Sustainable Finance & China's Green Credit Reforms: A Test Case for Bank Monitoring of Environmental Risk

75 Pages Posted: 20 Feb 2018 Last revised: 21 Aug 2019

Date Written: February 15, 2018

Abstract

As financial institutions and policymakers worldwide are considering how to integrate sustainability considerations throughout financial systems, a critical question is whether banks can effectively assess and monitor borrowers’ environmental credit risk. China’s green credit reforms, part of sweeping “green finance” policies adopted by the Chinese government over the past decade, require banks to do exactly that. China’s green credit reforms offer an opportunity to test current theories of the role of creditors in corporate governance and the potential role of banks in driving sustainable finance across global capital markets.

This study uses data from the 21 Chinese banks that are at the forefront of China’s green finance initiatives, as well as insights from fieldwork conducted in 2016 and 2017, to examine banks’ ability to monitor and price environmental credit risk. This investigation shows that leading Chinese banks are strengthening their ability to integrate environmental criteria into credit risk assessment but that key barriers to efficient pricing and monitoring of environmental credit risk remain. This article concludes with lessons from the Chinese context for sustainable finance reform elsewhere.

Keywords: corporate governance, creditor, bank, sustainability, finance, risk management, agency costs, monitoring, green finance, green credit, green bond, sustainable finance, China, ESG, international finance, financial institutions

JEL Classification: K2, K22, K32, K33, M14, O53, O16, P31, P28, Q56, Q58, Q28, Q38, Q48, Q01

Suggested Citation

Harper Ho, Virginia E., Sustainable Finance & China's Green Credit Reforms: A Test Case for Bank Monitoring of Environmental Risk (February 15, 2018). Cornell International Law Journal, Vol. 51, No. 3, 2018; University of Oslo Faculty of Law Research Paper No. 2019-03. Available at SSRN: https://ssrn.com/abstract=3124304 or http://dx.doi.org/10.2139/ssrn.3124304

Virginia E. Harper Ho (Contact Author)

University of Kansas - School of Law ( email )

Green Hall
1535 W. 15th Street
Lawrence, KS 66045-7577
United States
785-864-9217 (Phone)
785-864-5054 (Fax)

HOME PAGE: http://www.law.ku.edu

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