By Paul Davies, Gary Gengel and Andrew Westgate

In April 2015, the Final Report of the People’s Bank of China’s Green Finance Task Force made 14 recommendations to facilitate the establishment of China’s green finance system. Recommendation 13 proposed the imposition of lender liability on banks to force financial institutions “to take environmental impact into consideration in making investment and financing decisions”.

The practical consequence would be that banks and other financial institutions become liable for environmental pollution or damage caused by their borrowers. Although lender liability has been a feature of environmental regulation in Western countries in the past, it has been significantly scaled back, and most statutes provide a due diligence “safe harbor” for lenders. Otherwise, it is argued, lender liability becomes nothing more than a search for the “deepest pockets”.

Green Finance at G20

Green finance was a prominent topic at the eleventh G20 summit, which concluded last week in the city of Hangzhou, pushed to the forefront by the host country, China, which has cemented its position as a market leader in “greening” its economic system.

China’s commitment to green finance is well established– China’s government has been encouraging banks to take environmental issues into account with respect to their lending since it first issued green credit guidelines in 2007. In the months preceding the G20 summit, China had actively participated in international discussions regarding the development of green finance, highlighting China’s efforts to transition towards sustainable growth. China has become the world’s largest green bond market, issuing 33% of the world’s total in the first half of 2016. Increasingly, China is also adopting a leading role in establishing and developing the regulatory framework as green bonds become a fixture of environmental policy.

Commercial Banks Should Prepare for Implementation of New Guidelines

New guidelines for establishing the green financial system, released during the G20 Summit (4 September 2016), confirmed China’s earlier proposals to seek to introduce the concept of lender liability for environmental damage into China’s legal framework. The guidelines were published by the People’s Bank of China, but were jointly issued with six other government agencies, including the Ministry of Finance, the National Development and Reform Commission, the Ministry of Environmental Protection, and China’s regulatory commissions for banking, insurance and securities, indicating the breadth of government backing for these measures.

The introduction of lender liability would be a sea change in the environmental regulatory framework of what is now one of the world’s key manufacturing and financial markets. The new guidelines are anticipated to attract significant attention from around the globe. Banks and other financial institutions need to engage with the proposals as quickly as possible, with a view to not only seeking to clarify the scope and timing of any amending legislation, but also in considering what procedures and processes need to be in place to mitigate environmental risks associated with lending.

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