An obvious point often has to be made before it becomes, well, obvious.
In the paper highlighted this week (math heavy and as if ejected from Google translate; but indulge) Wen Shuyang from the Southwestern University of Finance and Economics in Chengdu takes an alternative look at China’s pollution problem.
He takes the novel, and to date he believes, unique approach and looks at the issue through the lens of capital allocation. Swerving finger waving at big polluters he looks around them to their facilitators, the Chinese banks.
What he shows is that in his study period of 2004-2014 bad capital allocation decisions by the banks most likely accelerated China’s environmental degradation. If capital had been allocated as in a free market much investment in the dirtier parts of the economy may not have taken place.
He further, politely, points out banks should want to avoid the grubbier industries anyhow as that’s where most of their wobbly loans are now residing. Not only therefore would it have been the green thing to do to not let extractors and smoke belchers have so much capital it would also have been the right business decision too. Yeowza!
My two pennyworth would be to point out the message appears to have been received by China’s big lenders and for the last couple of years they’ve been making an effort to fund more sustainable businesses, as a look at their reporting shows. However, it remains a large part of their business and as China isn’t in the habit of band-aid-rip problem solving expect the problem to persist.
In the meantime if you’re an institutional investor it’d do no harm to point out this work to your banking IR contacts. Over-lending to polluters is not only a bad business for banks, and by implication their shareholders but, as Mr. Wen points out, it’s long been a bad thing for the citizenry of China Inc. as well.
Obvious really.
You can access the paper in full via this link Pollution and Sustainable Growth.
Happy Sunday