Milestone in China’s ESG-related regulations on banking and insurance institutions

Introduction

The China Banking and Insurance Regulatory Commission (CBIRC) issued the Guidelines for Green Finance in the Banking and Insurance Industries (the Guidelines) in mid-2022 which took effect immediately. The Guidelines escalate the development of green finance by banking and insurance institutions (B&I Institutions) to a strategic level, and, for the first time, require that B&I Institutions should incorporate environmental, social and governance (ESG) requirements into their management processes and overall risk management regime. The Guidelines are regarded as a milestone in the development of green finance in China.

Before the issuance of the Guidelines, Chinese regulators had already started to take steps to promote and regulate green finance in certain sectors. However, those policies and regulations either only focused on a narrow sector or merely encouraged green finance. By contrast, the Guidelines set out systematic and comprehensive requirements on ESG management in B&I Institutions and clearly specify the goals to achieve carbon neutrality in the operation of B&I Institutions themselves and their assets portfolio.

Key provisions of the Guidelines

Corporate governance: The board of each B&I Institution is responsible for determining its green finance development strategy. The senior management personnel (SMP) is responsible for setting green finance targets, formulating working rules and carrying out internal supervisions, inspections and evaluations. The SMP is required to report the development of green finance to its board annually and report/disclose the relevant green finance circumstance to CBIRC/public according to the relevant requirements.

Business management: B&I Institutions should incorporate ESG risk management into their supply chains, such as client onboarding, loan and insurance underwriting, investment project approval policies, loan and premium pricing, and post-lending and investment management. B&I Institutions should also contractually urge their clients to strengthen their own ESG risk management.

Carbon neutrality: B&I Institutions should actively develop Fintech and adopt other carbon-reduction measures to ultimately achieve the goal of carbon neutrality in relation to their day-to-day operations and the management of their portfolio of assets.

Internal controls: B&I Institutions should establish a green finance evaluation and appraisal policy and incentives system.

Supervision and administration: The Guidelines provide that CBIRC and its local offices will use the results of its assessment as an important reference for regulatory ratings, business permit approvals and SMP performance evaluations for the relevant B&I Institution. However, there is currently no clarity on the extent or method that CBIRC will use to incorporate its assessment results into the B&I Institution’s relevant regulatory obligations.

Green insurance

After the issuance of the Guidelines, CBIRC further issued the Statistics Rules for Green Insurance Business (the Statistics Rules) on November 10, 2022. The Statistics Rules define for the first time “green insurance” to mean the economic activities in the insurance industry that provide risk protection and financial support in aspects such as environmental resource protection and social governance, green industry operation and green living consumption. For insurance products and services, green insurance includes insurance products and services provided by insurers relating to green, low-carbon and sustainable development. For assets and investments, green insurance includes investments made from insurance funds in green industries. Currently, the Statistics Rules only cover green insurance products and services.

The Statistics Rules provide detailed guidance on the types of insurance which can be regarded as “green insurance” which mainly relate to ESG, green industry and green living. Insurers are required to report on their statistics pursuant to the Statistics Rules to CBIRC on a monthly basis. The reporting regime commenced on a trial basis in December 2022 and will be formally implemented in July 2023.

The development of ESG-related policies and practices in China

With the Guidelines having established high-level ESG requirements for B&I Institutions, we expect CBIRC to supplement these requirements by issuing more rules and guidance (in addition to the Statistics Rules) on key topics in the near future.

As China’s ESG-related policies and practices continue to develop, we anticipate that new ESG rules relating to the financial institutions falling within the regulatory ambit of China Securities Regulatory Commission are likely to be published soon. We will closely monitor the developments in this area and provide further updates.