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TheThird Environmental Economic Policy --Guide to Green Securities--Unveiled

SEPA Vice Minister Pan Yue announced today that Guide to Strengthen Environmental Regulation on Listed Companies was officially released after a year of trial. Focusing on environmental review system and environmental information disclosure of listed companies, this Guide to Green Securities aims to contain excessive expansion of high energy consumption and high pollution industries, avert capital risks and promote listed companies to make constant improvement in their environmental performance. Pan Yue noted that Green Securities was the third environmental economic policy taken after Green Credit and Green Insurance. Though this Guide could not be deemed as Green Securities in its full meaning, major progress has been made in the core area.

SEPA issued Guide to Strengthen Environmental Regulation on Listed Companies (hereinafter referred to as Guide, see Annex I) recently, added Pan Yue, which required the target industries of firepower, iron and steel, cement, electrolytic aluminum, and high energy consumption and high pollution industries (13 heavily polluting industries) that have trans-provincial operations to undergo environmental review according to the regulations of SEPA when apply for IPO or refinancing. According to Circular on IPO Application of Heavy Pollution Industries (File CSRC No. [2008]6) issued by China Securities Regulatory Commission (CSRC), production and trading companies involved in heavy pollution industries must provide environmental review opinion by SEPA in their application documents for IPO. Applications without review opinion will not be accepted. Thus the review opinion is requisite for CSRC to accept applications.

Pan Yue revealed that SEPA would work with CSRC to establish a coordination and reporting system on environmental supervision of listed companies and broaden the channels for public participation of supervision. As provided by Measures for the Disclosure of Environmental Information, SEPA will notify CSRC regularly of environmental information of listed companies and the name list of companies who do not report their environmental information as required. Such information will also be made public. SEPA will select some high energy consumption and high pollution listed companies as trial companies for environmental performance assessment. The annual indexes of environmental performance and ranking of listed companies will be released for stockholders to supervise their performance.

Pan Yue said, apart from enhancing supervision on environmental law enforcement to limit the overexpansion of polluting companies, we need to invoke mature market tools to restrict their indirect financing and direct financing. As for indirect financing, we need to encourage commercial banks to carry out policies on green credit and for direct financing, we will adopt the policy on green securities, stressing post financing regulation and control of capital, so that money is used for the environment-friendly development of companies.

Now that the environmental access mechanism in China's capital market is not mature and there lacks sufficient environmental supervision on listed companies, some high energy consumption and high pollution companies either make use of the investment to expand pollution or break their promise to protect the environment after successful financing. As a result, environmental accidents and infringements take place again and again. Capital risk looms large and is likely to be shifted to investors under the circumstances of intensifying macro control and the policy of energy conservation and emission reduction. For instance, stockholders were faced with investment risks in 2007 when the ban on projects for the whole region was introduced, leading to weak performance of Datang International Power, Huaneng Power International, Huadian Power International and GD Power Electricity. Stocks of petrochemical, papermaking and pharmaceutical sectors were also affected. Therefore, strengthening environmental review on listed companies and pushing them to perform social responsibilities and disclose environmental information will not only improve their environmental performance but also protect the interests of investors.

Pan Yue noted that the policy of green securities was based on the trial experience SEPA had made in recent years. In the second half of 2007, SEPA issued Circular on Further Regulating Environmental Review of Production and Trading Companies Involved in Heavy Pollution Industries for IPO or Refinancing. Since the Circular was issued, SEPA has made environmental review on 37 companies among whom 10 companies were found to have serious record of violating environmental impact assessment and three synchronizations, causing major pollution accidents, more discharges of major pollutants and falsification in the review process. SEPA decided to reject these companies or delay the review (see annex II), hence stopped such companies from raising tens of billion Yuan through stock market.

As seen from 2007, Pan Yue said, the environmental review system for listed companies has basically taken shape. What is needed next is to facilitate information disclosure of listed companies and enhance environmental supervision on them. Currently listed companies in China do not voluntarily disclose enough environmental information as needed. According to sources, among the listed companies in 2006, only 50% made their environmental information public in their annual report, most of which were of qualitative nature. There was little information useful. The demand of stockholders cannot be satisfied as some companies did not disclose information on environmental administrative penalties they were subjected to promptly.

According to this Guide, SEPA will, on the one hand, inform CSRC and the public of environmental administrative penalties given to listed companies and their implementation, and announce the list of listed companies who heavily exceeded discharge standard or the cap of pollutants, caused major pollution accidents and had severe violation of environmental impact assessment regulations. CSRC will handle the cases in accordance with Measures on Information Disclosure of Listed Companies. On the other hand, SEPA will choose some mature industries to carry out environmental performance assessment, prepare and announce environmental indexes of securities market and ranking of listed companies to provide information for investors and management.

Pan Yue pointed out that this policy on green securities was not yet complete, but the essential part of the framework was set up. SEPA will work with related departments to make further study on procedures and scope to make the policy more mature and perfect. On the whole, listed companies are contributing more and more to economic aggregate and environmental impact. Whether green securities are able to divert social funds to green enterprises, safeguard the economic interest of stockholders and make listed companies shoulder environmental responsibilities will determine our efforts to change capital market into an economic leverage to promote energy conservation and emission reduction and will decide the progress of building the overall system of environmental economic policies.

Pan Yue showed that the exploration and practice of environmental economic policy would face more difficulties as it would concern the interest of more and more stakeholders. There is a long way to go to establish a complete system which needs the support of all economic authorities and social forces. SEPA will continue its work with related departments in studying policies on green trade, green taxation, compensation system for regions and river basins as well as emission trade. A complete environmental economic policy system will finally be set up to lay a solid groundwork for implementing Scientific Outlook on Development and building conservation culture.

(This English version is for your reference only.In case any discrepancy exists between the Chinese and English context, the Chinese version shall prevail.)

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