54370 Translated from original Vietnamese document VIETNAM THE BUSINESS INFORMATION CENTER AT THE VIETNAM CHAMBER OF COMMERCE AND INDUSTRY No.27 (30) October 2009 At the same time, MEP and CBRC signed an CHINA'S GREEN CREDIT POLICY agreement to establish an information-sharing mechanism that enables CBRC to incorporate Experience and Lessons for Vietnam environmental protection and compliance into its banking policies and compliance monitoring 1 Sustainability is now increasingly recognized as central to the growth of emerging market activities. economies. For the private sector, this represents both a demand for greater social and In November 2007, CBRC, as the primary environmental responsibility as well as a new landscape of business opportunity. The financial authority responsible for the regulation and supervision of banking institutions, issued the sector has been late to respond to this trend but is emerging as an important driver across all sectors important Guidelines on the Credit Granting for of the economy. New standards and codes of conduct have been developed within the banking sector Energy Saving and Emissions Reduction. This to promote corporate accountability, transparency, and consideration of impacts on environment and document encourages financial institutions to society. A clear example is the Equator Principles2, a voluntary set of principles for environmental implement the Green Credit Policy alongside the and social risk management in project finance, adopted by an increasing number of leading banks government's broader environmental policies, that operate in developing countries. At the same time, some developing country governments have including supporting enterprises working in been taking action to turn to commercial banks to address pressing environmental and social issues. environmental protection; controlling lending to This Bulletin introduces a policy initiative enacted by the Chinese government to address negative the 'liang gao' industries5, and categorizing all environmental impacts. The policy encourages the banking sector to apply environmental risk projects according to the extent of their management practices and commit to providing financing to projects and businesses that promote environmental impacts. environmental protection. The lessons learned in China can benefit Vietnam and serve as a model for Response of commercial banks to this policy Vietnam's financial sector. The policy sends a strong message to banks concerning new responsibilities towards China's decades of double-digit annual state-owned banks as well as joint stock banks are environmental protection. It encourages banks to economic growth have been achieved at an currently studying, developing, and implementing manage risks caused by environmental and social enormous sacrifice to the environment. Certain by- measures to ensure the success of the Green Credit issues, and will also help protect corporate products and behaviors that have been directly Policy. reputations. Additionally, it creates an opportunity linked to economic growth, namely pollution and The Green Credit Policy - an initiative that to explore new business ventures associated with unsustainable energy consumption, are now requires inter-agency coordination energy conservation and emissions reduction. threatening economic and social development, as China's Green Credit Policy aims to guide loan Both developments were received positively well as the country's global standing. Side effects financing away from highly polluting and/or energy by the commercial banks and lending institutions. from China's rapid economic growth and consuming enterprises and projects towards Consequently, they are altering their lending development are high costs to resources and enterprises and organizations favoring energy practices to favor enterprises that comply with the significant environmental degradation. Moreover, conservation and emissions reduction. The policy stated environmental safeguards. For example, in with China's emergence as a global producer and was jointly developed by the State Environmental 2008, 35 enterprises in Huzhou City of Zhejiang investor, the country's enterprises are increasingly Protection Agency (SEPA), the People's Bank of Province were denied bank loans totaling 214 being scrutinized - at home as well as abroad - for China (PBOC), and the China Banking Regulatory million Yuan because they failed to meet their environmental and social performance. Commission (CBRC) in July 2007. According to environmental protection standards. Similarly, the Banks have helped to fuel economic growth by the policy, firms that fail to pass an environmental Guangdong provincial banking system (excluding providing credit to enterprises, often pursuant to assessment or implement state environmental (Continued on page 4) national economic policies or at the behest of local protection regulations will be disqualified from authorities. However, banks have also seen how receiving loans from any financial institution. Firms severe environmental problems in these that have already obtained loans but are later enterprises can lead to non-performing loans. As a discovered to have violated the environmental result, Chinese financial institutions, especially regulations may have to pay back their loans. commercial banks, are now more aware of the To ensure that implementation of this policy is need for enterprises to follow Chinese laws on strictly enforced, a 'credit blacklist' of companies The Business Issue Bulletin provides those environmental assessment and protection. not meeting environmental standards has been interested in business issues with a short The Chinese government has recently developed and maintained by the Ministry of summary and analysis of a particular topic introduced its Green Credit Policy, which uses Environmental Protection (MEP)3. Banks are affecting the business environment in Vietnam, financial policy tools and incentives to improve prohibited from lending to companies on the list and exposure to different opinions held by various enterprise performance and reduce pollution. The until the companies remedy their environmental stakeholders on the topic. government is expecting the country's financial violations and are cleared from the blacklist. This The Bulletin is supported by Finland, sector to play a central role in establishing and list is included in PBOC's credit information Ireland, New Zealand, the Netherlands, and enforcing this policy. In response, various large database in the Credit Information System Bureau. 4 Switzerland. The statements and opinions presented here are only meant to provide additional reference (1) According to Nobel Prize-winning physician Murray Gell-Mann, sustainability can be defined as 'living on nature's income rather material and do not reflect the official opinion of than its capital'. the Vietnam Chamber of Commerce and Industry (2)Based on IFC's social and environmental performance standards, this voluntary set of principles is applicable to projects in all (VCCI) or IFC. industry sectors, with a total capital cost of $10 million or more, and to project finance advisory activities. Participating institutions agree not to "provide loans directly to projects where the borrower will not or is unable to comply with our environmental and social policies Readers are welcome to copy and distribute and procedures." Each bank implements its own policies and procedures to reflect the principles. the information contained in this bulletin (3) MEP has been upgraded from State Environmental Protection Authority (SEPA). provided acknowledgement is given to VCCI/IFC VCCI - 2009 (4) Over 40,000 information entries on environmental protection are included in this database. as the source. (5) In Mandarin this means 'double high' referring to heavily polluting and energy intensive industries. Viewpoints The Green Credit Policy - an initiative that requires inter-agency coordination l The 'greening' of the banking industry has Vietnam, particularly for consideration of developing a similar scheme for the two complementary aspects: 1) directing banking sector. credit toward environmentally favorable Mr. Cat Quang Duong, Deputy Head of Credit Department projects and enterprises which are committed State Bank of Vietnam to sustainability, and 2) denying financial support to environmentally damaging projects l China's experience in using credit policy for and enterprises. While both aspects can be energy saving and pollution alleviation with the directed and controlled by regulation, the key to close coordination of various governmental successful adoption of a Green Credit Policy is agencies (banking supervision, planning & to demonstrate how green lending increases investment, finance, environmental protection, profits and reduces risk, thus generating etc.) sets a good example that Vietnam should economic gain to lenders while simultaneously learn from. However, to effectively employ such supporting better environmental and social conditions for the greater public. a policy, all relevant parties need to be well- The Green Credit Policy not only responds to China's demand for prepared, from awareness among investors curbing pollution and energy consumption, but also appeals to the natural and the banking sector, to procedures with a instinct of banks to generate reliable revenues from lending and minimize specific and clear coordinating mechanism. lending risks to enterprises that do not adhere to environmental regulations We do not have a list of firms that have committed severe environmental or that cause catastrophic incidents. violations in Vietnam, nor do we have a two-way information system Mr. Ye Yanfei, Deputy Director-General between relevant agencies such as in China. Environmental impact Statistics Department, China Banking Regulatory Commission (CBRC)9 assessment is a good pollution control tool, especially as the Environment Law of 2005 is now in effect. Enforcement and compliance with The establishment of 14 'liang gao' environmental protection rules by investors and businesses, however, industries in China is an exemplary practice. remains superficial. Authorities also lack information about the use of However, for such a policy to be implemented environmental impact assessments by financial institutions. In addition, the in Vietnam, a roadmap should be established. project classification system based on environmental impacts does not exist. With the current limited awareness level of Ms. Le Minh Toan, Deputy Head of Planning and Finance Department officials, especially local governments, Environment Administration businesses and the general public, any attempts for immediate and obligatory China's experience in utilizing economic enforcement are unlikely to be viable. measures to protect the environment is useful. Government efforts to create conducive There is a primary need to set forth conditions and introduce incentives for loans environmental protection targets with specific and investment in energy saving and criteria and mandates in the socioeconomic renewable energy projects is a feasible option. development plan. Based on this, ministries Mr. Nguyen Phu Cuong, Deputy Head of Science and Technology Department and sectors can develop relevant legal Ministry of Industry and Trade normative regulations to guide implementation among enterprises. l I highly regard the Green Credit Policy effort of the Chinese government Ms. Phan Thanh Ha, Deputy Head of and its achievements in environment protection and energy saving. China's Financial and Monetary Department experience in developing this Green Credit Policy is definitely practical for Ministry of Planning and Investment Response of commercial banks to this policy l Green credit policies have been adopted extensively using voluntary to assess the impacts and effects of this policy on bank performance, I think principles, with the guidance and monitoring of relevant government that the implementation of the environmental risk management system by agencies in China. I see that Chinese banks have all implemented this Green the two banks is impressive. Credit Policy, though probably to different degrees. The largest Chinese Mr. Ho Xuan Nghiem, Deputy CEO bank, ICBC has utilized a green credit procedure for all projects, regardless of Sacombank size, with environment-related standards even higher than the national norms. After adopting the Equator Principles in October 2008, Industrial Bank Ms. Phan Thanh Ha, Deputy Head of Financial and Monetary Department (IB) has been focusing on building its environmental and social management Ministry of Planning and Investment systems, as well as constructing a dedicated Sustainable Finance Division to implement the Equator Principles. This team has developed internal l The implementation of environmental and social risk management at ICBC environmental and social policy and procedures and is in the process of and IB is positive, exemplified by well-developed organizational structures, integrating environmental and social considerations into their credit review management apparatus, monitoring and supervision mechanisms, and processes. IB is also training staff, from senior management to credit credit review and granting functions. The two banks themselves agree that officers, in both headquarters and local branches. At the same time, it is the introduction of environment and social risk management policy in the reaching out to educate clients about IB's environmental and social current context is a necessity. The question rests with the long-term and requirements, and providing training to key clients. sustainable development outlook for the bank, that "profit is one-off, Mr. Hua Bing, General Manager of Legal & Compliance Department sustainable development is permanent". Though further analysis is needed Industrial Bank of China10 (9) At the meetings with Vietnamese government and banker group, Aug 2009 in Beijing and Fuzhou. (10) At meetings with Vietnamese government and banker group, August 2009 in Fuzhou, China. 2 Viewpoints Strong commitment from both central and local government is vital to the success To date, the l State Bank has never circulated To support l banks in this area, CBRC partners with other governmental guidelines or reminders to commercial banks agencies and a number of international organizations, including IFC and on their involvement in environmental Equator Banks to organize training and workshops allowing banks to protection, which I think is the first step to exchange experience and gain exposure to international best practices in make to raise awareness of commercial managing environmental and social risks. CBRC has set up a web-based banks. If little improvement is observed after information system on enterprise environmental performance. Most of such education and communication, banks can access to this portal and check information about their potential compulsory rules can be considered to force borrowers and even existing clients. commercial banks to comply with Mr. Ye Yanfei, Deputy Director, Statistics Department environment risk management provisions in releasing loans. China Banking Regulatory Commission (CBRC) The establishment of a database that provides a list of enterprises violating environmental protection laws or causing heavy environmental Currently, l financial institutions operating in pollution, versus a list of businesses playing a proactive role in Vietnam are obliged to report monthly on loan environmental protection and projects using clean and innovative energy at portfolios to the State Bank. However, they environment management authorities is a very good idea which is also only need to provide information on likely to positively affect credit management of commercial banks. I would outstanding loans, type of customers, sectors, like to see it implemented as soon as possible. and are not required to report the Ms. Le Thi Kim Nga, Member of Management Board environmental and social impacts of the Vietcombank projects they finance. Most local banks have not yet employed environmental and social l to CBRC's periodic on-site examination and compliance In addition risk management systems. The State Bank audits to strengthen the implementation of this Green Credit Policy, CBRC should consider requesting all banks to apply asks all banks to report on a quarterly basis on the progress of environmental and social risk management in credit decision making implementing environmental risk management as well as loan processes in the near future if the goal is to develop the banking system classification based on environmental impacts. CBRC will then conduct sustainably and to contribute to environmental protection. analysis of an individual bank's portfolio to assess whether it is too Mr. Cat Quang Duong, Deputy Head of Credit Department weighted towards high environmental risk industries and sectors. State Bank of Vietnam The case for Vietnam l Energy consumption by local businesses at present can be divided in as soon as possible. IFC's support to Vietnamese banks in training, field two categories: 1) businesses using advanced equipment and studies, development of benchmarks and establishment of models toward technologies, mostly recently established manufacturing facilities, 100% an equator bank is highly desirable and vital. IFC has been developing a foreign-owned or joint venture businesses, accounting for a modest series of supporting tools which can be used by local banks, including proportion; and 2) businesses using old, outdated equipment and Sacombank, to stay increasingly updated on Equator Principles, technologies, taking a major share. If the latter group invests more in environmental and social standards, as well as environmental, health, and upgrading technologies and management practices, this could help save safety guidelines. up to 25 percent of energy consumption. This, in turn, can also become a Mr. Ho Xuan Nghiem, Deputy CEO potential market for financial institutions. Sacombank Mr. Nguyen Phu Cuong, Deputy Head of Science and Technology Department Ministry of Industry and Trade l Environment degradation in Vietnam has not been anywhere close to l consider this policy model on a pilot basis, for example with We should what is occurring in China. Nevertheless, relevant industries, including projects in the basins of the three rivers Cau, Nhue Day, and Dong Nai, finance and banking, should start to demonstrate their social where our priority should be to address environmental pollution issues and responsibilities now, through stricter control of loans, especially project for which a master plan for environmental protection has been approved by financing areas. the Prime Minister. Vietcombank has never encountered non-performing loans due to Ms. Le Minh Toan, Deputy Head of Planning and Finance Department customer infringement of environmental protection regulations. That, Environment Administration however, does not necessarily mean such incidents will never happen. As a safeguard measure, we have planned on more stringent environment risk l 2005, Sacombank issued a In June management for loan assessment and control. To do this, we will start provisional regulation on the establishment utilizing environmental impact assessment reports for projects during the and operation of the Environment and Social credit review process, and stricter reviews will be introduced for projects Management Taskforce. In July 2009, utilizing hazardous chemicals or posing potential environment and social Sacombank mainstreamed its environmental risks. We will not finance projects using outdated production lines or old policies and formed an environment and technologies which may adversely affect the environment. In fact, there social management committee. Sacombank was a case where we were performing regular audits of a cement factory in is seeking to become a green bank. The Vietnam, and learned that the company's staff were working in a hazardous adoption of Equator Principles is completely in and dusty environment. We subsequently reduced the company's loan sync with Sacombank's present development balance to compel the company to improve conditions, and ultimately a vision. Taking part in IFC's China study tour in total recall of the loan was employed. August 2009, and reflecting on what has been accomplished, Sacombank Vietcombank is also considering a plan to develop toward a green is on track to speed up its implementation and observe Equator Principles bank, through raising awareness of the entire staff and integrating 'green' 3 Viewpoints perspectives in our business strategy, service provision process, and Perhaps the l most important lesson learned especially customer assessment and management. Classification of loans from international and Chinese banks that based on environment-related factors used by ICBC is desirable and is one have implemented the Equator Principles and of our priorities for the future. Green Credit Policy is that environmental Ms. Le Thi Kim Nga, Member of Management Board responsibility and commercial success can go Vietcombank hand in hand. Practicing good environmental and social risk management reduces credit The banking l sector should respond to the recent National Strategy for losses, protects reputations, and generates Cleaner Production in Industry until 202011 by only extending loans to profits for banks and their borrowers. Early projects/businesses complying with environmental protection and energy adoption of good environmental and social saving regulations. This is a new area for Vietnam in general, and for the practices reduces long-term costs, avoiding State Bank in particular. The State Bank is seeking support from the necessity of spending resources on remedial work. These international international organizations in the process of developing policies and and local policies and practices are tools to assist commercial banks to regulations to manage the environmental and social risks in credit manage risks, particularly environmental and social risks, and in exploring businesses and to develop the banking sector in a sustainable way. We are sustainable business practices. particularly interested in tools, guidelines and best practices in By effectively managing social and environmental risks and identifying environmental and social risk evaluation of investment projects which can opportunities alongside these risks, banks are beginning to create long- be utilized by our banks. term value for their business. Some banks are driven toward a To get the banking sector to contribute to the national environmental sustainability path because of the need to manage environmental and social protection and energy saving strategy, the State Bank needs risks, while others enter the path through their desire to offer innovative cooperation from other related agencies, particularly the Ministry of sustainability products and differentiate themselves from their Natural Resources and Environment (MONRE). I agree that it would be competitors. While entry points will vary from bank to bank, it is our view ideal if a communication channel were to be established between State that the optimal long-term value creation is a win-win approach to achieve Bank and MONRE so that the State Bank is able to inform credit institutions on businesses/projects violating environmental regulations. Such a our economic development and environmental protection agenda. We hope blacklist is necessary but needs to be carefully set up as it might involve these international and regional experiences and lessons are useful for privacy issues. Vietnamese policy makers and commercial banks. Mr. Cat Quang Duong, Deputy Head of Credit Departmen Ms. Rong Zhang, Program Officer State Bank of Vietnam Environment and Social Development Department, IFC (Continued from page 1) developed to further strengthen the enforcement of the Policy and to extend responsibility and accountability to the public sector. Led by MEP, it will Shenzhen) cut 400 million Yuan in loans for seven enterprises as a result of the include: "Green Insurance"6, "Green Securities"7, and an "Environmental information provided by the environmental protection information system. Tax"8. This framework demonstrates increasing awareness and commitment In addition, several banks have already put in place internal systems, from China's public sector to address environmental issues resulting from policies, procedures, databases, and tools to manage policy implementation. rapid economic development. For example, the Industrial and Commercial Bank of China (ICBC) established The case for Vietnam a special database on 47,000 of its clients, focusing on environmental Lessons learned from China's experience can serve as a valuable model information and risk. It also adopted a 'one-ballot-veto' mechanism which for Vietnam. Recent news reported by the Ho Chi Minh City (HCMC) allows for a single ballot rejection of loans based on a borrower's government that over 100 enterprises in HCMC's export processing zones environmental performance. ICBC also ranks its borrowers based on their and industrial parks do not have wastewater treatment systems is evidence of environmental performance on a nine-category basis, ranging from the fact that Vietnam's rapid growth is having negative environmental 'environmentally friendly' to 'potential environmental risk'. impacts. In addition, 70 enterprises were reported to be without waste gas Another notable development supporting the Green Credit Policy comes treatment systems, and 22 of 106 central and private hospitals had not from the joint stock Industrial Bank (IB). IB's unique sustainability strategy completed their wastewater treatment facilities. Other cases include pollution began with a 2006 decision to become IFC's first partner bank in China to by manufacturing firms, including the case of Vedan Vietnam illegally finance energy efficiency projects. By the end of 2008, IB had granted 86 loans dumping untreated waste into the Thi Vai River, a Korean MSG manufacturer for energy conservation and emissions reduction projects totaling 3.3 billion dumping toxic waste, and a Vietnamese leather tanning company pumping Yuan, covering 22 provinces in China. Also, in October 2008, IB announced its carcinogenic chemicals into a HCMC river. adoption of the Equator Principles, thereby becoming the first Chinese Equator These cases should propel the government to take measures for more bank. aggressive enforcement of environmental regulations by shutting down Strong commitment from both central and local government is vital to the severely polluting production facilities and asking financial institutions to take success into account environmental risks when lending. Vietnam's financial Although significant progress has been made after more than one year of institutions should initiate steps to adopt some of the measures in the Green implementing the Green Credit Policy, MEP admits that there are a number of Credit Policy. In the short term, the public sector should encourage banks to challenges - especially at the provincial level. For instance, resistance by local adopt the Equator Principles and introduce preventative measures as a way to governments to withdraw from highly-polluting, highly-profitable businesses raise awareness. The government should then gradually move toward more (a key resource for local tax revenue); and limited awareness among local restrictive standards (i.e. blacklisting) as seen in the Policy in China. While government officials and small-scale bankers about environmental issues Vietnam is prioritizing economic development, it should not be at the expense limits the depth and breadth of implementation. of the environment. This is a message that should be integrated at all levels In the meantime, a comprehensive Green Policy Framework is being throughout various sectors. (6) Firms in industries highly prone to environmental accidents will be required to buy insurance on the basis of their environmental risk profile. (7) Heavy industry companies, including those in power, cement, and steel, that seek an initial public offering must meet certain environmental criteria, and listed companies in certain heavy polluting industries must provide minimum levels of disclosure of environmental and energy performance. (8) Environmental taxes based on different industries, products, and pollution levels. (11) On September 7, 2009, the Prime Minister issued Decision No. 1419/QÐ-TTg, approving the National Strategy for Cleaner Production in Industry until 2020 with an aim to strengthen state management in environmental protection and optimizing the use of natural resources and energy, reducing emissions and improving people's lives. Office: 5th floor- ?Hong Giang - Director of Business Information Center - BIZIC - VCCI ?International Trade Center - N0 9 Dao Duy Anh St., Hanoi Publisher: Phan Legal consultants: ? Mr. Tran Huu Huynh, Director General of Legal Dept., VCCI - Mdm. Pham Chi Lan, Senior Advisor Tel: (84.4) 5743084 ? ? Fax: (84.4) 5742773 ? E-mail: vcci@hn.vnn.vn Layout and printed ? by: Newdays JSC.; 10,000 copies License N0: 27/GP-XBBT by the Ministry of Information and Communications, dated 19/5/2009 ?