"China’s new green finance guidelines have a deforestation blind spot", 1 August 2022

On 1 June, the China Banking and Insurance Regulatory Commission (CBIRC) issued a new set of green guidelines. These lay out detailed expectations for banks and insurance companies to identify, monitor, prevent and control their environmental, social and governance (ESG) risks.

Policymakers in China have been showing a growing interest in green finance. Traditionally, policies in the area have mainly focused on encouraging financial flows into supporting green, non-polluting and low-carbon businesses. But in recent years, there have been signs of regulators signalling to financiers that they should also be more mindful of their dealings with the not-so-green businesses. New requirements and expectations around risk management and disclosure are emerging in this context, including those to be found in the new guidelines.

While it is encouraging to see the Chinese banking regulator stepping up efforts to properly manage environmental and social risks, the new guidelines are still short on managing deforestation risks and, as voluntary guidelines, weak on ensuring implementation. [...]

Blind on forests and weak on implementation

The new Green Finance Guidelines are a positive step forward, especially in their potential to divert finance away from not-so-green businesses. But can they help shift the billions that Chinese banks and other investors put into companies linked to the destruction of climate-critical forests? [...]

The new guidelines provide a framework for financiers to undertake due diligence on companies operating in forest-risk sectors. However, alone they will not be sufficient to ensure that Chinese financiers are not financing companies linked to deforestation. This is especially so because there is a risk that the guidelines may not cover environmental and social risks embedded in forest-related global supply chains. The guidelines have a clear focus on limiting financing for high-polluting and carbon-intense sectors, currently limited to six industries: coal power, petrochemicals, chemical engineering, steel production, building-materials production, and non-ferrous metal smelting. 

Chinese banks are still at a very early stage of fully understanding and incorporating ESG considerations into their operations, according to a 2021 report by the Institute of Finance and Sustainability, a think tank. Thus, it is quite likely that banks will not prioritise addressing deforestation-related risks in their investments. Our 2021 investigation also found that the Chinese banking sector seems to have a deforestation “blind spot”. Five of China’s largest banks, which are also the biggest Chinese financiers for the forest-risk sectors, have very weak or no commitment to tackling global deforestation, according to Forest 500, an annual assessment of companies most exposed to tropical deforestation risk. [...]

There are clear warning signs that Chinese financiers currently have inadequate safeguards to address deforestation risks. The Chinese regulator must seize this opportunity to enshrine in national law the environmental and social risk management expectations found in this new set of green finance guidelines, and position China as a leader in global efforts to save the remaining climate-critical forests and the people dependent on them.