Pathways to Sustainable Banking in China: From Environmental Risk Management to Green Financing

Abstract: In order to achieve the goal of sustainable banking, banks such as commercial banks have to adopt proactive strategies for reducing internal operation risks from environmental issues thereby realizing long-term profitability by external financing of environmentally friendly products and services. As a general pathway to sustainable banking, environmental risk management (ERM) is regarded as a preventive strategy to direct bank managers to develop business towards sustainability initially. On this basis green financing can be further implemented as an offensive strategy at the higher level or phase for approaching sustainable banking. China's commercial banks, such as the Industrial and Commercial Bank of China (ICBC), are facing the challenges of environmental issues as well as potential market opportunities of environmental financing. Respecting the financing system for corporate customers in ICBC, some environmental concerns have been taken into consideration for its daily credit risk management, however a lack of concrete ERM policies with practical approaches and tools exposes ICBC's credit assets to potential environmental risks. At the same time there are only limited funds distributed to environmentally sound and profitable industries. Considering the potential and huge market for environmental financing in near future, ICBC's managers should pay greater attention to green financing opportunities. Other preconditions are needed such as the preventive ERM, new business ethics with corporate social responsibility (CSR), and offensively seeking potential markets by external support and cooperation. During the research process of the thesis, the author explores how preventive ERM can be incorporated into the actual credit risk management in ICBC currently and presents initial suggestions for implementation of green financing in the near future. Through this research the author aims to construct an appropriate pathway to sustainable banking for ICBC and other Chinese commercial banks as well as raise awareness of sustainable development among ICBC's managers such that strategies for sustainable banking will be institutionalised in the near future.