Making green finance mainstream: The way ahead for China
Green finance refers to financial transactions that support the low carbon transition and fight against climate change. The Paris agreement adopted in 2015 turned the spotlight on the need to align financial systems with policies supporting sustainability while reducing environmental risks. The unprecedented volume of capital needed to achieve the agreement's goal of limiting global warming to 1.5°C this century has galvanized the development of green finance.
Green finance can make a major contribution to global efforts to create sustainable economies where emissions are reduced and growth enabled, increasing the level of financial flows from banking, insurance, micro-credit, and investment from the public, private, and not-for-profit sectors to sustainable development projects.
China has become a global green finance powerhouse in a few short years driven by powerful policy momentum. With an annual green investment of up to $633 billion needed in the next few years as the country transitions to a more environmentally sustainable growth model, there is now a requirement for China to rise to a range of practical challenges in order to develop a more commercially-driven market.
China took its first decisive steps towards a future where financial resources are aligned with low-carbon development in 2015. This was the year of the Paris agreement on climate change and the setting up of a green finance committee under the People's Bank of China. The following year, the country embedded the concept in its 13th five-year plan, and seven central ministries published guidelines for establishing a green financial system. China also took on the role of the world's green finance cheerleader, using its G20 (Group of 20) presidency to get heads of state to agree on the shared goal of promoting green finance.
Going from zero to hero
China started out on its green finance journey with speed and ambition. Driven by policies and plans developed by the People's Bank of China and the national development and reform commission, progress has been considerable and rapid. China's green bond market grew from zero before 2015 to the largest in the world in 2016. Green credit, green funds, and green insurance have also been launched—as have five pilot zones whose purpose is to explore different green finance categories and provide a pipeline of innovative ideas to fuel market growth. In addition, China has looked beyond its own borders and become a major green financier of overseas infrastructure projects through its Belt and Road Initiative.
Stepping up progress
Today, just four years after the launch of China's roadmap by the green finance committee, a huge amount has been achieved. But there can be no resting on laurels. China's government is alive to the need to speed up the march to the mainstream.
Why? Because green finance is still not flowing at the rate required to match the country's plans for transition to an 'ecological civilization.' Because a significant proportion of potential investors and stakeholders have yet to be convinced they should engage with this new economic trend. And because one thing is certain: environmental pressure and demand for green financial products are only going to grow. Millennials are just the first of the 'green generations' who expect to find ethical meaning in their investments, not just financial performance.
Greening financial flows
China's government and the People's Bank of China have started work on the next development phase of the country's green finance market, which must now move beyond policy-led demand and towards greater commerciality and sustainability. This is vital if China is to open up all available opportunities for financial markets to support its low-carbon transition.
In the first instance, the focus will be on financing projects in critical sectors such as construction, transport, utilities, and industrial processes. It's also vital to enable corporations to access new investment streams for their green projects and smaller companies to more easily borrow money for theirs. A larger and more streamlined market will also encourage and enable international organizations working in China, such as the World Bank and International Finance Corporation, to more readily integrate green finance into their projects.
Harmonizing green standards
Until now, the market in China has been critically constrained by a lack of central government-developed green finance standards. Among the issues to be resolved is a fundamental one: the lack of consensus on what constitutes a green project.
This means that currently a project categorized as green in China may not be viewed the same way by international investors. Improving domestic guidelines and regulations and aligning these with international best practice is now a top priority. To guide this work, there is already a financial industry standardization system construction development plan (2016-2020), issued by the People's Bank of China and other ministries.
Success will need more than this, though. Learning about other countries' green finance markets—the solutions they are finding and the standards they are setting—will also be crucial.
Promoting flagship projects
Given the short history of green finance, it's not surprising there aren't yet huge numbers of projects financed in this way in China. There are, though, promising signs of things to come.
In 2017, the Industrial and Commercial Bank of China, one of the country's 'big four' state-owned commercial banks, released the 'one belt one road' climate bond with a total size of $2.15 billion. This is the first climate bond in China to receive external verification and climate bond certification subject to both domestic and international green standards. It became the single largest Euro green bond issued by Chinese issuers at the time. The proceeds will be used for eligible green projects involving renewable energy, low-carbon transportation, energy efficiency, and water sustainability.
Accelerating the development of a healthy market requires the creation and promotion of projects showcasing green finance in action, which will act as demonstrators and credibility builders. These could be brand new projects with green finance driving their development from the outset, or they could be green projects already underway that could be encouraged to go green financially too, such as the U.S.-China clean energy research center building energy efficiency (CERC-BEE).
Championing greater transparency
Full disclosure of environmental and carbon information is vital to the liquidity, accountability, and integrity of any green finance market, and China has some way to go on this front. Lack of access to this data has long been seen as a barrier to green investment in China.
Some progress has been made by the government, including publishing outline guidance for listed companies and green bonds and starting to evolve its own disclosure framework. This has in part been achieved through initiatives like the U.K.-China climate and environmental information disclosure pilot. Building on this work, today's push for greater transparency is about standardizing data reporting requirements and promoting open information exchange throughout the value chain. Governments, financial institutions, private companies, research institutes, and data providers all need to be involved in this work, which will also require some capacity building, particularly in areas such as environmental risk analysis.
"As one of the lead runners in green finance, China now needs to advance its national standards and coordinate with what is happening internationally to make green finance mainstream." Shaojin Li, senior consultant, ICF
Promoting the concept
Green finance is a hot topic at the top level of government and finance in China, but its relative newness means there are many people key to its future who don't yet know exactly how it works and what it could do for them. To fast-track market growth, there needs to be a wider understanding of the concept among national and local government departments, including those dealing with political reform, the environment, agriculture, construction, industry, information technology, and science and technology, as well as investors, businesses, professional bodies, and citizens. Deeper understanding among financial institutions and regulators wouldn't go amiss either at a time when the market is striving for ever-greater sophistication. China might decide, for instance, to develop green private equity and venture capital investment or innovative monetary policy tools to incentivize green lending.
Dialogue, education, research, inter-governmental exchange, and capacity building can all play their part in meeting these—and other—needs China will encounter as it strives to mobilize more capital to finance its low carbon transition. For no matter how holistic the measures and how purposeful the policies that underpin the green finance market, the bottom line is that only projects that get financed will get done.
