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Greening the finance of China’s commodity imports: Lessons from practice

September 2016 – At the invitation of the China Banking Regulatory Commission, the University of Cambridge Institute for Sustainability Leadership (CISL) and the Banking Environment Initiative worked with the Chinese banking industry to ask whether it is possible to green the finance of China’s commodity imports, and thereby address the risks associated with unsustainable agricultural production.

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Greening-finance-China-En.pngContext

Of all China’s imports, agricultural commodities stand out in that China has a dependency on imports to feed its population, they represent a relatively low percentage of the dollar-value of imports but on average have the highest embodied greenhouse gas emissions per unit value. The latter is because the expansion of agriculture is very often associated with deforestation, which in turn is the second largest source of global greenhouse gas emissions after power generation. Sustainable methods of production of these commodities can make them significantly less environmentally harmful.

The Chinese government and regulatory authorities already have initiatives to ‘green’ China’s financial system. At the invitation of the China Banking Regulatory Commission, the University of Cambridge Institute for Sustainability Leadership (CISL) and the Banking Environment Initiative (BEI) worked with the Chinese banking industry to ask whether it is possible to green the finance of China’s commodity imports, and thereby address the risks associated with unsustainable agricultural production.

About the report

This report by the University of Cambridge Institute for Sustainability Leadership and the Central University of Finance and Economics (CUFE) provides research on the environmental effects of agricultural commodity production and trade. 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. Chinese banks and leaders will also find clear examples of best practices and approaches in this report which they can use to improve the healthy development of China’s green credit system.

The report is based on work carried out in partnership by CISL and the Research Center for Climate and Energy Finance (RCCEF) of CUFE (Beijing), with the support of the Banking Environment Initiative and encouraged by the China Banking Regulatory Commission (CBRC). It is 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 turn, the workshops were supported by expert analysis and facilitation by CISL and RCCEF. The project was also supported by the UK Foreign and Commonwealth Office.

Key findings

This research project identified a number of key findings relating to ‘greening the finance of China’s commodity imports’. Firstly, that Chinese banks, their regulator and Chinese commodity importers acknowledge that supporting sustainability in agricultural commodity supply chains is an increasingly important issue. A number of examples of good practice for sustainable trade finance were identified, however it was acknowledged that these are in the early stages.

The report also identifies four key challenges currently faced by Chinese banks to make progress on ‘greening’ their trade finance, and makes the following recommendations for possible pathways forward to address each of these challenges, based on the ideas raised during the workshops:

1. Lack of level playing field

Official recognition of the importance of greening China’s trade finance was identified as a key pathway forward to address this challenge.

2. Lack of definitions

A variety of Chinese industry bodies are already working to set out guidance for companies investing overseas in agricultural commodities, to clarify what is considered sustainable from a Chinese point of view. It was recommended that this existing work by Chinese industry authorities be integrated into banking guidance.

3. Lack of ownership

A number of possible pathways forward were identified to build ownership, these include: banking industry association leadership, setting commercial targets, and developing a ‘Green Trade Finance League Table’ for China.

4. Lack of capacity               

Two key opportunities were identified to build capacity on the topic of ‘green trade finance’. Firstly, to form a Chinese bank-client industry platform to facilitate cross-industry learning. The second is to form strategic partnerships with international experts to foster learning and sharing of best practice.

Citing this report

Please refer to this report as University of Cambridge Institute for Sustainability Leadership (CISL). (2016, September). Greening the Finance of China’s Commodity Imports: Lessons from Practice. Cambridge, UK: Cambridge Institute for Sustainability Leadership.

Published: September 2016

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Acknowlegdements

This report is based on work carried out in partnership by CISL and RCCEF of CUFE, with the support of the BEI and encouraged by the China Banking Regulatory Commission (CBRC). It is 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 turn, the workshops were supported by expert analysis and facilitation by CISL and RCCEF of CUFE. This project was conducted under the Chatham House rule.

The lead authors of this report were Andrew Voysey and Thomas Verhagen (CISL), with invaluable input from Simon Tyler (Senior Associate, CISL), Professor Wang Yao, Associate Professor Sun Jin, PhD DuanYuwan, Mei Dougzhou, Zhou Mohan and Jiang Beibei (CUFE). The work benefited from expert contributions from members of the BEI’s Sustainable Trade Finance Council, including representatives from Barclays, Deutsche Bank, Standard Chartered Bank, Unilever, Westpac, Wilmar and WWF. We are also grateful for expert contributions from Chinese experts, who are named in the report.

All involved would like to thank the UK’s Foreign and Commonwealth Office for financial support for this project.

Disclaimer

The opinions expressed here are those of the authors and do not represent an official position of CISL, the University of Cambridge, or any of its individual business partners or clients. This report is not, and should not be construed as, financial advice.