China, People's Republic of : Bank of Xingtai Green Finance Development Project

Finance / Finance sector development

The project is aligned with the following impact: industrial transformation and green development in Hebei province promoted and environmental conditions improved. The project will have the following outcome: volume of green finance provided by the city and rural commercial banking sector in Hebei province increased. This outcome will be achieved through three outputs.

Output 1: The Bank of Xingtai's green finance system established. The project will help the Bank of Xingtai (i) adopt domestically and internationally accepted green finance taxonomy as the basis for subproject eligibility and selection criteria, (ii) establish an ESG framework for monitoring subproject performances, and (iii) implement the GRI principles for reporting and disclosing subproject ESG information to the public. The establishment and adoption of the green finance system will be accomplished through (i) the operationalization of a sophisticated green finance IT system that will apply domestic and international green finance taxonomies to define what constitutes "green", and (ii) implements the ESG and GRI guidelines. The EU's sustainable finance taxonomy, which is among the most comprehensive anywhere, will be incorporated in the subproject eligibility criteria.

Output 2: Green finance lending by the Bank of Xingtai initiated and increased. The project will support the Bank of Xingtai's establishment of a green finance lending business line and help it increase its green lending volume during project implementation and beyond. The ADB project funds will serve as a catalyst for green financing provided by the private sector and other commercial sources. Specifically, the ADB loan of

170 million is expected to leverage

170 million in counterpart funding from the Bank of Xingtai and an additional

340 million from private sector and commercial sources such as other commercial banks. Each euro of ADB financing will leverage

3 or more from other sources, and significantly expand the project's green finance and development impact.

Output 3: The Bank of Xingtai's environment, social, and governance and related institutional capacities improved. The project will help the Bank of Xingtai strengthen its institutional capacity. It will develop an ESG risk management framework. The Bank of Xingtai's environmental and social management system (ESMS) will be improved, a dedicated safeguard unit established, and environmental and social safeguard training provided for its staff. The project will also support the improvement of the Bank of Xingtai's financial and risk management capacity through training to bank staff on credit assessment and treasury operations. This will help integrate the ESG risks to the bank's credit review process and extend the sourcing of other low-cost funds such as from the capital markets. To disseminate the experience of the Bank of Xingtai and support replication, extensive knowledge-sharing programs on green finance in general, and green finance business models for commercial banks in particular, will be conducted with the participation of other city and rural commercial banks across Hebei and other provinces. The Bank of Xingtai will enhance human resource management to expand gender mainstreaming at the institutional and lending product levels. This will be an important step in the Bank of Xingtai's journey toward becoming a more sustainable and inclusive financial institution.

The ecological and environmental damage to the PRC from the 1980s of rapid economic development and industrialization is enormous. In 2019, the PRC ranked 120th out of 180 countries on 24 environmental sustainability categories, including the state of its air, water, soil, oceans, climate, and biodiversity. The challenge is particularly severe in Hebei province, one of the nation's industrial hubs and the location of the project. As of 2018, the average annual mean concentration of particulate matter 2.5 micrometers or less in diameter (PM2.5) in the air of Hebei province was 60 micrograms per cubic meter (

g/m3), six times the World Health Organization acceptable level (10

g/m3). Hebei province's average annual mean concentration of particulate matter 10 micrometers or less in diameter (PM10) was 109

g/m3, more than five times what the World Health Organization considers acceptable (20

g/m3). Worsening environmental conditions are making Hebei province and many regions of the country less livable. It is the poor who suffer the most, and the PRC's total welfare loss because of pollution was estimated at $1.59 billion as of 2013 (or 9.9% of gross domestic product), the latest estimate.

These environmental and social concerns placed green finance at the heart of the PRC's national development strategy under the 13th Five-Year Plan, 20162020. Green finance will likely feature more prominently in the 14th Five-Year Plan, 20212025. The National Development and Reform Commission (NDRC), the People's Bank of China (the central bank), the China Banking and Insurance Regulatory Commission (CBIRC), and the Ministry of Ecology and Environment are the leading agencies for green finance development. Some headway has already been made, with the country's 21 largest banks (comprising 3 policy banks, 6 state banks, and 12 joint stock banks) increasing their green financing to an annual average of $234 billion during 20132017. However, based on the estimated total green finance needs of $350 billion per annum, the gap of about $116 billion cannot be filled by these large financial institutions alone. Commercial banks such as the Bank of Xingtai dominate the PRC financial system, which makes expanding their green finance lending capacity an essential step toward improving the country's environmental conditions.

The outbreak of the coronavirus disease (COVID-19) and the allocation of national resources to combat the pandemic in 2020 have not changed the Government of PRC's long-term policy priority of pursuing green growth and environmental sustainability. The pandemic-related economic slowdown will not affect the robust demand for green finance over the medium term. Conditions in the PRC are gradually returning to normal, and the government's economic recovery plans are anchored on a less energy-intensive and more environment-friendly path. The Hebei Provincial Government has been successful in controlling COVID-19, which has minimized the pandemic's impact on the Bank of Xingtai's business. As a result, no significant changes to the project are anticipated because of COVID-19.

To fulfill their abundant potential to drive environmentally sustainable growth, commercial banks beyond the largest 21 must become accustomed to the new green commercial banking concepts and practices that have taken hold internationally. These include ESG criteria and the GRI sustainability reporting standards. The traditional commercial banking practices that base lending decisions primarily on borrowers' credit qualities are no longer sufficient. Recognizing that ESG issues can impact a business's long-term sustainability, commercial banks across the world are increasingly considering the ESG attributes of potential borrowers when assessing risks. For example, when borrowers breach environmental rules and regulations, they will face fines, suspensions, or even shutdowns that can undermine banks' underlying asset quality and profitability. In addition, commercial banks increasingly need to disclose their ESG performance for government and public scrutiny. Most city and rural commercial banks in the PRC have limited knowledge of the concepts and practices related to ESG and the GRI. The PRC's request for ADB financing to help expand green finance is a response to this gap. The project's integration of ESG and GRI considerations into the Bank of Xingtai's lending procedures will help promote the green and sustainable lending. It will create a replicable model for other commercial banks in the PRC.

Defining what constitutes "green" is by applying the green finance taxonomy, which is difficult to do. This is true particularly for city and rural commercial banks with limited experience in green finance. The complexity is compounded in the PRC by the existence of different taxonomies. The three green finance taxonomies currently in use were developed by the NRDC, the People's Bank of China, and the CBIRC, which have overlapping interpretations on how green should be defined. Moreover, these domestic standards are not fully aligned with international standards, particularly in terms of the use of fossil fuel. For example, the European Union (EU) standards exclude fossil fuel-based technologies, particularly from solid fossil fuels, which the NDRC's Green Industry Guidance Catalogue (2019) still consider to be green. Precise definitions of what is truly green can be achieved through the use of information technology (IT) that employs big data, cloud computing, and sophisticated algorithms to help banks sort through the complex domestic and international green finance standards.

Hebei province is the PRC's industrial heartland for steel, petrochemicals, cement, glass, and leather. As a result, Hebei also is one of the country's most polluted provinces. The PRC's 10 most polluted cities include four in Hebei province: Shijiazhuang (ranked second), Xingtai (third), Handan (fifth), and Baoding (eighth). The Hebei Provincial Government is determined to reverse this trend, particularly as an important participant in the central government's Beijing-Tianjin-Hebei (BTH) air quality improvement program (BTH program). The provincial government is implementing a 3-year "blue sky" action plan during 20182020 to restructure and modernize its industrial base and reduce its pollution level.

The Bank of Xingtai is committed to become a leading green bank. This adds impetus to the province's efforts to transform its industries and manufacturing sectors to address pollution and move onto a sustainable development path. The Bank of Xingtai is implementing the national and provincial green finance agendas, and is keen to learn from international experience. Although headquartered in Xingtai city, the bank's reach extends across the province through a network of 4 branch offices and 74 subbranches. This provides for a strong home market advantage. The bank is rated satisfactory under the capital adequacy, asset quality, management quality, earnings, liquidity, and sensitivity to market risk (CAMELS) modelthe international standard for financial analysis of commercial banks and involves comprehensive evaluations of CAMELS.

Once the Bank of Xingtai builds up its own green finance operations and strengthens its institutional capacity under the project, other city and rural commercial banks will have a reference point for adopting similar green finance business models. To help demonstrate the project's green finance model, the Bank of Xingtai has committed to undertake knowledge-sharing and information-dissemination activities. These activities will include the preparation of publications and other media products, internal and external workshops, and other knowledge events and materials on the project's results, benefits, and lessons. Some of these activities will be jointly hosted with ADB, green finance associations, public sector entities, and other financial institutions. City and rural commercial banks account for 26.2% of the PRC's banking sector's overall assets, and 95% of the PRC's banking institutions (excluding rural cooperatives and other smaller financial institutions) by number. Replication of the project's experience could add to the PRC's long-term green finance endeavors.

ADB's $2.0 billion in funding for the BTH program from 2015 to 2020 has included support for policy and regulatory reform, the expansion of clean technologies in small and medium-sized enterprises, the development of advanced clean technologies, energy-efficient heating and cooling systems development, and coal-to-natural gas conversion. A targeted green finance model, to be implemented through the commercial banking sector, will complement and add substantial value to the BTH program. The impact of this project will be significant, particularly since city and rural commercial banks have not yet been exposed to or involved in green finance practices, despite growing interest among their industrial and corporate borrowers who must become part of the pollution reduction solution.

By promoting industrial transformation and helping reduce pollution in Hebei province, the project is aligned with the PRC's 13th Five-Year Plan (footnote 8); the provincial government's "blue sky" action plan; and the Xingtai City Master Plan, 2016-2030. It supports ADB's country partnership strategy for the PRC, 2016-2020 to (i) help translate innovative ideas into actual projects for implementation; (ii) support transformative and demonstration projects, which can be replicated and scaled up; (iii) promote institutional reform efforts; and (iv) enable private sector participation. It is also aligned with four operational priorities of ADB's Strategy 2030: (i) addressing remaining poverty and reducing inequalities, (ii) accelerating progress in gender equality, (iii) tackling climate change, building climate and disaster resilience, and enhancing environmental sustainability, and (iv) strengthening governance and institutional capacity. By helping to reduce air pollution and greenhouse gas emissions, the project will generate regional public goods.

Industrial transformation and green development in Hebei province promoted and environmental conditions improved.

Volume of green finance provided by the city and rural commercial banking sector in Hebei province increased

The loan became effective in April 2021. By 31 March 2023, the total amount of approved sub-loan reached $35.2 million and disbursement reached $31.5 million. One subproject is under preparation, and subproject pipeline is under further development.

Two dedicated staff have been hired by BOX to support the implementation of the environment, social safeguard and gender action plan. External green assessment, environment, social and gender, financial management, corporate governance and green finance experts with IFI project experiences have been mobilized to strengthen BOX's capacity. Detailed capacity development work plan was prepared and updated from time to time.

The Environmental and Social Monitoring Report, Audited Entity Financial Statements, semi-annual Project Progress Report and Gender Development Monitoring Report were submitted to ADB in due course.

Annual loan monitoring review missions were conducted virtually in 2021 and 2022.

Bank of Xingtai's green finance system established

Green finance lending by Bank of Xingtai initiated and increased

Bank of Xingtai's ESG and related institutional capacities improved

BOX's green finance IT system was installed in 2021 and has started the operations by following the designed performance targets. BOX issued internal guidelines to promote the identification and preparation of eligible subprojects. The subproject pipeline is being assessed against eligibility criteria including E&S and green standard requirements.

As of 31 December 2022, the total amount of approved sub-loan reached $16.7 million, and disbursement reached $19.3 million. Two subprojects are under preparation, and subproject pipeline is under further development.

Two dedicated staff have been hired by BOX to support the implementation of the environment, social safeguard, and gender action plan. External green assessment, environmental, social and gender, financial management, corporate governance and green finance experts with IFI project experiences have been mobilized to strengthen BOX's capacity. BOX was invited to participate the virtual webinars on international best practices of PRI, ESG and GRI. BOX team regularly participate ADB's trainings on safeguards, gender, financial management, project management, disbursement, and green financing. Detailed capacity development work plan was prepared and updated from time to time.