1. Background
Against the backdrop of overlapping adverse factors such as the business sinking of large financial institutions, financial disintermediation, and narrowing interest margins, local financial institutions are confronted with mounting pressures including intensified competition, declining revenues, and deteriorating asset quality. Hence, accelerating transformation and exploring new business growth drivers have become an imperative priority[1]. As the birthplace of the "Lucid waters and lush mountains are invaluable assets" concept and a national green finance reform and innovation pilot zone, Huzhou City in Zhejiang Province has developed an influential "Huzhou Model" in practicing green development philosophy, building a green finance system, and promoting green development. This model has provided local financial institutions with a new competitive edge through differentiated positioning and clear guidance for future development.
Founded in 1998, Huzhou Bank is the only city commercial bank with legal person status in Huzhou. Endowed with a strong "green DNA", it is the third bank in China to adopt the Equator Principles[2] and among the first batch of pilot banks to disclose environmental information in the country[3]. In recent years, to further enhance its competitiveness and meet the demand of local transformation and development, Huzhou Bank has strategically elevated green finance to a core development priority based on local conditions. By implementing the strategy of "Finance + Green + Technology + Cooperation + Risk Control", improving its organizational structure, refining policy and institutional mechanisms, and innovating products and services, Huzhou Bank has achieved rapid development in green finance.
2. Challenges
With the sustained and rapid development of various businesses and the increasingly stringent regulatory requirements, Huzhou Bank will face substantial development pressures in the future. Specifically, on the one hand, green finance requires financial institutions to incorporate the cost of natural resource utilization into their decision-making criteria, which generates significant positive environmental externalities. However, in the case of market failure, such positive externalities will expose commercial banks to higher upfront costs and management risks in the financial market. On the other hand, since green finance services target projects themselves, it is essential to identify whether a project falls into the category of green projects and meets the relevant requirements for accessing green financial support.
Nevertheless, for a long time, the channels for financial institutions to identify and connect with environmental projects have been insufficiently smooth, and they have been unable to promptly grasp the financial needs of projects with environmental benefits. This has resulted in high customer acquisition costs for financial institutions when exploring corporate clients engaged in green and sustainable development. For instance, some businesses of green-related enterprises have actually been carried out but not classified as green finance projects.
Digital technology can play a significant role in addressing the personalized pain points in green finance. Relying on its digital transformation strategy, Huzhou Bank has developed a green credit management system, which realizes the full-process online and intelligent management of the bank’s green credit business, thus achieving cost reduction and efficiency improvement in green finance operations.
3. Initiatives
1) Establishing a Green Credit Identification System
In accordance with the green credit classification standards, Huzhou Bank has built a green credit identification and evaluation system covering 256 specific green sub-categories across 4 tiers (Green, Blue, Yellow, Red) and 9 grades, based on dimensions such as the industry, business scope, loan purpose, and production technology of credit-granting enterprises. The green credit management system automatically classifies enterprises into four categories: Friendly (Green), Qualified (Blue), Watchlist (Yellow), and Exit (Red). Differentiated credit granting in terms of credit limit and interest rate is implemented according to these classifications.
2) Establishing an Environmental Benefit Measurement System
In compliance with the specific requirements of financial regulators for environmental benefit measurement and based on different industries, Huzhou Bank has established professional environmental benefit measurement models. The formulas and parameter requirements for project environmental benefit measurement have been embedded into the backend of the system, enabling the system to automatically calculate the environmental benefits of green projects. Credit policies are adjusted in a timely manner based on the results of environmental benefit measurement, and an expedited approval channel is prioritized for low-carbon projects.
3) Creating an ESG Risk Control Model System
Through rigid system constraints, Huzhou Bank has strengthened the full-process management of environmental and social risks. It has formulated environmental and social risk management systems in accordance with the eight management performance standards of the Equator Principles. By integrating internal customer information and external platform data, the bank has moved ESG risk management for credit customers forward in the process. A total of 67 fourth-level indicators covering aspects such as corporate environmental credit rating, carbon emission management level, employee rights protection, safe production, corporate governance, and operation management have been incorporated into the indicator system. The evaluation results, together with financial indicators, are integrated into the probability of default model to automatically predict loan quality.
4) Creating a Green Demand Matching System
Through big data analysis, Huzhou Bank accurately grasps market trends and customer needs, formulates customized investment and financing plans based on customers’ "digital portraits", and matches differentiated green financial products such as the "Green Micro and Small Enterprise Express Loan".
4. Outcomes
1) Improved Green Identification Efficiency
By the end of 2021, the bank had conducted green identification and full-process classification for over 42,000 transactions. The number of identified green credit loans increased by 13.49% compared with 2020 and 47.18% compared with 2019, with the accuracy rate of green identification remaining above 98%. In addition, the bank has completed ESG evaluations for more than 1,800 corporate customers across the bank, generated over 10,000 rating reports, and identified more than 60 enterprises with ESG risks. This has effectively enhanced the ability to predict the repayment capacity of credit customers and improved the efficiency of financing support for green micro and small enterprises.
2) Enhanced Green Management Capability
The system has provided a basis for the credit approval department to launch the green credit expedited approval channel. The green credit approval time has been shortened to one-third of the original duration, indirectly reducing the financing costs of enterprises by over 30 million yuan. In addition, the number of staff responsible for green credit data reporting has been reduced from two full-time employees to one part-time employee, and the reporting time has been shortened from 3 days to 1 day.
3) Strengthened Green Financial Service Capacity
Through the digital transformation of green finance, Huzhou Bank can more accurately identify environmental benefits, implement differentiated financial services more efficiently, and thus strengthen its green financial service capability. For example, focusing on local agricultural characteristics, the bank has launched loan services related to agricultural industries such as white tea, Huzhou sheep, Taihu Lake fish, and Huzhou crabs. As of July 2024, the balance of the above-mentioned businesses has exceeded 5.7 billion yuan, and the proportion of green loans in the bank’s total loans has exceeded 30%.
References
[1] Shi Xiaoyun. Practice and Suggestions on Green Finance Development of Small and Medium-sized Banks[J]. The Chinese Banker, 2023,(05):67-69.
[2] The Equator Principles are a set of voluntary financial industry benchmarks established with reference to the sustainable development policies and guidelines of the International Finance Corporation (IFC). They aim to judge, assess and manage environmental and social risks in project finance, and advocate that financial institutions fulfill their due diligence obligations in verifying environmental and social issues in project finance.
[3] http://www.huzhou.gov.cn/art/2019/7/25/art_1229213493_55075370.html
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