Enterprises' Green Credit Assessment

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Enterprises' Green Credit Assessment
--From the Perspective of Financial Institutions' Green Credit
LI Junli
School of Business, Ludong University, China, 264025
[email protected]
Abstract: Green credit is not only a financial leverage which promotes environmental protection, it is
also an inevitable choice for financial institutions to avoid their environmental risks, and the green credit
assessment is a critical link for implementation of green credit. In this paper, based on analysis of
various factors affecting level of enterprises’ green credit, the indicators of green credit assessment are
designed. The factors mainly consist of conditions of enterprises' environmental protection, character,
capital, capacity. And the designed indicators mainly include comprehensive resource consumption per
unit output, harmless treatment rate of wastes and so on. And the model for enterprises' green credit
assessment is built with analytic hierarchy process to provide financial institutions with a technical
method of green credit with a view to promoting smooth implementation of green credit.
Keywords: Credit assessment, Green credit, Environmental credit, Analytic Hierarchy Process
1 Introduction
In recent years, although China's economy has developed rapidly, the extensive economic growth
pattern has not fundamentally changed, and the environmental problem has become more serious. In this
regard, Chinese government has developed a series of policies to promote energy saving, it has also
continuously improved environmental legislation and strengthened environmental law enforcement, and
certain achievement has been made. However, it turns out that environmental problem can't be
effectively solved through relying solely on administrative enforcement, financial regulation and other
economic means should be in place. Under this social environment, green credit comes into being.
Green credit refers to a financial policy in which financial institutions offer credit funds with preferential
interest rates to environment-friendly and energy saving enterprises, and implement credit restrictions
and impose high interest rates on enterprises which cause damage to the environment. It aims to guide
more credit funds to be used by enterprises which contribute to environmental protection and discourage
enterprises to develop at the cost of environmental pollution, so as to realize "green allocation” of credit
funds.[1], as well as to establish environmental thresholds in the field of credit financing. Green credit is
not only a financial leverage used by the government to implement regulation of environmental
protection, as for financial institutions, due to increasingly strict environmental regulations; it is also an
inevitable choice for them to avoid environmental risk ① in the field of credit financing. And the key to
implementing green credit mechanism is green credit assessment on enterprises, the assessment results
offer financial institutions with a reference for their green credit decisions, in other words, the financial
institutions decide on whether to provide the enterprises with loans, the amount of loans and level of
interest rates in accordance with the enterprises' green credit level.
In credit assessment on enterprises, existing research primarily focuses on impacts of financial condition
on enterprises' credit level, while impacts of environmental condition are rarely considered. Currently,
some scholars have specifically assessed on enterprises' performance in environmental protection, but
most of them study on it from the perspective of corporate social responsibility. Based on existing
research, the paper tries to incorporate assessment indicators of environmental credit into existing
① In the field of credit financing, environmental risk refers to that a company's polluting activities exceeds
environmental bearing capacity, public and non-governmental organizations to increase demands on environmental
behavior of enterprises, as a result, costs of environmental pollution for enterprises increase, this can lead to more
risk for financial institutions which offer the enterprises with credit funds. [2]
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“enterprises’ credit assessment system" from the perspective of financial institutions' green credit so that
environmental factors are reflected directly in enterprises’ credit assessment. In other words, enterprises’
green credit assessment is a kind of comprehensive credit assessment including enterprises’
environmental credit, specifically, it refers to the use of various indicators which affect enterprises’
credit level, including qualitative and quantitative indicators that indicate enterprises’ environmental
level ,as well as ethical and financial indicators in assessing on enterprises' green credit level. Compared
with traditional enterprises’ credit assessment, enterprises’ green credit assessment takes environmental
credit of target enterprises into account. This paper focuses on analysis of factors affecting enterprises’
environmental credit, and briefs on financial condition and other factors which affect credit level of
target enterprises, but this does not indicate that the financial position has less impact on the level of
green credit.
2 Factors Affecting the Level of Enterprises’ Green Credit
From the perspective of financial institutions credit, enterprise credit reflects the enterprises’ willingness
and ability of contract performance. Enterprises’ credit assessment is the assessment on the enterprises'
willingness and ability of contract performance. Analysis of factors affecting the level of enterprises'
green credit is also the analysis of enterprises' willingness and ability of contract performance. Ability of
contract performance is a sufficient condition for contract performance, while the willingness is a
necessary condition, without the willingness, strong ability of contract performance can not ensure
contract performance.
2.1 The factors affecting enterprises' willingness of contract performance
Willingness of contract performance means the enterprises' willingness to pay back their loans in agreed
period; it is directly related to the enterprises' moral character. Their moral character can be reflected in
their historical credit records, including previous business credit records and social credit records,
specifically, business loans principal and interest repayment records, accounts payable records and tax
evasion records.
2.2 Factors affecting enterprises' ability of contract performance
The ability of contract performance refers to the enterprises' economic ability to pay back their loans
within the agreed period of time. It is affected by many factors, such as the conditions of enterprises'
environmental protection, and financial status.
2.2.1 Conditions of enterprises' environmental protection
With increasingly strengthening environmental legislation and enforcement, the conditions of
enterprises’ environmental protection have direct effect on credit risk of the financial institutions. The
enterprises with poor level of environmental protection are subject to penalty, suspension of business
and even closing down which results in loss of economic benefit, and their capabilities of paying back
debts would worsen which can lead to increased credit risk for financial institutions. Therefore, in order
to avoid credit risk arising from environmental risk, financial institutions should lower credit rating of
the enterprises with lower level of environmental protection, and restrict credit funds to these enterprises.
While environmental- friendly enterprises enjoy some preferential policies, or get some government
support, therefore, they have great development prospects and strong ability of contract performance,
financial institutions should appropriately improve their credit ratings, and offer them with more credit
funds. In short, the correct analysis of environmental protection level of assessed enterprises is the key
to assessing the enterprises' ability of contract performance.
According to existing research literature and investigation results, the paper proposes that the factors
affecting target enterprises' environmental protection level mainly include the conditions of resource
utilization, discharge of waste, investment in environmental protection as well as compliance of national
and local environmental regulations.
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2.2.1.1 The conditions of resource utilization and waste discharge
According to relevant theories in environmental economics[3], currently, environmental resource is
becoming increasingly scarce; it has become an important variable affecting the operation of economic
system. The relationship between the environmental system and the economic system is becoming more
and more close; the environmental system provides a variety of environmental resources which are
necessary for production to the economic system which generate various wastes which then reach the
environmental system after the process of production and consumption. The relationship between the
two systems is as shown in Figure 1.
Environmental System
Environmental
Resources
E*
Human
Economic
System
Service
Production
Consumption
Waste
E′
Environmental System
Figure 1 The Relationship between Environmental System and Economic System (1)
In the figure 1, we can see that the economic system interacts with the environmental system in two
links. Firstly, the environment system provides the economic system with environmental resources,
while the economic system generates wastes and discharges them toward the environmental system. In
the first link, if the economic system extracts resources exceeding the environment system's power of
regeneration, exhaustion of resources occurs. In the second link, if the amount of waste generated by the
economic system exceeds the environment system's capacity, environmental pollution, ecological
imbalance and other environmental problems take place. Assume that E is reserves of materials in the
environmental system, E * is the material input into the economic system from the environmental
system, E is the pollutants which are discharged from the economic system toward the environmental
system, K refers to precipitated materials in the economic system, the mass balance model can be
expressed as: E * = E + K. Assume that production and consumption does not generate precipitated
materials, namely K = 0, then the mass balance model is E * = E, meaning that environmental
substances input into the economic system become pollutants with same quantity after production and
consumption, and return to the environmental system, which is shown as figure 1. In the process of
material flow, environmental resources' only function is providing human being with services. Assume
that K is a constant greater than zero, then E * and E′ maintain equal changes in the same direction, that
is to say, if more environmental resources are used in the process of production and consumption, more
pollutants are discharged toward the environmental system. While decrease of used environmental
resources means that less pollutants are discharged which leads to declining environmental damage and
better quality of the environment. According to the mass balance model, the deterioration of
environmental quality is closely related to excessive use of environmental resources. But certain
environmental resources are a necessary condition for social development, in order to reduce the amount
of used environmental resources, while meeting needs of social development, we have no choice but to
improve use efficiency and cyclic utilization rate of environmental resources. In other words, the wastes
ˊ
ˊ
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generated in the process of production and consumption are not necessarily discharged toward the
environmental system at once, wastes may return to the production process and become raw materials,
which is shown in figure 2.
Environmental System
Environmental
Resources
Human
Economic
System
Services
Production
Consumption
E*
Waste
E′
Cyclic Utilization of Wastes
Environmental System
Figure 2 The Relationship between Environmental Systems and Economic System (2)
According to Figure 2, if wastes are recycled within the economic system, use efficiency and recycling
utilization rate of environmental resources improve, on the one hand, it reduces the amount of used
resources in production and consumption, on the other hand, it reduces amount of discharged wastes
from the economic system. It can ease the resource exhaustion because of over-exploitation of
environmental resources, environmental pollution because of excessive discharge and environmental
imbalance, and environmental quality improves. Based on the above analysis, as a basic production unit
in the economic system, its conditions about utilization of environmental resources and waste emissions
are key two factors affecting its environmental protection level. In the use of environmental resources,
the paper selects comprehensive resource consumption per unit output, comprehensive energy
consumption reducing rate per unit output②, recycling rate of wastes and other indicators. Among them,
comprehensive energy consumption reducing rate per unit output can dynamically reflect an enterprise's
environmental conditions; In waste emission, the paper selects waste emission rate per unit output,
harmless treatment rate of wastes and other indicators.
2.2.1.2 Investment in environmental protection
Various wastes which are generated in production process may be recycled and be input again into
production process, or be discharged into the environmental system. As for wastes that can not be
recycled, companies are accountable for their harmless treatment and disposal before discharging them
into the environmental system, and should bear the treatment costs. However, the environmental
capacity to accommodate waste has same features as public goods, namely its property rights is
ambiguous, as a result, the “free rider” problem occur easily when it is used by enterprises. That is to say,
the enterprises discharge wastes freely. wastes discharged into environmental system before necessary
treatment would cause environmental pollution and other environmental problems, and bring certain
② Comprehensive energy consumption reducing rate per unit output= (unit consumption during the report periodunit consumption during the base period)/ unit consumption during the base period *100%, it is a comprehensive
index which can reflect the degree of saving environmental resources.
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social costs, if enterprises do not compensate for the social costs, here the external diseconomy of
production occurs, which is also named as the socialization of personal costs,in other worlds, the other
sectors in the society take on costs that the enterprises should bear, which is shown as Figure 3.
Product
Raw
Materials
Pr o d u c t io n
Wastes
Direct Discharge
Discharge after
Harmless Treatment
Pollution
External
Diseconomy of
Production
Socialization of
Personal Costs
：
Social Costs
Figure 3 Environmental degradation is the inevitable result of external diseconomy of production
The practice has proved that the private costs of treatment saved because of direct discharge is much less
than the social costs brought by that, the difference is the external cost. The existence of external cost is
the primary cause for enterprises' excessive production, which is not favorable to the society as a whole,
while the internalization of external costs is a kind of Pareto improvement. If enterprises bear the cost of
waste disposal, increase investment in environmental protection, the harm the enterprises cause to the
environment can significantly reduce, thereby the environmental risks can be reduced. Therefore, the
amount of investment the enterprises make in environmental protection is an important factor affecting
their environmental protection level. The investments the enterprises make in environmental protection
include: investment in pollution control, investment in clean production, investment in production of
circular economy. The investment of enterprises in environmental protection can be quantified as the
proportion of environmental investment compared with total output.
2.2.1.3 The conditions about compliance with environmental regulations
If the enterprises violate national or local environmental regulations, they will be subject to
corresponding penalties, such as imposing a fine, suspension of business and so on, then the normal
production and business activities of them will be affected or even interrupted, as a result, management
profits of them suffer, which will decrease their abilities of paying back their loans to some degree.
Therefore, whether enterprises are compliant with relevant environmental laws and regulations directly
affects their environmental risks, and become an important factor affecting their ability of contract
performance. In this regard, the indicators selected include the times of illegal environmental pollution
[4]
, whether or not having relevant environmental certifications [4] and the times of complaints about
enterprises’ pollution from the public and so on.
2.2.2 Financial position
The enterprises' financial position is an objective factor affecting their ability of contract performance, it
can be reflected by the following factors: capital strength, operating capacity, profitability and
development capability, etc.
The enterprises' capital strength is the basic factor affecting their credit level, which is the stock of
enterprises' ability of contract performance. The capital strength consists of asset size and asset
structure. The asset size is measured by total equity; the asset structure can be measured by
asset-liability ratio, liquidity ratio, quick ratio, cash ratio and other indicators. Asset-liability ratio can
reflect the long-term solvency, liquidity ratio, quick ratio ,cash ratio and other indicators reflect the
liquidity of the enterprises' assets, so they can be used to measure the short-term solvency, sufficient
liquidity of assets is the key to ensuring the enterprises paying back their loans on time, which can
reflect enterprises' ability of contract performance more really.
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Operating capacity, profitability and development capability can comprehensively reflect the enterprises'
operation and management capabilities, which represent the increment of enterprises' ability of contract
performance in the future. The enterprises' operating capacity can be measured by receivable turnover,
turnover of inventory, asset turnover and other indicators; Profitability of the enterprises can be
measured by total sales, return on assets, profit ratio of sales, rate of return on equity and other
indicators. While sales growth rate, profit growth rate, capital maintenance and increment ratio and
others can dynamically reflect the enterprises' the financial position [5].
3 Enterprises’ Green Credit Assessment Based on AHP③
3.1 Building green credit assessment index system
Based on understanding the meaning of green credit and its affecting factors in the round, using the
"3C" ④analysis method about enterprise credit, adding factors affecting the enterprises' environmental
credit level as well as available research literature at home and abroad, the paper designs a set of green
credit assessment index system consisting of target layer, Rule layer, sub-rule layer and index layer after
investigating and surveying actually and asking for relevant expert advice, as shown in table 1.
Target Layer
Rule Layer
Table 1 Green credit assessment index system ⑤
Sub-rule Layer
Index Layer
Conditions of Resource
Utilization
V11,W11
Enterprise
Green
Credit
Level
Environmental
Protection
Level
V1 ,w1
（
）
Conditions of Waste Discharge
V12,W12
Investment in Environmental
Protection
V13 ,W13
Conditions about Compliance
with Environmental
Regulations
W14,W14
V
Character
V2 ,w2
（
）
Business Reputation V21 ,W21
Comprehensive Resource Consumption
Per Unit Output V111 ,W111
Comprehensive Energy Consumption
Reducing Rate Per Unit Output
V112 ,W112
Recycling Rate of Wastes
V113 ,W113
Waste Emission Rate Per Unit Output
V121 ,W121
Harmless Treatment Rate of Wastes
V122 ,W122
Proportion of Environmental Investment
Compared with Total Output V131 ,W131
Times of Illegal Environmental Pollution
V141 ,W141
Whether or Not Having Relevant
Environmental Certifications V142 ,W142
Times of Complaints about Enterprises’
Pollution from The Public V143 ,W143
Rate of Debt Discharge
V211 ,W211
Rate of Accounts Payable Discharge
V212 ,W212
③ AHP refers to analytic hierarchy process.
④ "3C" refers to Character, Capacity and Capital.
⑤ "V" represents the indicators at all levels, "w" represents the weight of indicators at all levels. Vi is the i-th
indicator attached to V; Vij is the j-th indicator attached to Vi; Vijk is the k-th indicator attached to Vij; Wi is the
weight of the i-th indicator attached to V;Wij is the weight of the j-th indicator attached to Vi; Wijk is the weight of
the k-th indicator attached to Vij.
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Social Reputation V22 ,W22
Capital
V3 ,w3
（
Tax Evasion Records
V221 ,W221
Total Equity V31,W31
）
Asset-liability Ratio V32,W32
Quick Ratio⑥
Operating
Capacity
V41 ,W41
Receivable Turnover
V411 ,W411
Turnover of Inventory V412 ,W412
Capacity
V4 ,w4
（
V33,W33
）
Asset Turnover
V413 ,W413
Total Sales V421 ,W421
Profitability V42 ,W42
Return on Assets
V422 ,W422
Profit Ratio of Sales
V423 ,W423
Rate of Return on Equity V424 ,W424
Development Capability
V43,W43
Sales Growth Rate
V431,W431
Profit Growth Rate
V432 ,W432
Capital Maintenance and Increment Ratio
V433 ,W433
3.2 Determining the weight of the rule layer with the use of AHP
The specific steps are as follows:
In the first step, select experts. In this paper, ten relevant experts including three account managers from
financial institutions, two credit assessment theorists, three credit managers, two environmental
managers are selected.
In the second step, build judgment matrix A. Each of the experts makes two two contrast on the
importance degrees of four indicators in the rule layer --- environmental protection level, character,
capacity and capital, and get the judgment matrix :A = (aij) 4 × 4, thereinto the value of aij is shown as
table 2, and aji = 1/aij
1
3
Table 2 the Values of aij
5
7
9
The i-th indicator
is as important as
the j-th indicator
The i-th indicator is The i-th indicator is The i-th indicator is The i-th indicator is
a
little
more much
more significantly
more extremely
more
important than the important than the important than the j-th important than the
j-th indicator
j-th indicator
indicator
j-th indicator
Note: If the degree of importance is between the sheets, we can choose 2,4,6,8 correspondingly.
⑥ Quick Ratio = (Current Asset - Inventory) / Current Liabilities, the indicator can accurately reflect enterprises'
short-term solvency.
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In the third step, calculate the maximum eigenvalue of the judgment matrix A
corresponding eigenvector (
，
λmax
and its
).
w1 w 2 , w 3 , w 4
In the fourth step, make the consistency inspection on the judgment matrix A. First of all, calculate the
consistency coefficient:
CI =
λmax − n
n −1
=
λmax − 4
3
. RI is the average random consistency index of
Then calculate the random consistency ratio
CI
CR =
RI
the judgment matrix that T.L.Saaty derives with random sampling method, it is available in table 3.
When there are four indicators, RI=0.90; when CR<0.1, the consistency test is passed.
Table 3 The Average Random Consistency Index RI
matrix Exponentnumber n 1 2 3
4
5
6
7
8
RI
0 0 0.58 0.90 1.12 1.24 1.32 1.41
In the fifth step, make normalization on eigenvector (
，，，
9
1.45
10
1.49
), and get the weight of four
w1 w 2 w 3 w 4
indicators in the rule layer (w1, w2, w3, w4).
3.3 Determining the weight of sub-rule layer and index layer with the use of AHP
In determining the weight of single level order of various indicators in sub-rule layer relative to the
corresponding rule layer: (w11, w12, w13, w14) (w21, w22) (w31, w32, w33) (w41, w42, w43), the method and
process used is exactly the same as that of calculating the weight of rule layer.
In determining the weight of single level order of various indicators in index layer relative to the
corresponding sub-rule layer: (w111, w112, w113) (w121, w122) (w141, w142, w143) (w211, w212) (w411, w412, w413)
(w421, w422, w423, w424) (w431, w432, w433), the method and process used is exactly the same as that of
calculating the weight of rule layer.
3.4 Determining the comprehensive weight of index layer
The weight of index layer wijk, the weight of sub-rule layer wij and the weight of rule layer wi all refer
to their degree of importance compared to above layer, we also need further to determine the
comprehensive weight of index layer, namely the importance degrees of index layer compared to
target layer (enterprises’ green credit level). the detailed calculation is that the weights of single level
order in each layer are multiplied continuously from the index layer up, namely, the comprehensive
weight of index layer is equal to wijk* wij*wi.
3.5 Building the model of green credit assessment
The green credit assessment is to quantify the comprehensive effects of all assessment indicators
inclusive of environmental effects on enterprises’ green credit level. The paper adopts the weighted
average method to determine the comprehensive assessment results.
Assumed that m is the green credit score; mi is the score of the i-th one-level indicator(defaults are equal
to 0); mij is the score of the j-th two-level indicator under the i-th one-level indicator(defaults are equal
to 0); mijk is the score of the k-th three-level indicator under the j-th two-level indicator(defaults are
equal to 0).
wi is the weight of the i-th one-level indicator; wij is the weight of the j-th two-level indicator compared
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to the i-th one-level indicator(defaults are equal to 1); wijk is the weight of the k-th three-level indicator
compared to the j-th two-level indicator(defaults are equal to 1). Then the result of enterprises’ green
credit assessment is as follows:
4
m = ∑ wi mi
(1)
i =1
4
Thereinto, mi =
∑w m
ij
(2)
ij
j =1
4
mij = ∑ wijk mijk
(3)
k =1
After combining the above items, some enterprise’s green credit score is as follows:
4
4
4
m = ∑∑∑ w i wij wijk mijk
(4)
i =1 j=1 k =1
4 Conclusion
The paper researches enterprises’ green credit assessment from the perspective of financial institutions'
green credit. From two aspects about the enterprises' ability of contract performance and willingness of
contract performance, involving in enterprise character, the conditions of environmental protection,
financial status and other indicators, the paper assesses the enterprises’ green credit by AHP. The
selected indicators in this paper are comprehensive, at the same time, the paper gives prominence to
“green”, namely, emphasizes on the effect of the environmental credit on the enterprises' credit level.
The purpose of this paper is to provide financial institutions with a technical method to carry out green
credit and promote green credit assessment.
Acknowledgements:
This paper was financially supported by the National soft science project” theory, practice and case
study on technology innovation of promoting Energy saving and emission reduction by finance”
(2010GXS5D228)
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