Recently, the results of Stress Testing of the Impact of Environmental Factor on Commercial Bank Credit Risk undertaken by Industrial and Commercial Bank of China have been officially released on the international conference on “The Future of Green Finance” held in London. This research is not only ground-breaking across China’s banking industry in the research field of environmental risk quantification and transmission mechanism, but also provides guidance in the global banking industry for the researches on green finance and environmental risk quantification.

As climate change and environmental and resource constraints become a global issue, green development has been elevated to a national strategy in China. As an international consensus, environmental risk is a risk inevitably confronted by commercial banks in operation. Most leading international banks have incorporated environmental risk into risk management system, and abidden by or formulated corresponding sustainable credit and investment principles or standards. However, regarding the impact of environmental factor on the operating risk of commercial banks, few quantitative evaluation tools are available, making environmental risk management and market development aimless. Therefore, ICBC has been commissioned by Green Finance Committee of the People’s Bank of China to carry out the research, which led to some pioneering results. First, it has built a theoretical framework and basic model on the impact of internalization of enterprises’ environmental cost on commercial banks’ risks, pointing out that environmental factor would increase the operating risk of commercial banks at least by means of credit risk, joint and several liability risks, as well as reputational risk. Second, based on the quantitative evaluation on the impact of environmental factor on the enterprises’ costs and benefits, commercial banks have incorporated the environmental risk factor into the credit rating system for enterprises, which influences the financial resource allocation and pricing of commercial banks to enterprises, and thus promotes the green development of economy by means of financial leverage. Third, the stress testing of environmental cost has been conducted respectively in thermal power industry and cement industry by using the “from the bottom up” method for the first time, which has opened up a transmission channel and created an estimating method on the impacts of environmental factor on commercial bank credit risk, and demonstrated the correlation and correlation degree between them. Fourth, the impact of environmental risk on enterprise credit rating and the corresponding quantification problem have been addressed from the perspective of stress testing.

Mr. Jiang Jianqing, ICBC Chairman, says that, the Bank has been well aware of the far-reaching effects of environment and resources on the economic and social development, active in implementing the green finance strategy, and is committed to creating a world-leading green finance institution. Through many years' exploration and practice, ICBC has integrated the idea of green finance into the Bank’s vision, development strategy, credit culture, credit policy and system, management process, product and service innovation and capacity building, established from top to bottom a set of feasible long-term mechanism for development of green finance, and become a pioneer and leader among banking institutions to practice green finance and accomplish sustainable development.

Mr. Yi Huiman, ICBC President, states that, the Bank adheres to green operation, advocates the production and life styles coordinated with ecology, and has continuously improved its own energy-saving and emission-reduction. ICBC’s achievements on the development of green finance have been highly recognized both at home and abroad. In recent years, the Bank has successively joined the international organizations such as “The UN Global Compact” and “Financial Action Task Force of United Nations Environment Programme”, and has been conferred with many awards such as Green Finance Award for Domestic Listed Companies, Corporate Social Responsibility Award, and China Low Carbon Pioneer Bank.

According to Mr. Zhang Hongli, the project leader and ICBC Vice President, the stress testing of environmental factor applied by commercial banks for quantitative estimation of the impact of environmental factor on the banks’ credit risk can effectively enhance the banks’ capability of controlling and preventing environmental risk, provide a basis to measure the environmental risk factor for pricing of credit products, assist the banks in rationally arranging credit and investment portfolios, and positively promote the adjustment of credit and investment structure. Moreover, it also provides a reference basis for banking regulatory agencies where environmental risk is concerned, and provides a quantification tool of environmental risk guiding the market funds for green investment. So far, the results of the project have been submitted by the Green Finance Committee of the People's Bank of China as important outcomes to “G20 Green Finance Study Group”. For the next step, ICBC’s Study Group will take the occasion of the “G20 Research Project on Environmental Factor Quantification” to further advance the research of stress testing from different dimensions such as price and regions, and positively promote the construction of green finance systems and mechanisms in China and other countries.

Mr. Andrew Voysey, the director of Financial Industry Group in Cambridge Institute for Sustainability Leadership (CISL), said that ICBC’s research of stress testing on environmental factor has strong implication to all enterprises. As financial institutions are incorporating environmental factor into the decision-making process on allocation of financial resources by means of risk quantification technology, the enterprises’ management on environmental risk will become a direct factor determining the cost of financing.

The international conference on “The Future of Green Finance” is jointly hosted by the Business Organizations of the G20 Countries (B20), United Nations Environment Programme (UNEP) and London government. ICBC Vice President Mr. Zhang Hongli attended the conference on behalf of B20 as a co-chairman of B20 Financing Growth Taskforce.