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Green Finance

The Color of Money

Beijing knows that promoting smart climate action is vital for the world’s future. That’s why it’s pioneering green finance to find the funding to transform the globe

By NewsChina Updated Feb.1

The first Chinese Green Covered Bond is listed on the London Stock Exchange, November 11, 2016 / Photo by CNS

On November 4, the groundbreaking Paris Agreement came into effect, after being ratified by over 55 countries. The agreement, passed last December, now covers over 55 percent of global greenhouse emissions, the percentage needed for the treaty to be enacted. But as the parties convened this November in Marrakesh to negotiate real climate action, important questions on how the deal will be implemented and financed remained. 

As the new administration of US president-elect Donald Trump has already threatened to pull the US out of the deal, China is left as a possible global leader on climate change, a burden the East Asian giant is willing to shoulder.  

This year’s Conference of the Parties (COP), as the climate change discussions are referred to, is being called “the COP of Action.” But ambitions need money. In Marrakesh, the gathered nations discussed how they would mobilize at least US$100 billion in finance for climate-related projects for developing countries by 2020. Although a developing country itself, and one which could, in all justice, claim financial support from the developed countries to adapt and mitigate the effects of climate change, China is not waiting to act.  

Domestically, in order to overcome the financial hurdles for low-carbon development, China has started work on a national green finance system. Internationally, apart from mobilizing the China-backed 20 billion yuan (US$ 2.95 billion) of the South-South Climate Cooperation Fund (SSCCF) to help other developing countries respond to climate change, China has made indispensable efforts in pushing forward green finance as part of the G20 agenda. This July, the first report on G20 green finance was ratified, clarifying the definitions, objective, scope and upcoming challenges. 

Silent Revolution 

Green finance refers to financial activities that support projects that deliver environmental benefits. These can include, for example, reductions in pollution and greenhouse gas emissions as well as more efficient use of resources. 

In China, green finance is not a new concept. According to Ma Jun, chief economist at the People’s Bank of China (PBOC), and a major campaigner for green finance promotion, China’s green finance has developed over the past few years alongside the promulgation of a series of policies regarding green credit, bonds, and insurance. “For example, the Ministry of Environmental Protection, the PBOC and the China Banking Regulatory Commission (CBRC) jointly established China’s green credit system in July 2007. The CBRC released its Green Credit Guidelines in February 2012, outlining the requirements for banks and other financial institutions for their delivery of green credit services, promotion of energy conservation and emissions reduction, and environmental protection,” Ma told NewsChina by email. 

However, according to Wang Yao, dean of the International Institute of Green Finance, the policies of green finance were not implemented effectively after the ideas were introduced. “But up until 2014, although green finance was not well-known to the general public, most domestic banks gradually attained an understanding of the three major policies on green credit, green bonds, and green insurance from a theoretical point of view,” explained Wang to NewsChina during a recent interview in Beijing: “China’s recent emphasis on ‘green finance’ started in 2014 when the public became aware of the persistent nationwide pollution issues and the country decided on overall environmental reform.”  

China released more stringent restrictions and punishments for polluters through a revised environmental law in 2014. But greening the existing energy and transport sectors will require enormous financial support. According to estimates by the Chinese Academy for Environmental Planning (CAEP), achieving the environmental improvement objectives set by the central government will require annual investments in green industries of about 3-4 trillion yuan (US$440 million to $580 million) during the 13th Five-Year Plan period (2016-2020). Given limited fiscal resources, it is thus very important to mobilize large amounts of private capital to facilitate the transformation of the economy. 

The same year also saw the appointment of Ma Jun, a former Deutsche Bank chief China economist, as chief economist at the PBOC, the country’s central bank and financial regulator. Ma’s aggressive push for green finance accelerated the lifting of the green financial system to the national level and saw it being included into the central government’s “Overall Reform Plan for Promoting Ecological Civilization” published in September 2015. Subsequently, the 13th Five Year Plan approved by the National People’s Congress in March 2016 also stated that the country would “establish a green financial system.” 

A US$2.5 million project to treat the land contaminated by oil and heavy metal is launched, Wuhan, capital city of Hubei Province in central China, August 28, 2015 / Photo by IC

Burgeoning Rules 

In December 2015, the PBOC and its Green Finance Committee issued China’s Green Bond Guidelines. Banks and companies then issued over US$20 billion in green bonds in the first nine months of 2016, accounting for almost 40 percent of the global total, more than any other country in the world. In addition, according to Ma Jun, China is making progress on other fronts of green finance, developing incentives for green loans, developing indices for green equities and green bonds, launching green equity funds, pushing for greater environmental risk disclosure by publicly listed companies, developing environmental stress test methodologies and experimenting with carbon markets and carbon finance products.  

Deadly pollution incidents, or ones which leave people chronically ill, have increasingly made headlines. The new Environmental Protection Law passed in April 2014 made it clear that the State encourages companies to purchase pollution liability insurance. Ma Jun told NewsChina that from 2007 to the third quarter of 2015, more than 45,000 enterprises bought pollution liability insurance, and insurance companies paid claims of over 100 billion yuan (US$14.7 million). 

In 2015 prior to COP21 in Paris, China made a commitment to the world that it would peak its carbon emissions by 2030 or earlier, and announced a plan to launch the national carbon trading scheme – the largest trading scheme of its kind in the world – by 2017. So far, significant progress has been made and different provinces across the country have presented to the central government full lists of key enterprises to be included in carbon trading. Once approved, the lists will be published, together with different enterprises’ greenhouse gas emission statistics. Hu Min, Program Director of the Low Carbon Economic Growth Program at Energy Foundation China told NewsChina in November that the chances of China fulfilling its promise to hit its carbon emissions peak by 2030 are very high, since China has very detailed domestic policies and has submitted detailed action plans to the UN.  

Along with the solidification of carbon trading, another significant action, according to Ma Jun, is that China is moving towards introducing mandatory requirements for listed companies and bond issuers to disclose environmental information, such as discharges of key pollutants and CO2 emissions on a quantitative and regular basis. At present, more than 20 stock exchanges worldwide have introduced Environmental, Social and Governance (ESG) information disclosure requirements or guidelines for listed companies, and at least seven stock exchanges have introduced mandatory disclosure requirements for listed companies. In China, the Shenzhen and Shanghai Stock Exchanges have published voluntary guidelines regarding environmental information disclosure. But due to their voluntary nature, Ma added that only about 20 percent of the listed companies in China have disclosed their environmental information so far. 

“Though ESG data have proven to be a valuable tool for enhancing fund performances, it has been slow to take off in Asia. Companies in the region [including China] are still grappling with disclosure requirements. Another issue is that many investors are uncertain about how to conduct an ESG evaluation as part of the investment decision-making process,” commented Fiona Reynolds, managing director of the Principles for Responsible Investment (PRI), a United Nations-supported initiative during an October interview with NewsChina. Thus “green” awareness of institutional investors, added Reynolds, remains at “an infant stage” in China. The awareness of institutional investors that environmental risk will be vital for investment prospects remains quite low. “This is the result of weak environmental law enforcement and the low cost of breaking environmental law in China,” admitted Wang Yao to NewsChina. 

A resident living near a coal-fired power plant pushes his three-wheeled cart, November 26, 2015 / Photo by CFP

Taking the Lead 

“World leaders understand more clearly than ever that smart climate action is essential to deliver better, more equitable and longer-lasting economic growth. The shift to a low-carbon economy is truly inevitable, and those that embrace this direction first will benefit most,” said Andrew Steer, the CEO of World Resources Institute (WRI), a non-governmental global research organization in a recent press release. 

Over the past few years, China has embarked on a dedicated journey towards a low carbon economy, which includes the recent ambitious agenda to plant the seeds of a global green financial system. As proposed by China, the G20 set up a green financial research group in December 2015. The group is dedicated to looking for new ways to direct resources through green finance, to speeding up the shift in the global economy towards a more environmentally friendly era, and to promoting international collaborations in green finance. 

China made good use of the presidency of the G20 in 2016 to place green finance as a key agenda item for the group, and the synthesis report produced by the G20 Green Finance Study Group, co-chaired by China and the UK, identifies the major challenges to green finance and laid the key steps to mobilizing private capital for green investment.  
All these agendas have received positive feedback from G20 leaders, financial policymakers and major financial institutions. Germany, next year’s G20 president, announced in October that green finance will remain a key part of the agenda for the G20 in 2017. “It is certain that the next few years will be a golden era for green finance,” said Wang Yao.  

But with the Paris Agreement not yet ratified by the US Senate, it’s as vulnerable to predation by US president-elect Donald Trump as a fifteen-year-old girl at a beauty pageant. Trump has claimed throughout his campaign that he would withdraw all funding from the UN and redirect climate programming funds to infrastructure projects. It’s thus highly possible that the US will shrink its future investment in combating global warming and developing clean energy. China, in contrast, wants to keep its momentum on change, working alongside the rest of the world in taking action with a clear vision and firm leadership on climate change issues, with green finance being one of its top priorities.  

In addition, China enjoys a unique political system that can allow it to launch an overall top-down framework for the development of a green finance scheme faster and more smoothly than other countries. “We are expecting to see big changes coming, since it is quite certain that 2017 will be an important year for China to materialize all those green policies, ” said Wang Yao, talking confidently about the future.