Title: ESG in Banking: Case Studies and Recommendations

Release Date: December 2021

Introduction

The 2021 International Green Finance Conference was held in Beijing on December 3. The world’s leading experts in sustainable finance were invited to introduce the best ESG practices of global important financial institutions, based on the G20 consensus on sustainable finance development. During the conference, Zhang Fang, Head of the ESG Center at the Beijing Institute of Finance and Sustainability (IFS), released the report titled " ESG in Banking: Case Studies and Development Recommendations" (hereafter as "the report") on behalf of the joint research team. The joint research team consisted of green finance experts from IFS, Deutsche Bank, Citigroup, Huzhou Bank, Bank of China Zhejiang Branch, and Industrial and Commercial Bank of China Huzhou Branch.

Sustainable finance and financial ESG governance are crucial for the global economy's low-carbon transition. Commercial banks, as important entities in the modern financial system, are increasingly practising ESG principles. The report aims to summarize best practice of commercial banks in ESG and provide recommendations for their continuous improvement.

The report points out that ESG management and enhancement by commercial banks are of significant importance. First, it helps accelerate the sustainable transition under carbon reduction goals, as carbon peak and carbon neutrality targets of each country drive their commercial banks to actively explore green and low-carbon market opportunities in response to climate change. Second, it assists banks in adapting to regulatory trends, as domestic and international regulatory authorities introduce a series of policies and standards requiring commercial banks to enhance their ESG performance and disclosure, gradually establishing an institutional framework for commercial banks' ESG practices and promoting their attention to their own ESG performance. Third, it contributes to banks’ increasing focus on high-quality sustainable development requirements, as commercial banks strengthen their attention to ESG issues, enhance risk management capabilities, and attract more capital attention.

The report reviews the practices of international commercial banks such as Deutsche Bank, Barclays Bank, Standard Chartered Bank, Citigroup, HSBC, Bank of East Asia, Credit Suisse, and BNP Paribas, and conducts case studies on domestic institutions such as Bank of China, Industrial and Commercial Bank of China, China Construction Bank, Postal Savings Bank of China, Industrial Bank, Shanghai Pudong Development Bank, Huaxia Bank, and Huzhou Bank. The conclusion is that domestic and international commercial banks have established key performance indicators (KPI) for ESG. For example,

• For the environmental factor, key indicators include green finance or sustainable finance, ESG integration into risk management, and sustainable operations of banks themselves.

• For the social factor, key indicators include protection and cultivation of bank employees' rights, customer satisfaction, inclusive finance or financial inclusiveness, community investment and services, and supplier management.

• For the governance factor, key indicators include sound governance and organizational structure, and ESG-related business processes.

Furthermore, the report puts forward the demands and challenges faced by domestic commercial banks in ESG practices. These include that ESG-related risks are becoming primary risks for regulators’ penalty, and the performance and disclosure of ESG in domestic banks are still lagging behind mainstream ESG rating frameworks as well as leading practices of international banks.

Therefore, the report proposes several recommendations to improve ESG management of domestic commercial banks.

1. Attracting more attention of the board of directors to ESG and conveying the bank's commitment to ESG to the external and internal stakeholders.

2. Improving ESG governance mechanisms and organizational structures, establishing a sound working mechanism for implementing ESG strategic plans.

3. Applying ESG tools to promote high-quality business development, expanding the ESG market, incorporating ESG into business processes and risk management, and customizing ESG evaluation indicators based on their own business characteristics.

4. Building ESG professional capacity, utilizing fintech, and building ESG data application and management systems.

5. Improving the operational performance of ESG within the organization, promoting sustainable development in terms of institutional framework and employee performance.

6. Disclosing more ESG information, selecting appropriate disclosure methods and scopes that align with the bank's development phase, and improving the quality of ESG information disclosure.

The research team will use this report as a starting point to build a Chinese ESG system in the banking industry that is both in line with China's reality and effectively aligned with international practices, so as to continuously serve high-quality real economy and effectively prevent risks in Chinese banks.