"China’s new financial regulator must show it means business on ESG risk management" 19 June 2023

• China’s groundbreaking Green Finance Guidelines require both policy and commercial banks to establish grievance mechanisms for affected communities
• The newly formed National Financial Regulatory Administration should see to it that Chinese banks implement this requirement

It has been a year since the China Banking and Insurance Regulatory Commission (CBIRC) issued the Green Finance Guidelines, which stepped up requirements for Chinese banks and insurers to manage environmental, social and governance (ESG) risks, including by establishing complaint channels for affected communities. [...] When environmental or social harm occurs, two things are true: first, people living near or working at investment sites who suffer the most from the harm deserve channels to seek redress; and second, investments are less sustainable when that harm goes unaddressed.

Communities affected by Chinese overseas development were therefore hopeful when a year ago, the Chinese banking sector regulator issued the Green Finance Guidelines, which required, among other things, that banks and insurers establish complaints mechanisms. When Chinese banks’ financing causes negative impacts, it is difficult for impacted communities to identify and engage with the relevant banks. [...] For financiers, this represents a crucial missed opportunity to mitigate the risks of reputational harm, stranded assets, and missed investment objectives that arise when they remain in the dark about affected communities’ experiences. [...]

Having effective complaints channels to ensure “green” investments are truly sustainable and rights-respecting would boost Chinese investors’ competitiveness going forward. Financial institutions are beginning to differentiate themselves by how well they manage and measure their environmental and social impacts. It is standard practice for multilateral banks, such as the World Bank and the Asian Infrastructure Investment Bank (AIIB), to have environmental and social frameworks and grievance mechanisms in place, policies which are published and publicly accessible. [...]

The Export-Import Bank of China, one of China’s policy banks, has adopted policies and grievance mechanisms applying to specific projects that have received multilateral bank funding, but no Chinese bank has adopted an institution-wide complaint mechanism. [...]

China broke new ground in issuing the Green Finance Guidelines, as no other state has required both policy and commercial banks to establish grievance mechanisms. If Chinese banks were to implement this requirement expeditiously, it would put them ahead of the field – Australia’s ANZ bank remains the only commercial bank with a grievance channel for communities.

The newly formed National Financial Regulatory Administration holds new potential for the implementation of the Green Finance Guidelines, as the head of the new regulator has pledged to take a more proactive attitude to resolving risks through “early identification, early warning, early detection, and early disposal”. [...]

Bank-level grievance mechanisms consistent with good international practice are indispensable in achieving this goal. Assurance standards should also be published that detail the minimum requirements for a complaints channel to be deemed compliant with the Green Finance Guidelines and which help make sure that the new complaints channels are legitimate and effective.

It is a critical time for China’s new financial regulator to demonstrate that it is serious about China’s green finance commitments. A way to judge its success will be whether Chinese banks finally establish effective channels to hear from the people they impact. [...]