Green Fi­nance: China’s Global Im­pact

Con­sid­er­ing the im­proved poli­cies and grow­ing mar­ket, China’s green fi­nance is usu­ally con­sid­ered a glow­ing ing suc­cess story. But chal­lenges re­main for ex­pand­ing and har­mo­niz­ing green fi­nance at the global level.

China Pictorial (English) - - Contents - Text by Wang Yao and Mathias Lund Larsen

In China, green fi­nance is a com­pre­hen­sive pro­gram cov­er­ing the en­tire fi­nan­cial sys­tem. Since its emer­gence, a num­ber of key trends have shown up.

The pol­icy sys­tem con­tin­ues to im­prove. Since the launch of the Guide­li­nes­forestab­lish­ingth­e­green Fi­nan­cial­sys­tem in 2016, govern­ment de­part­ments have been devel­op­ing and im­ple­ment­ing poli­cies at in­creas­ingly de­tailed lev­els. One case ev­i­denc­ing the grow­ing am­bi­tion of the Chi­nese govern­ment to de­velop green fi­nance is the Peo­ple’s Bank of China (PBOC) us­ing its medium-term lend­ing fa­cil­ity (MLF) specif­i­cally to sup­port the green econ­omy by al­low­ing green bonds as col­lat­eral. Fur­ther­more, the As­set Man­age­ment As­so­ci­a­tion of China (AMAC) re­cently pub­lished a draft ver­sion of its green in­vest­ment guide­lines to get feed­back from Chi­nese in­vestors.

Many green fi­nance tools are ma­tur­ing. To­day, green credit ac­counts for nine per­cent of all the credit is­sued by banks at around 8 tril­lion yuan. Green bonds re­mained sta­ble at 248.6 bil­lion yuan of an­nual is­suance in 2017 and a sim­i­lar level so far in 2018. The num­ber of green funds has in­creased to 265 with con­tin­ued ex­pan­sion pre­dicted this year. Green PPPS now num­ber more than 8,000 with a to­tal value sur­pass­ing 7 tril­lion yuan. Green in­sur­ance has ex­panded to a to­tal risk cov­er­age of about 28 bil­lion yuan after grow­ing rapidly in 2017. Of par­tic­u­lar note is the de­vel­op­ment of en­vi­ron­men­tal rights trad­ing. China is scal­ing up its car­bon trad­ing sys­tem. The plan to es­tab­lish a na­tional scheme, pub­lished in De­cem­ber 2017, has mapped out con­crete steps. After two to three years, the na­tional scheme will be in place. While it cur­rently only cov­ers the elec­tric­ity sec­tor, seven ad­di­tional sec­tors, in­clud­ing the petro­chem­i­cal in­dus­try, chem­i­cal in­dus­try, con­struc­tion ma­te­ri­als, steel, metal, pa­per and aviation, will be in­cluded to bring half of China’s to­tal emis­sions into the car­bon trad­ing sys­tem.

ESG (en­vi­ron­men­tal, so­cial and gov­er­nance) in­te­gra­tion is ac­cel­er­at­ing as in­vestors be­come more con­scious of green fi­nance prin­ci­ples and prac­tices. The main chal­lenge is to con­vince in­vestors that sus­tain­able in­vest­ments can be prof­itable, a con­cept that is sup­ported by re­search re­sults pub­lished by Mor­gan Stan­ley Cap­i­tal In­ter­na­tional (MSCI), Ox­ford Univer­sity and Arabesque (a multi­na­tional as­set man­an­age­ment com­pany). Green in­vest­ment ment is of­ten per­ceived as riskier, which is not nec­es­sar­ily true. In fur­ther sup­port port of the ESG busi­ness case, re­cent re­search by the Bank of In­ter­na­tional nal Set­tle­ments and Natixis pointed out ut that green bonds ac­tu­ally carry lower wer coupon rates than other bonds with h sim­i­lar ma­tu­ri­ties. To help in­vestors s grasp en­vi­ron­men­tal risks, in 2018 the In­ter­na­tional In­sti­tute of Green n Fi­nance launched a re­port along­side de UNEP FI and UNPRI specif­i­cally on ESG in­te­gra­tion in the Chi­nese as­set et man­age­ment in­dus­try.

Lo­cal green fi­nance is ex­pand­ing ng rapidly. This in­cludes both des­ig­nated ted green fi­nance pi­lot zones and nu­mererous vol­un­tary pro­grams. Cur­rently, Zhe­jiang, Guang­dong, Jiangxi, Guizhou prov­inces and Xin­jiang Uygur Au­tonomous Re­gion have be­come pi­lot ar­eas. Such ini­tia­tives are pre­dicted to ex­pand in the com­ing ing years. All pi­lot zones have made pro­gogress in sup­port­ing poli­cies, or­ga­ni­za­a­tional struc­ture, prod­ucts and ser­vices ces in­no­va­tion, mar­ket con­struc­tion and nd in­sti­tu­tional de­vel­op­ment. Guang­dong ong has launched a num­ber of in­cen­tive e

schemes for green fi­nance in­clud­ing guar­an­tees and in­ter­est rate sub­si­dies. Xin­jiang has es­tab­lished green project plat­forms. Jiangxi is pro­mot­ing the mar­ke­ti­za­tion of eco­log­i­cal com­pen­sa­tion through a trad­ing sys­tem that pro­vides train­ing for all rel­e­vant stake­hold­ers. In re­sponse to the na­tional top-level de­sign for green fi­nance, over 10 prov­inces and au­tonomous re­gions not cov­ered by the pi­lot pro­gram have also re­leased pol­icy frame­works on green fi­nance.

The Chi­nese govern­ment is in­clud­ing crit­i­cal green com­po­nents in the im­ple­men­ta­tion of the Belt and Road Ini­tia­tive. This is promi­nently un­der­lined in the doc­u­ments En­vi­ron­men­tal

Risk man­age­ment ini­tia­tive for China’ s Over­seas in­vest­ment by the China Green Fi­nance Com­mit­tee and Guid­ance on pro­mot­ing green belt and

Road by China’s State Coun­cil. These doc­u­ments high­light the im­por­tance that China at­taches to re­duc­ing the en­vi­ron­men­tal and so­cial risks of its over­seas in­vest­ments. This is of great in­ter­na­tional im­por­tance be­cause the Ini­tia­tive wel­comes con­tri­bu­tions from many stake­hold­ers around the globe.

Key Chal­lenges

One of the key chal­lenges for fur­ther devel­op­ing green fi­nance in China is the lack of clear and har­mo­nized stan­dards. There are a num­ber of stan­dards re­lated to green fi­nance in China, but they dif­fer from in­ter­na­tional stan­dards. To solve the prob­lem of har­mo­niz­ing stan­dards, the Na­tional De­vel­op­ment and Re­form Com­mis­sion is devel­op­ing a green in­dus­try cat­a­logue, which will lay the foun­da­tion for defin­ing ‘green’ across the fi­nan­cial sec­tor. China is the world’s sec­ond-largest green bond mar­ket, and the in­creas­ing in­ter­na­tion­al­iza­tion of Chi­nese bond is­suers and in­vestors is im­pact­ing global stan­dards. It is im­por­tant to un­der­stand that with dif­fer­ent lev­els of de­vel­op­ment, eco­nomic struc­tures and en­ergy sys­tems, coun­tries will have dif­fer­ent def­i­ni­tions of ‘green.’

As part of the ef­forts to har­mo­nize green bond stan­dards between China and the EU, the China Green Fi­nance Com­mit­tee un­der the PBOC and the Euro­pean In­vest­ment Bank un­der the EU jointly is­sued a white pa­per out­lin­ing how in­ter­na­tional green bond stan­dards can be har­mo­nized. And work on com­pat­i­bil­ity will con­tinue in the fore­see­able fu­ture. While ex­pected to be com­pat­i­ble, green fi­nance stan­dards should also be flex­i­ble to re­flect lo­cal cir­cum­stances such as de­vel­op­ment stage, nat­u­ral re­source en­dow­ment, in­dus­trial lay­out and en­ergy com­po­si­tion.

An­other chal­lenge is that in­vestors and com­pa­nies are not ad­e­quately con­scious of en­vi­ron­men­tal risks. This is of­ten due to a lack of rel­e­vant en­vi­ron­men­tal in­for­ma­tion at cor­po­rate level that can be quan­ti­fied and an­a­lyzed. To tackle this prob­lem, en­vi­ron­men­tal in­for­ma­tion dis­clo­sure is grad­u­ally be­com­ing manda­tory for listed com­pa­nies. In 2018, all listed com­pa­nies are re­quired to ei­ther dis­close this in­for­ma­tion or pro­vide jus­ti­fi­ca­tion for re­fus­ing, which is ex­pected to in­spire a dis­clo­sure rate of more than 90 per­cent. By 2020, it will be manda­tory for all listed com­pa­nies to dis­close rel­e­vant en­vi­ron­men­tal in­for­ma­tion. In this re­gard, it is im­por­tant to note that most large Chi­nese com­pa­nies are pub­licly listed, even state-owned en­ter­prises. This pro­vides crit­i­cal in­for­ma­tion for all stake­hold­ers to wisely make fi­nanc­ing de­ci­sions.

While green fi­nance in China is al­ready con­sid­ered suc­cess­ful, the scale needs to ex­pand con­tin­u­ously. De­spite the im­pres­sive growth of green loans and bonds, the num­bers are still rel­a­tively small com­pared to the fi­nan­cial sys­tem as a whole and in­creas­ing de­mand for green in­vest­ment. Ex­pand­ing it re­quires pub­lic re­sources to max­i­mize the abil­ity to lever­age pri­vate cap­i­tal. To this end, a num­ber of ini­tia­tives have been car­ried out, such as the ex­pan­sion of green PPPS.

Also, bet­ter com­mu­ni­ca­tion on green fi­nance is needed to im­prove

pub­lic un­der­stand­ing. Since more and more peo­ple are en­gaged in green fi­nance, knowl­edge about green fi­nance should bet­ter per­me­ate all lev­els of stake­hold­ers. Bet­ter com­mu­ni­ca­tion between the govern­ment, fi­nan­cial in­sti­tu­tions, com­pa­nies, in­ter­me­di­aries, re­searchers, and the pub­lic is nec­es­sary. In this process, the Green Fi­nance Com­mit­tee of China So­ci­ety for Fi­nance and Bank­ing plays a cru­cial role.

Driv­ing Green Fi­nance Glob­ally

The last cou­ple of years have brought sev­eral mon­u­men­tal shifts, and the most glar­ing change is the United States’ new ap­proach to for­eign pol­icy. Amid in­creas­ing un­pre­dictabil­ity and frag­men­ta­tion, China and many of its part­ners are work­ing to­gether as pil­lars of sta­bil­ity. This is par­tic­u­larly true of cli­mate change gov­er­nance and green fi­nance.

Un­der the G20, China pi­o­neered the agenda for devel­op­ing and sup­port­ing green fi­nance. Dur­ing China’s G20 pres­i­dency, green fi­nance be­came a key theme at the meet­ing for the first time. The G20 Green Fi­nance Study Group was launched as part of an ef­fort to sup­port the G20’s goal of strong, sus­tain­able and bal­anced growth. This ini­tia­tive con­tin­ues to­day through the lat­est G20 sum­mit in Ham­burg and will ad­vance fur­ther in 2018 in Ar­gentina.

An­other in­ter­na­tional green fi­nance ini­tia­tive pro­moted largely by China is fo­cused on cen­tral banks for their crit­i­cal role in the ef­fort to green the global fi­nan­cial sys­tem. To strengthen the global re­sponse to the goals of the Paris Agree­ment by en­sur­ing the fi­nan­cial sys­tem’s man­age­ment of risk and mo­bi­liza­tion of green fi­nance, eight cen­tral banks and su­per­vi­sors es­tab­lished the Cen­tral Banks and Su­per­vi­sors Net­work for Green­ing the Fi­nan­cial Sys­tem (NGFS). The net­work had ex­panded to cover 15 coun­tries by mid-2018. The NGFS of­fers an op­por­tu­nity to scale up and co­or­di­nate global ef­forts.

China works di­rectly with a num­ber of coun­tries and groups. For ex­am­ple, China is work­ing with the EU and the ASEAN on sev­eral ar­eas to pro­mote green fi­nance on the global stage. Within the Belt and Road Ini­tia­tive, China works with rel­e­vant coun­tries to en­sure the in­clu­sion and pri­or­i­ti­za­tion of green fi­nance. An­other ex­am­ple is Chi­naUK co­op­er­a­tion on green fi­nance, which has been car­ried out over the last three years and will con­tinue in the fu­ture un­der the frame­work of the China-uk Eco­nomic and Fi­nan­cial Di­a­logue. China also works with France in par­tic­u­lar to es­tab­lish Paris as a Euro­pean leader in green fi­nance.

China also ac­tively en­gages in global fo­rums on green fi­nance. These in­clude a num­ber of av­enues un­der the UN sys­tem such as COP ne­go­ti­a­tions of the UNFCCC. From a re­search per­spec­tive, China also works with in­ter­na­tional or­ga­ni­za­tions such as UNEP FI and UNPRI. Based on a re­port re­leased by the Fi­nan­cial Sta­bil­ity Board’s Task Force on Cli­mate Re­lated Fi­nan­cial Dis­clo­sure, China is car­ry­ing out pi­lot pro­grams while co­or­di­nat­ing ef­forts with the UK which is run­ning sim­i­lar pi­lot pro­grams. These pro­grams will shape rec­om­men­da­tions on how cli­mate fi­nance should be car­ried out glob­ally in the fu­ture. Such com­bined ef­forts have great im­pli­ca­tions for ex­pand­ing and har­mo­niz­ing green fi­nance at the global level.

China’s over­seas green in­vest­ment is on the rise, through both sov­er­eign and non-sov­er­eign backed chan­nels. China has cre­ated or co-cre­ated 15 funds worth al­most US$150 bil­lion. These funds pri­mar­ily in­volve devel­op­ing coun­tries in Africa and Latin Amer­ica, coun­tries along the Belt and Road routes and ASEAN coun­tries. ‘Green’ is among the pri­mary top­ics for in­vest­ment of these funds, two of which are specif­i­cally green-themed funds, namely the South-south Cli­mate Co­op­er­a­tion Fund and the U.s.-china Green Fund.

Dr. Wang Yao is di­rec­tor-gen­eral of the In­ter­na­tional In­sti­tute of Green Fi­nance (IIGF) at the Cen­tral Univer­sity of Fi­nance and Eco­nom­ics (CUFE) and deputy sec­re­tarygen­eral of the Green Fi­nance Com­mit­tee of China So­ci­ety of Fi­nance and Bank­ing. Mathias Lund Larsen is head of the In­ter­na­tional Co­op­er­a­tion De­part­ment of IIGF.

March 26, 2018: Lord Mayor of Lon­don Al­der­man Charles Bow­man and Dr. Ma Jun, di­rec­tor of the Green Fi­nance Com­mit­tee of the China So­ci­ety for Fi­nance and Bank­ing, sign an agree­ment on strate­gic co­op­er­a­tion at the launch cer­e­mony of the China-uk Green Fi­nance Cen­ter in Bei­jing. VCG

May 27, 2017: The Chang’an Land­fill Gas Clean De­vel­op­ment Mech­a­nism Project be­gins op­er­a­tion in Chengdu, cap­i­tal of Sichuan Prov­ince. It gen­er­ates power of about 166 mil­lion kilo­watt hours while elim­i­nat­ing emis­sions of 900,000 tons of car­bon diox­ide each year. VCG

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