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China looks to green its import of agricultural commodities

China looks to green its import of agricultural commodities

Thomas Verhagen, Senior Programme Manager

9 September 2016


The production and trade of agricultural commodities worldwide is a significant generator of carbon emissions globally. As China is one of the biggest importers of agricultural products, exploring whether to integrate green standards into trade processes for agricultural commodities is an important question in the context of China’s contribution to sustainable development.

This is no easy feat however given the multiple challenges that it faces in encouraging investors, producers and traders to manage environmental and social risks and implement standards in line with sustainable development, as well as reducing the credit and reputational risks for finance providers.

Of particular note are the steps that have been initiated by the Chinese banking regulator to help address these challenges;  the Cambridge Institute for Sustainability Leadership (CISL) was recently invited by the regulator to work with Chinese banks as they contribute to and learn from international best practice on this topic, along with the banking industry leadership group that CISL facilitates, the Banking Environment Initiative (BEI).

This work, which led to a new report, Greening the finance of China's commodity imports: Lessons from practice, was carried out in partnership with the Research Center for Climate and Energy Finance, Central University of Finance and Economics, Beijing (RCCEF) and encouraged by the China Banking Regulatory Commission. It was informed by a series of workshops in Beijing attended by representatives of Chinese and foreign banks, commodity traders, financial regulators, government bodies and academic and civil society experts.

In the foreword of the report, Mr Ye Yanfei, Policy Research Bureau, China Banking Regulatory Commission said:This report shows thorough and pioneering research on the environmental effects of agricultural commodity production and trade. Crucially, it also highlights related risks which China’s banking institutions and leaders need to understand better, especially those who care about greening Chinese banks’ lending activities, building an ecological civilisation and achieving genuinely sustainable international development.”

China’s increasing commitment to implement its green agenda was demonstrated recently by the announcement of its plans to ratify the Paris Agreement alongside the United States. This bold move signalled to the international community that China means business in pursuing its green agenda. This drive for sustainable growth was echoed in China’s finance industry, when the People’s Bank of China, along with six other government agencies issued the Guidelines for Establishing the Green Financial System to the finance industry. These guidelines aim to advance the development concepts of innovation, harmony, greenness, openness and sharing, and promote the establishment of China’s green financial system. The People’s Bank of China also commissioned a major report on green finance for the G20 summit in Hangzhou. CISL contributed to this report as an official Knowledge Partner.

Our work with the G20 and our report on China’s soft commodity imports provide useful insight into the approaches China might employ to achieve its aims.

Why are sustainable soft commodities important to China?

Of all China’s imports, agricultural commodities stand out. That is because China has a dependency on imports to feed its population; agricultural commodities represent a relatively low percentage of the dollar-value of imports but on average have the highest embodied greenhouse gas emissions per unit value. For every yuan or dollar spend, soft commodities in China embody up to almost four times more greenhouse gases than other import classes. This is mainly caused by detrimental production methods, a strong driver of tropical deforestation, as well as the relatively low price of soft commodities.

Chinese banks, their regulator and Chinese commodity importers all acknowledge that supporting sustainability in soft commodity supply chains is an increasingly important issue. But why? Through a series of expert workshops that we ran for these stakeholders in China we collectively identified the five strategic developments driving this agenda:

1. Foreign relations

As one of the world’s largest commodity importers China is interested in taking more account of the negative impacts unsustainable production methods have on its key trading partners.

2. Security of supply chains

Given its dependence on agricultural imports, China has interest in ensuring that significant shifts in global standards for agricultural production (expected as countries develop policies to fulfil their ambitions in the Paris Agreement) do not threaten the security of its own supply chains.

3. Industry policies

Under the guidance of China’s Ministry of Commerce, various agencies are developing specific guidance for Chinese firms that invest overseas in commodities like palm oil and timber.

4. Financial regulation

The China Banking Regulatory Commission’s (CBRC) Green Credit Guidelines already requires Chinese banks to adhere to international sustainability norms in all of their overseas financing. At present, however, there is no specific guidance on how to apply this policy to trade finance.

5. Credit risks

What used to be reputational risks associated with unsustainable production are now also impacting credit risks. One example of this was the recent downgrade warning issued by S&P for the palm oil producer IOI due to its suspension from the Roundtable for Sustainable Palm Oil and subsequent withdrawal of client contracts.

Recommendations

Greening the finance of China’s commodity imports is currently hampered by a lack of a level playing field, a lack of definitions, a lack of ownership and a lack of capacity. In our report we offer potential solutions to these challenges. For instance, Chinese regulators could level the playing field in the market for soft commodities trade finance by providing more clarity on relevant policy guidance such as its Green Credit Guidelines (the set of rules introduced by the Chinese banking regulator to redirect bank lending away from environmentally damaging activities and towards clean, green activities). This could be done by integrating existing work by Chinese non-financial industry authorities into banking guidance.

Ownership could be increased if Chinese banking industry bodies included sustainable commodity finance on their agendas. Ownership would also increase if banks set commercial targets or industry bodies facilitated a public league table along the lines of a ‘China Green Trade Finance League Table’. Finally, capacity could be increased by bringing together commodity companies and banks into a forum which facilitated cross-industry learning. If such a forum were founded, it could benefit by forming strategic partnerships with international experts that are already active in this field such as the Banking Environment Initiative.

Important leadership has been shown by China through this work and China’s wider action to drive its green agenda. These are early steps, and are moving in the right direction, but as this report shows there is still much more to be done if China is to green its financial system and lead the rest of the world by example.

About the author

Thomas joined CISL in 2015 as Senior Programme Manager for the Banking Environment Initiative. Prior to CISL, Thomas worked for ten years at ABN AMRO bank. Here he experienced first-hand the necessity of, and opportunities for, change by working in credit portfolio management and business model innovation.

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Articles on the blog written by employees of the University of Cambridge Institute for Sustainability Leadership (CISL) do not necessarily represent the views of, or endorsement by, the Institute or the wider University of Cambridge.