Starting July 2021, The Peoples Bank of China (PBoC) will begin scoring Chinese banks based on their domestic green finance investments every quarter, according to the final version of the“Green Finance Evaluation Plan for Banking Institutions” published on 6 June 2021.

While green finance refers to government-certified green financial products, including loans, securities, and unit trusts, the document states that for now, only green loans and green bonds will be evaluated. The PBoC will be responsible for evaluating 24 major banks, while PBoC Shanghai head office and its municipal branches will oversee the remaining banks, according to their respective areas of jurisdiction.

The method used will be 80% quantitative and 20% qualitative. The quantitative evaluation consists of four parts:

• Value: Value of the bank’s green loan and green bond holdings expressed as a percentage of total value of business (25%)
• Share: Share of the bank’s green loan and green bond holdings in the domestic market (25%)
• Growth: Year-over-year growth of the evaluated bank’s green loan and green bond holdings (25%)
• Risk: Value of the evaluated bank’s green loan and green bond holdings at risk expressed as a percentage of all green loan and green bond holdings (25%)

Out of each 25%, 10% will be based on the current quarter performance of the bank being evaluated, vis a vis its historical performance over the previous three quarters, while 15% reflects a peer comparison rating of how one bank compares to other evaluated banks during the current quarter.

In this way, the quantitative evaluation requires eight sub-scores. Per Figure 3, each sub-score ranges from 20 to 100, and the overall score will be a weighted average.

A fixed score of 60 will be given to institutions with no green loans or bonds on their balance sheets, which is also the average score for financial services providers who cannot establish such businesses due to compliance restrictions. For banks that are capable of issuing green loans or green bonds, the lowest possible score (i.e. 20) will be given if they do not do so.

The qualitative evaluation that makes up 20% of the overall score, however, is wholly based on the appraisal carried out by regulatory bodies. The qualitative evaluation contains three parts:

• The bank’s compliance with national or municipal green finance policies (30%)
• The bank’s internal development of green finance regulations and governance (40%)
• The bank’s financial support for green businesses (30%)

The new evaluation plan is a fundamental change from its predecessor, which represented a trial green loan evaluation plan released in 2018. The scope has since been extended to include green bonds in addition to green loans. In this new version, A bank’s ability to grow its green finance business becomes more emphasized, and its weighted value increases from 5% to 10%, while the number which represents peer comparison is reduced from 20% to 15%. Qualitative evaluation turned its focus to the bank’s own policies and actions from implementation of government policies. In the earlier version, qualitative evaluation was 100% about the implementation of government policies but now it is only 30%. The results, as the document suggests, will be considered by PBoC when it rates banks, and the central bank will formulate more effective green finance polices by taking reference from these more comprehensive results and scorings.

Green finance will be the most essential area to develop during the in the following five years or longer, PBoC vice governor Guiping Liu said at the recent 13th Lujiazui Forum. Liu also disclosed that green loans amounted to CNY 13 trillion in Q1 2021, up 24.6% year-over-year, and outpaced the growth of other loans by 12.3%. The PBoC is also exploring other financial means to boost decarbonization, including climate-related risk stress test, and is designing other policy tools that help finance direct decarbonization projects.