Source: Google

China is changing and the link with recent developments at ICBC

Agricultural commodities such as soy and palm oil are known to be major drivers of global deforestation. In recent years, scrutiny on the cultivation of these commodities has increased and for right reasons. China is one of the world’s largest consumers of these commodities. There are also structural factors, such as the growth of the processed food industry in China being one of the main reasons behind the huge consumption of palm oil.

While China may be one of the largest consumers of these commodities, Chinese banks are among the biggest global financiers of companies involved in the production of forest risk commodities such as soy and palm oil. According to Global Witness, an international NGO founded in 1993, “Chinese banks are pouring billions into the agribusiness, propelling global deforestation while failing to take adequate measures to ensure that their money doesn’t contribute to environmental destruction”. It also states, “Chinese banks and investors provided over 22.5bn USD loans and underwriting from January 2013 to April 2020 to major companies producing and trading forest-risk commodities”.

During the afore mentioned time period, Industrial and Commercial Bank of China provided US $ 3.66 billion to major companies producing and trading forest risk commodities. To add insult to injury, in a Forest 500 ranking that assesses deforestation policies of 500 most influential companies and financial institutions dealing in forest risk commodity supply chains, ICBC was among the worst performing banks in the world, scoring 0 out of 100. Clearly, ICBC has done itself no favours by indulging in the financing of activities that have adverse effects on the environment.

ICBC and the Belt and Road Initiative

Since the launch of the Belt and Road Initiative (BRI) in 2013, China has provided over US $ 50 billion for financing of coal facilities across 150 countries. While domestically, China has been cutting down its air pollution levels by closing old coal facilities and subsidising the renewables sector following Xi Jinping’s call to slash coal consumption to 50% of the country’s total energy capacity by 2030, it has been financing coal projects overseas unabated. The funding across Africa, Eurasia and South America has, to a large extent, been provided by the Chinese banks. Critics argue that these banks are now being used for political and strategic manoeuvring by the Chinese Government.

The irony is that among all the Chinese banks, ICBC was the first to join the Task Force on Climate related Financial Disclosure (TCFD). ICBC hasn’t utilized the platform to strike out industries it wouldn’t finance. What makes things worse is that, Banking on Climate Change 2020 shows that the top four Chinese banks, including ICBC, have together financed fossil fuels with around US $ 240 billion in the four years since the adoption of Paris Agreement. When it comes to coal mining and power, the four Chinese banks lead the list, together making up 51% of financing to top 30 coal power companies globally from 2016-2019, and 67% of financing to top coal mining companies. In 2019, ICBC provided $ 4.18 billion worth of direct funding to the world’s top 30 coal power companies and was also the world’s leading coal underwriter over the past two years.

Historically, China has been a major producer of coal and as such its advocacy of coal is understandable. But as Xi Jinping announced China’s target of becoming carbon neutral by 2060, it undoubtedly won’t be a good image for the country if its banks continue financing projects that are environmentally damaging. Moreover the economics of coal, as researchers have pointed out, isn’t all that encouraging enough to warrant such huge investments. Not only is coal environmentally toxic, investments in coal power plants have provided increasingly diminishing returns. Some have suggested that China could save up to $400 billion if it phased out coal in line with the Paris Agreement. The increasing demand for renewables coupled with their fast-dropping cost and energy storage has made a few new solar and wind cheaper than existing coal.

For China to seek shade under the renewable umbrella, it becomes imperative that its banks take proactive measures to ensure their money doesn’t flow into environmentally unfriendly activities. And with the Chinese government currently in the process of revising its Commercial Banks Law, there is a crucial opportunity for the regulators to address these issues.

ICBC on the wrong side of Legal and General Investment Management

Many asset managers are increasingly becoming aware of the importance of ESG. Ever since the pandemic struck, asset managers such as BlackRock have been increasingly promoting sustainability as a core issue. But Legal and General, one of the largest asset managers in the world has been on the ESG cause long before the pandemic. It has been very vigilant on the ESG front, punishing companies that failed to comply with sustainability norms and rewarding companies that did.
As it turns out, on 15th June 2021, Legal and General Investment Management dropped four companies (including ICBC) from its funds for failing to comply with sustainability norms. ICBC’s failure in disclosure of Scope 3 emissions related to investments coupled with absence of specific policy related to coal led to its exit from LGIM funds. Please refer EMAlpha’s insight “Asset Managers take investor activism further, the reason…ESG”

EMAlpha’s ESG and Sentiment analysis of ICBC

Following its exit from the Legal & General funds, EMAlpha took a look at the sentiment and ESG score as capture by its AI.

Figure 2: Sentiment and ESG chart of ICBC from 26th April 2021 to 30th June 2021