Regulator update: China's excellent green credit guidelines are ... mandatory! A whole new set of worry lines for bank compliance staff :)

This China banking regulator stuff is getting exciting.

Under China's Green Credit Banking Guidelines (see last night's blog) banks are meant to a make sure that environmental assessments have been done for all company lending and that projects financed by loans remain in compliance with environmental laws. According to the Annual Report of Green Credit in China, only a small percentage of banks are so far reporting on this and the various other related regulator guidelines around green finance.

I had a long talk tonight with a senior Chinese banking regulator, and it turns out the guidelines are not voluntary, but are mandatory rules. The issue for them has been letting banks have some time to get up to speed as well as getting a good reporting system bedded down before they start enforcement. But they do indeed intend to enforce.

The model is very interesting: Environment Protection Agencies around China are required to provide the central government with an electronic feed about companies breaking local environmental protection or pollution laws. While the inputs are still of variable quality (because local reporting agencies are controlled by local governments, sometimes the biggest environmental law-breakers) the banking regulator now has all available information in the national credit bureau database - the electronic resource all banks use. Companies "in default" of environment laws are essentially blacklisted. Under the (mandatory) Green Credit Banking Guidelines the banks are not allowed to provide such companies finance.

If the regulator then finds the bank still lending - whack! Restricting their business, fines, etc. A whole new set of worry lines for internal compliance folk at the banks.

Compare that enforcement model to waiting for an Attorney-General to get an environmental action case off the ground in the US; or to waiting for an environment agency to act in the EU. Instead the banking regulator tells the bank to cut off credit to the offending company. Now that is action. And it also helps with confidence-building infrastructure to police green bond issuance.

I'm beginning to really like Beijing.