Eco-Friendly Econ­omy

While the im­pact of China’s green ini­tia­tives are no­tice­able on the sur­face level, they are backed by some­thing equally as im­pres­sive.

Norway-Asia Business Review - - S NAPSHOTS - CHEYENNE HOLLIS

The coun­try has built up a green econ­omy which is now backed the govern­ment and help­ing sup­port wide rang­ing en­vi­ron­men­tal poli­cies.

In 2015, the Na­tional Bu­reau of Statis­tics of China found that the coun­try needed CNY3 tril­lion (USD434.6 bil­lion) to CNY4 tril­lion (USD579.5 bil­lion) of green in­vest­ment an­nu­ally in or­der to achieve its en­vi­ron­men­tal goals and in­ter­na­tional car­bon emis­sion com­mit­ments.

The fol­low­ing year, the Peo­ple’s Bank of China and six govern­ment agen­cies is­sued the Guide­lines for Es­tab­lish­ing the Green Fi­nan­cial Sys­tem that gained the ap­proval of the State Coun­cil. The high-level back­ing en­sured China’s green in­vest­ment and fi­nanc­ing aims could be scaled up rapidly and al­lowed for a swift tran­si­tion to a green econ­omy.

“In China, we be­gan think­ing about green fi­nance in 2014. It started with 14 steps to build a green fi­nan­cial eco-sys­tem that were adopted by the govern­ment in 2016. At the time it was the only over-arch­ing green fi­nan­cial sys­tem in the world. China has ini­ti­ated even more ini­tia­tives as part of a green econ­omy,” Mr Ma Jun, Chair­man of

Green Fi­nance Com­mit­tee (GFC) of China So­ci­ety of Fi­nance and Bank­ing, pointed out.

Mr Ma, who also serves as a Mem­ber of the Mon­e­tary Pol­icy Com­mit­tee of the Peo­ple’s Bank of China, added that the focus on the build­ing of a green econ­omy wasn’t solely a do­mes­tic ex­er­cise. When China held the G20 pres­i­dency in 2016, the coun­try launched the Green Fi­nance Study Group which it co-chaired along­side the United King­dom. And when the coun­try hosted the G20 sum­mit in Hangzhou, a focus was placed on green fi­nance.

“In 2016, China was head of G20 and we em­pha­sised green fi­nance. We wanted to cre­ate a con­sen­sus on green fi­nances which we even­tu­ally ac­com­plished. This was an im­por­tant mile­stone com­pleted at a very high-level,” Mr Ma noted.

The Belt and Road Ini­tia­tive is an­other area where China is in­cor­po­rat­ing its green econ­omy into the global sys­tem. Ac­cord­ing to re­search from New Cli­mate Econ­omy, tak­ing ac­tion against cli­mate change as op­posed to a busi­ness-as-usual strat­egy could pro­duce a di­rect eco­nomic gain of USD26 tril­lion be­tween 2018 and 2030. Ad­di­tion­ally, there would be a net em­ploy­ment gain of 37 mil­lion jobs. China be­lieves it can help the world achieve these ben­e­fits and is look­ing for part­ners will­ing to con­trib­ute as well.

“We launched green in­vest­ment prin­ci­pals as part of the coun­try’s Belt and Road Ini­tia­tive. A to­tal of 33 fi­nan­cial firms have agreed to these prin­ci­pals, but there is still room for growth,” Mr Ma said. “We are look­ing for par­tic­i­pa­tion from Nor­we­gian fi­nan­cial in­sti­tu­tions and com­pa­nies as they can help play a role in the build­ing of a green econ­omy.”

A to­tal of USD57.4 bil­lion worth of green bonds were is­sued in Belt and Road Ini­tia­tive coun­tries last year. China ac­counted for nearly 40 per­cent of the green bonds is­sued in the coun­tries, the high­est amount glob­ally, ac­cord­ing to re­search from Refini­tiv Data. How­ever, green bonds are just one area of China’s green econ­omy plans.

The four pil­lars

Mr Ma ex­plained that the Chi­nese green eco­nomic move­ment can cur­rently be bro­ken down into four pil­lars: tax­on­omy, in­cen­tives, dis­clo­sure and green fi­nan­cial flows. Each one has been de­vel­oped since 2016, but the speed of this has dif­fered for the four pil­lars.

Ac­cord­ing to Mr Ma, hav­ing for­mally recog­nised tax­on­omy allows for uni­ver­sal stan­dards to be es­tab­lished.

This is im­por­tant for a num­ber of rea­sons. Firstly, fi­nan­cial in­sti­tu­tions have a clearer pic­ture that allows them to focus on making cor­rect in­vest­ments. Ad­di­tion­ally, an agreed upon tax­on­omy can pre­vent green­wash­ing where some busi­nesses try to cir­cum­nav­i­gate the sys­tem by fal­si­fy­ing in­for­ma­tion. At the mo­ment, China cur­rently has three sets of tax­on­omy.

With tax­on­omy in place, it allows for the govern­ment to be­gin in­cen­tivis­ing the shift to­wards a green econ­omy which is some­thing Mr Ma stressed, “The govern­ment needs to pro­vide in­cen­tives to make projects worth­while. This in­cludes low-cost fund­ing and eas­ily ac­ces­si­ble fi­nanc­ing.”

In its Ex­plor­ing Green Fi­nance In­cen­tives in China re­port, PwC China sug­gested the county’s bank­ing reg­u­la­tors in­tro­duce short-term pro­grams to banks that en­tices them to pro­vide pref­er­en­tial rates to green in­dus­tries or pos­si­bly pro­vide higher flex­i­bil­ity in their cap­i­tal ar­range­ment should they par­tic­i­pate in in­creased green fi­nance lend­ing.

The goal of these in­cen­tives is to stim­u­late in­vest­ment in green projects, but Mr Ma noted greater dis­clo­sure would be re­quired. It is some­thing China has been work­ing on and could soon roll out.

“Every­thing needs to be re­ported when it comes to en­vi­ron­ment, both the ben­e­fits and neg­a­tives. In 2020, China will in­tro­duce manda­tory re­port­ing for all listed com­pa­nies. We be­lieve we are the only coun­try in the world that re­quires this,” Mr Ma stated.

How­ever, some con­cerns re­gard­ing dis­clo­sure re­main. Even with China launch­ing manda­tory re­port­ing this year, it will need to work to de­velop the knowl­edge and tools that en­sures its ef­fec­tive­ness.

“Dis­clo­sure of en­vi­ron­men­tal per­for­mance in­for­ma­tion re­mains in­suf­fi­cient. Within the fi­nan­cial sec­tor, en­vi­ron­men­tal risk analysis ca­pa­bil­i­ties need to be de­vel­oped,” Ms Wang Yao, Di­rec­tor Gen­eral of the In­ter­na­tional In­sti­tute of Green Fi­nance, Cen­tral Uni­ver­sity of Fi­nance and Eco­nom­ics, Bei­jing, told The Lon­don School of Eco­nomic and Po­lit­i­cal Sci­ence. “At the same time, due to the lack of tools for en­vi­ron­men­tal risk iden­ti­fi­ca­tion and quan­tifi­ca­tion, some fi­nan­cial in­sti­tu­tions un­der­es­ti­mate the risks that pol­lut­ing in­dus­try in­vest­ments may bring. More­over, most prac­ti­tion­ers lack pro­fes­sional knowl­edge of green in­dus­tries.”

The fi­nal pil­lar of the Chi­nese green eco­nomic move­ment is to es­tab­lish and grow green fi­nan­cial flows. This is some­thing al­ready hap­pen­ing in China, but the scope is some­what lim­ited.

“China has de­vel­oped a sys­tem of govern­ment green loans, ETFs and other fi­nan­cial flows to stim­u­late this ac­tiv­ity. A to­tal of 21 Chi­nese banks now have out­stand­ing green loans while 500 green funds have been launched in the past year,” Mr Ma said. “Mostly, these funds have tar­geted in­fra­struc­ture, but now they are mov­ing into other sec­tors, such as tech­nol­ogy. There is an op­por­tu­nity here for Nor­we­gian com­pa­nies to be­come more in­volved.”

Green sup­port

And while these are the four pil­lars driv­ing green fi­nance in China, there are several other as­pects con­tribut­ing to the green econ­omy. For ex­am­ple, the Chi­nese Emis­sions Trad­ing Scheme (ETS) is ex­pected to over­see its first trades af­ter be­ing an­nounced in 2017. Ex­perts hope it can en­cour­age power util­i­ties and man­u­fac­tur­ers to re­duce their re­liance on coal while China’s Min­istry of Ecol­ogy and En­vi­ron­ment is al­ready ex­plor­ing ways to ex­pand the scope of the pro­gramme.

There is also the com­pul­sory green in­sur­ance sys­tem rec­om­mended by the Peo­ple’s Bank of China in 2017. The bank ex­plained this in­sur­ance could make in­vest­ment in high en­vi­ron­men­tal risk prod­ucts less ap­peal­ing to share­hold­ers and could even­tu­ally be a key el­e­ment of the green fi­nance sys­tem.

In 2018, Shen­zhen in­sti­tuted manda­tory en­vi­ron­men­tal pol­lu­tion li­a­bil­ity in­sur­ance re­quire­ments for more than 1,000 busi­nesses in ten in­dus­tries. It re­mains the largest city in China to have en­acted a manda­tory green in­sur­ance sys­tem.

For China’s green econ­omy am­bi­tions to fully suc­ceed, more work will need to be done. In par­tic­u­lar, the law will need to keep up with green fi­nance.

“Im­prove­ment of key laws and reg­u­la­tions are crit­i­cal next steps. It is necessary to strictly im­ple­ment the En­vi­ron­men­tal Pro­tec­tion Law and pro­mote the Reg­u­la­tions on Com­pen­sa­tion for Eco­log­i­cal Pro­tec­tion to clar­ify how the fi­nan­cial sys­tem should man­age en­vi­ron­men­tal ex­ter­nal­i­ties,” Ms Wang pro­claimed. “At the same time, leg­isla­tive amend­ments in the fi­nan­cial sec­tor also need to be pro­moted, such as the in­clu­sion of green el­e­ments into the Com­mer­cial Bank­ing Law, Se­cu­ri­ties Law, In­sur­ance Law, and pen­sion fund reg­u­la­tion.”


Above left: Fund­ing en­vi­ron­men­tal projects, such as ones to elim­i­nate smog in Shang­hai, is part of the rea­son green fi­nance is em­pha­sised by the govern­ment. Above: Mr Ma Jun ex­plained to the crowd at NABS 2019 that Nor­we­gian fi­nan­cial in­sti­tu­tions and com­pa­nies could help with the green econ­omy.

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