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Cornell International Law Journal

Keywords

Sustainable finance, ESG, Global finance, Green credit reform

Abstract

In the past few years, the focus of international organizations on sustainable finance— the integration of environmental, social, and governance (“ESG”) considerations into global financial systems— has intensified because of its potential to promote financial stability, better risk assessment, and more efficient allocation of capital. The success of these efforts depends in part on whether banks and other financial institutions can manage, price, and monitor environmental risk.

This Article offers new answers to this question from China— one of the most important global test sites for sustainable finance. Corporate governance theory suggests that creditor monitoring can promote managerial accountability and lower agency costs, a role that is critical in economies like China, Europe, and much of the developing world, where companies depend heavily on bank financing. China’s recent green credit reforms offer an opportunity to re-examine these theories and assess banks’ potential to drive sustainable finance across global capital markets.

To examine banks’ monitoring potential, this Article uses data for 2012– 2017 from the annual reports and sustainability reports of the twenty-one Chinese banks that are at the forefront of China’s green finance initiatives, as well as insights from fieldwork conducted in 2016 and 2017. This investigation shows that leading Chinese banks are strengthening their ability to integrate environmental criteria into credit risk assessment in response to regulatory priorities but that barriers to efficient pricing and monitoring of environmental credit risk remain. This Article identifies key lessons from the Chinese context for sustainable finance reform elsewhere.

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