Green Finance: China’s Mark at the G20 Summit
At the G20 Hangzhou Summit in September, green finance took a lot of the spotlight. For the first time, green finance was included on the G20 summit agenda after it was proposed by China. Additionally, the G20 Green Finance Synthesis Report, which was accepted and endorsed by the G20 leaders at the summit, attracted massive attention and became an important Chinese contribution to G20 history.
Pressing Need
According to the G20 Green Finance Synthesis Report, green finance can be understood as financing of investments that provide environmental benefits in the broader context of environmentallysustainable development. It aims to direct financial resources to the development of resource-efficient technology and protection of the ecological environment. It is a strategic approach to motivate enterprises to place greater attention on environmental protection and consumers to gradually form environmentally-friendly consumption habits. Feng Qiaobin, professor of the Department of Economics at the Chinese Academy of Governance, believes that the core of green finance is “to channel social funds to green fields for the purpose of environmental protection and sustainable development, through introduction of financial leverage.”
With the development of the world economy, environmental pollution, resource exhaustion, and ecological imbalance have become life-and-death issues globally. Against this backdrop, the concept of green finance was introduced in the early 1990s. In 1992, at the United Nations Conference on Environment and Development (UNCED) in Rio de Janeiro, Brazil, two major documents on global environmental issues, Agenda 21 and the Rio Declaration on Environment and Development, were signed. With environmental protection and emission reduction as key focal points of the conference, the concept of green finance was introduced and promoted.
In June 2003, the Equator Principles were proposed. Since then, this set of voluntary standards adopted by financial institutions to determine, assess and manage social and environmental risk in project-related transactions has promoted international usage of the green finance mechanism.
On January 25, 2016, less than three months after China took over the G20 presidency, the country jointly organized a G20 Green Finance Study Group (GFSG) with Britain. Co-chaired by the People’s Bank of China and the Bank of England, central banks of both countries, GFSG soon held its first meeting in Beijing. More than 80 participants from all G20 members, as well as a number of invited countries and six international organizations, actively participated in the GFSG. The acting secretariat of the study group is the United Nations Environment Programme.
Over the following months, GFSG conducted research on the banking industry, bond market, institutional investment environment, risk analysis and the indicator system. The group later produced the G20 Green Finance Synthesis Report and submitted it to the G20 Hangzhou Summit in early September.
The report provides a number of voluntary options for G20 members and other governments, including providing policy signals which support green investments, promoting voluntary principles for green finance, expanding learning networks for capacity building, supporting the development of local green bond markets, promoting international collaboration to facilitate cross-border investment in green bonds, encouraging and facilitating knowledge sharing on environmental and financial risk, and improving the measurement of green finance activities and their impacts.
Wang Yao, director of the Research Center for Climate and Energy Finance at the Central University of Finance and Economics, says that G20 could speed up the greening process of financial institutions worldwide. Through efforts at the global level, more financial instruments will be created, and an increasing number of products and services related to credit, securities, and insurance will emerge. These new instruments, products and services will help more social funds be allocated to environmentally-friendly industries such as environmental protection, energy conservation, clean energy and green building, thus furthering development of green finance.
Chinese Green Finance
Green finance, as a new financing concept, is becoming a major impetus to realize green growth and sustainable growth worldwide.
Although China’s foray into green finance is relatively late compared to developed countries, it has become a strong international performer.
After more than three decades of high-speed development that has caused an unbalanced situation in terms of economic development and environmental protection, China chose to adopt the green development concept. In 2007, China’s Environmental Protection Administration (now Ministry of Environmental Protection), People’s Bank of China, and China Banking Regulatory Commission jointly issued a document outlining strategies to use environmental protection policies and regulations to prevent credit risk, a move that signaled the dawn of green finance in China to many. In 2008, China’s Ministry of Environmental Protection and financial regulatory authorities released successive, new policies to promote green insurance, green bonds, and green credit, marking the formal launch of green finance policy. In 2011, an evaluation and research project on green credit was launched, and a data center for China’s green credit was organized. These efforts aimed to provide authoritative information support for commercial banks’ green credit, as well as management and risk assessment. In March 2016, China proposed the establishment of a modern financial system and included development of green finance in its 13th Five-year Plan (2016-2020). On August 31, 2016, China’s seven ministerial-level administrations jointly released a document on constructing the green financial system. The document was a notable consensus between China’s top decision makers and various administrations that is sure to bring great support to the movement, promote China’s green investment and financing, and accelerate the green transformation.
Thanks to the top-level design of the government and joint efforts from the public and private sectors alike, green finance has witnessed a rapid development in China in recent years. China is now one of the only three countries in the world to introduce a green credit indicator system and the first in the world to issue definition standards for domestic green bonds. The concept of green finance has been embraced by an increasing number of Chinese financial institutions, especially banks. In the first seven months of 2016, a total of 120 billion yuan of green bonds were issued by China, accounting for 40 percent of green bonds issued globally during that period. China has become the largest green bond market in the world.
In terms of carbon trade, China piloted a carbon emission trade project in seven provinces and municipalities in 2011. More than 1,900 enterprises and institutions that discharge pollution were listed on the carbon trade platform, and a total of approximately 1.2 billion tons of carbon emission quota were allocated. At present, certified emission trading managed by China’s Clean Development Mechanism (CDM) takes up 80 percent of the world’s total. By 2017, China will launch a unified carbon market nationwide, which will surpass the EU emissions trading system and become the world’s largest.
China has also been working with other countries and international organizations to promote the development of green finance. In June 2016, China and the EU agreed on a 10-million-euro project aiming to strengthen cooperation in carbon trading. In July, the New Development Bank launched by BRICS nations issued green bonds in China. It was the first time a multilateral development bank was approved to issue yuan-denominated green bonds in China.
Ma Jun, director of the Green Finance Committee of the China Society for Finance and Banking, believes that existing problems, such as mismatches between green projects and the duration of funding sources, information asymmetry, and a lacking of green analytical abilities in investors, will ultimately be resolved. Ma says that greater access to medium- and long-term green financing will happen through the development of the green bond market, third party certification, and a green rating system.
China has reached a strategic peak of green finance development, and will no doubt accelerate global green finance governance through efforts to boost international cooperation in green finance utilizing available mechanisms such as G20.