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