ineffective of EFPs on leverage marketmechanism with judgment of financial institutions.Incomplete or unclear guidelines for EFP implementa-

tion. The guidelines were found to be significant infacilitating a correct understanding and proper implemen-tation of the EFPs, especially in China’s diverse conditionsand rapidly changing situations.In view of the fact thatenvironmental issues were out of core business of financialinstitutions, considerable efforts are still needed to developand refine the guidelines for other EFP instruments.Poor sharing of environmental information between

environmental departments and financial sectors. Inpractice, asymmetric information has been regarded asone of the main problems behind the failure of policy.According to the GC policy, more than 40000 pieces ofinformation on environmental violations of enterpriseshave been input into the database, and a sharingmechanism of environmental information has been


gradually shaped by the joint efforts of the environmentaldepartments and the banks. Nevertheless, there is stillmuch room for improving the environmental informationsharing mechanism in terms of delivery efficiency andexecutive quality. Further more, the environmental infor-mation sharing mechanism among the MEP and the CSRCand the CIRC has not been established yet.Inadequate supervision to motivate financial institutions.

Environmental liability and its extended lender liabilitycan produce a strong stimulus to financiers to incorporateenvironmental considerations into their business process.In addition, environmental liability can spur the risktransfer demands of both companies and banks and, inturn, the development of the environmental insurancemarket. The environmental liability of lenders has beenproven to optimise the sharing of liability between firmsand financiers and improve both the levels of prevention ofand compensation for environmental damages [24].In China, because of the absence of concrete legal

requirements and policies on the environmental liability offinancial activities, it is hard for financial sector spendingmoney on environmental benefits which may not influencetheir incomes but adding costs. Especially in lessdeveloped areas, banks were solely profit-led in makinglending decisions in the context of pursuing economicgrowth regardless of the environmental cost. Moreover,such attention on environmental liability has not beendiffused to the insurance and securities markets. Theaverage reduction in market value to information dis-closure of environmental violation events is estimated tobe much lower than similar events in other countries,demonstrating that the negative environmental events ofChinese listed companies have a weak impact on the stockmarket [25]. For example, quite a few stock service firmsstill maintained the investment rating of the Zijin MiningCorporation, mentioned above in section 3.2, as a “strongrecommendation” even after a serious river pollutionaccident caused by the company in 2010. Ironically, thecompany has been regarded as a good client by the localbanks despite its dismal records on pollution control.Therefore, strict legal liability circumstance absent inproviding supervision force for environmental responsibledecision of financial institutions.Inadequate public incentives to motivate financial

institutions. The most important cause of the low supplyof environmental finance is that financial institutions indeveloping countries have sufficient alternative opportu-nities to earn higher returns at lower risks [26]. Althoughthe EFPs encourage financial products innovation onenvironmental area, they provided no supporting measuresto sharing risks of financial institutions on environmentalrelated investment. In light of the problem, more publicincentives need to be introduced into the development andimplementation of the EFPs to boost the investmentsrelated to environmental improvements that is desperatelydesired in China. Such an introduction may contribute

substantially to increasing the investment volume usinggovernmental seeding inputs by attracting more privatefunds flowing into the environmental markets.Lack of relevant information for tracking and evaluating

the performance of the EFPs. In general, environmentalfinance information (EFI) is primarily composed of thedata produced by environmental reviews and permitsassociated with the financial operations of loans, insuranceand investment and the executive data of the environ-mental finance products and services. The proper dis-closure of such information may to the stakeholders benefitnot only studying the effectiveness of EFPs but alsoimproving the supervision and evaluation of the relatedproducts and services. However, there is no way to getsuch information besides the insufficient disclosure in CSRreports of financial institutions.In addition, internationally, environmental finance for

dealing with Climate Change (CC) has become a majorconcern [27,28], while the incorporation of biodiversityand ecosystem services (BES) elements into financialdecision making is definitely a frontier field of environ-mental finance [29]. Driven by the strong political willexpressed clearly in the relevant official documents,including the National Program Dealing with ClimateChange and China Biodiversity Conservation Strategy andAction Plan (2011–2030) [30], great efforts have beenmade from the central to the local levels to reduce GreenHouse Gases (GHG) emissions and ease the pressures onbiodiversity. For example, the pilot and demonstrationprojects of the carbon emission trading systems are beingdeveloped in the cities of Beijing, Tianjin, Shanghai,Chongqing, and Shenzhen as well as in the provinces ofHubei and Guangdong. In addition, a group of tradingplatforms has been established for environmental propertyrights. Therefore, innovative instruments will have to beaddressed to assistance fulfilment of the national plan, thuspresenting both challenges and opportunities for the furtherdevelopment of the EFPs.

5 Recommendations for further improvingof the EFPs

Despite the great progress made in pollution control byinstruments of the EFPs, China is still facing arduousenvironmental challenges while maintaining rapid eco-nomic growth. To fulfil the given environmental targets,improving the effectiveness of environmental managementis essential, and a robust EFP system may contributesignificantly to that end. Here, the improvements in fivekey aspects are recommended based on the lessons learnedin domestic practice and the successful experience outsideChina.Developing more specific guidelines for implementation

of the policies. Although the General Guideline on GreenCredit (No. CBRC [2012]4) has recently been issued by


the CBRC [31], the GC policy necessitates a technicalguideline to teach banks how to evaluate and manage theenvironmental risks of credit loans. Meanwhile, the GIpolicy necessitates a practical guideline to demonstrate astandard procedure for environmental accident investiga-tion, liability determination, and insurance payments. Toassist the implementation of GI policies, the MEP and theCIRC jointly issued the Grading Method of EnvironmentalRisks for the Chloralkali Industry [18]and the GradingMethod of Environmental Risks for the Sulphuric AcidIndustry (for trial use) [18], respectively, over the past twoyears. More guidelines are necessary on the environmentalrisk assessment of the heavy metal-related industries, suchas the lead acid battery industry and the regenerated leadindustry. And the GS policy in particular necessitates aguideline on EPE for listed companies.Enhancing information sharing and disclosure. First,

real-time information sharing must be achieved to properlysupport financial decision making. Currently, environ-mental departments use manual reporting to deliver themonthly acquired environmental information to the PBOC,which then inputs the information into the database. Thus,there is a potential risk caused by the time delay indelivering the information used to make decisions. Second,more types of environmental information must be sharedwith financial institutions. In addition to information onenvironmental violations, the environmental departmentspossess many other types of information associated withthe EIAs of building projects, such as the corporateenvironmental performance ratings [32], cleaner produc-tion auditing results, environmental certification, andenvironmental awards. Therefore, a plan to improveinformation sharing should be developed to add morevariations of environmental information to the existingsharing platform. Secondly, the scope of the institutionsinvolved in information sharing must be widened tosupport the implementation of GI and GS policies. Forexample, in the US, environmental information must beentered into the Securities and Exchange Commission(SEC) Electronic Data Gathering, Analysis, and RetrievalSystem [33]. It is recommended that the MEP work withthe CIRC and CSRC to develop specific plans ofenvironmental information sharing based on existingexperiences at home and abroad. Thirdly, a well-definedpolicy is needed that calls for a much closer collaborationbetween the financial regulators and environmentalauthorities to develop an EFI disclosure system. Thepolicy should make information disclosure compulsory forinvestments that use public funds. In addition, the policyneeds to encourage financial institutions to voluntarilydisclose the EFI, based on such well-known, standardisedreporting frameworks as the finance sector supplement ofthe Global Reporting Initiative.Establishing public-private-partnership for development

of environmental finance. The MEP and the Ministry ofFinance (MOF) should work closely to improve the public

and private partnerships in the field of environmentalinvestment. With the leverage and demonstration functionsof public inputs, a diversified composition shall be realizedby involving more private institutions, including commer-cial banks, private venture funds, and equity funds. Furthermore, a good balance of risk and return of environmentalinvestment needs to be designed for private investors,especially in operating such investment products as thecollective funds or pooled governmental and privatecapital. The balance may be achieved either by runningthe governmental inputs in a non-or-low-profit mode or bygiving the public share a subordinate position in distribut-ing the investment profits. Issuance of specialized funds orfinancial bonds should be allowed with additional requeststhat the collected capital must be used for environmentalpurposes. If the interest or dividend tax exemption for thedepositors and investors of green funds or bonds is addedas an incentive, the instrument may to a large extentimprove the supply of environmental finance products andservices. For example, under the mode of the NetherlandsGreen Fund, the depositor tax exemption has beentranslated into a significantly lower borrowing cost forprojects tapping into these funds, while the governmentleveraged €45 private capital into green projects with €1public capital [34].Establishing environmental liabilities with financial

activities. A new policy is needed for the establishmentof an external evaluation and internal supervision systemon environmental liability for Chinese banks. Because theCBRC has already proposed regular evaluations of thebanks’ conducts on green lending, it is recommended thatthe results of these evaluations be used as importantevidence in rating the performance of banks and their topexecutives as well as issuing admittance approvals of newbranches. The encouraging measures should also beemployed by the EFPs to provide more incentives forfinancial institutions in adopting environmentally respon-sible principles in their business. In the European Union,the Eco-Label Regulation and Eco-Management and AuditScheme have been extended to the financial sector sincethe year 2000. Similar devices, such as green labeling or anawards system may be adopted by the Chinese financialsector and granted to the financial institutions with provenexcellent performance in development of environmentalfinance.More importantly, it is recommended that environmental

liability and compulsory environmental insurance shouldbe set by a special law or regulation in China. In thisrespect, the good news is that the compulsory environ-mental insurance system has been just launched in heavymetal-related industries and some other industries withhigh environmental risk by administrative orders issued bythe MEP and the CIRC (No. CIRC[2013]10). To improvethe legislation process, a monographic study should bedeveloped on lender liability and compulsory insuranceunder environmental liability. In addition, to be a potential


liable party due to a brownfield as collateral could causedirect environmental risks to financiers, thus providestrong incentives to their environmental assessment.Therefore, the environmental liability of lenders shouldbe first integrated into the proposed Soil PollutionPrevention Law in legislative process.Involving the related issues with CC and BES. As China

moves toward green growth, a step-by-step plan forincorporating CC-and BES-related issues into financialactivities should become one of the key tasks for furtherimproving Chinese EFPs. As a first step, the criteria forevaluating the factors of CO2 emissions, energy efficiencyand ecological sensitivity should be established for theenvironmental review of bank loans, and a preferentiallending policy may be developed for green companies andprojects with significant potential to reduce GHG emis-sions and to produce ecological benefits. As a second step,the innovations of financial products should be encouragedby policies to stimulate the development of so-calledcarbon finance. These products may include mortgageloans for carbon emission permit or forestry property rightsand even carbon-based financial derivatives. As a finalstep, all of the EEA requirements in the GS policies mustbe refined in accordance with low carbon and biodiversityfriendly principles. The qualified disclosure of carbon- andBES-related information needs to become the responsi-bility of the listed companies. In addition, the EPLIcovering ecological damages should be further expandedby GI policies, and the CC-related insurance may bestudied first by a pilot project.

6 Conclusions

The Chinese EFPs have experienced a four-phase evolu-tion featured by the progressive involvement of financialinstitutions into the objective-led environmental planssince the early 1980s. A system of the EFPs covering GC,GS, and GI has created new instruments for environmentalmanagement as well as revised financial operations of themain financial markets for credit, securities and insurance.The Chinese experience indicates that environmental

finance should not be regarded as a luxury that can only beused by developed countries with fully equipped financialsystems and strict environmental legality. Indeed, it may bedeveloped in a flexible manner in most developingcountries that strongly desire environmental improve-ments.However, to some extent, the Chinese EFPs are failure in

stimulation judgement of financial market. Therefore,more legal, information, technical, and economics mea-sures are needed to change the attitude of the financialsector on developing environmental finance towardproactive participations into the process from passiveresponses to government policies. Moreover, in the furtherstudy, systemic and detailed evaluation of each EFPs

instruments are needed to examine their effectiveness andefficiency.

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