Green Finance Revolution: China Can Lead

By Zhu Shouqing, Andrew Steer 12 January, 2016

WRI's Zhu & Steer on why it's prime time for green finance in China and share 5 recommendations how to get there

There is interest to shift to a sustainable economy but the financial sector isn't designed to support it; this is changing
New report released by China Green Finance Task Force & WRI lays out clear recommendations to help this shift
The opportunity is now for China to promote green finance globally with AIIB, policies & upcoming events

Given the Paris Agreement and the need for more money for resilience and adaption measures, we thought it’s time to review the situation of green finance in China. This article first appeared on the World Resources Institute’s website on 11 November, 2015  (see here). 

With air, water and soil pollution coming to the brink of crisis in China, there’s much interest in shifting to a more sustainable economy. But that’s hard to do when financial sector design doesn’t support it.

“Despite some progress, the financial system hasn’t yet created the right incentives to move…
…But that may be changing”

Despite some progress, the financial system hasn’t yet created the right incentives to move capital from polluting industries to clean sectors on a large scale. Costs to the environment are not accounted for.
For example, the absence of a carbon price and lack of lender’s liability for borrower’s environmental damages means that fossil fuel consumption and related business risks do not easily flow into corporations’ and financial institutions’ risk assessments.

Green Finance Reform and Green Transformation
But that may be changing. Today, the Green Finance Task Force of the China Council for International Cooperation on Environment and Development (CCICED), a commission established by the Chinese government and of which WRI’s President Andrew Steer is a co-chair, has released its new report, Green Finance Reform and Green Transformation.
The report lays out clear recommendations for how the national government can put the right institutions in place to help shift investments from polluting to sustainable industries. If the government adopts this set of recommendations, it could help push China forward in its shift to a low-carbon economy.
Andrew Steer’s views on the current status and challenges of green finance in China are in the box below.

Greening Finance: A View from Beijing

China’s thinking in this area is already more advanced that in most countries. The starting point is a recognition that “green finance” is not merely a matter of creating pots of money that will be channeled toward pollution control, renewable energy, etc. Such funds will never be sufficient to shift investment to the extent required. It requires a much more fundamental review of what it would take for financial markets (and all their associated asset pools in banks, bond and equity markets, insurance and pension funds) to advance the major shifts in energy, city design, transport systems, industrial engineering and rural development that will be required for a sustainable future.
Biases against sustainable finance exist on the demand and supply sides of financial markets (in virtually all countries, not just China). First, on the demand side, while there is a huge need for green investment, this is not adequately translated into effective demand through well-prepared bankable projects seeking finance. Such demand can only be created by well-enforced environmental policies and a broad fiscal and regulatory regime that rewards sustainable investment. On the supply side there are two problems.
First, financial markets are not knowledgeable about environmental issues, and fail to incorporate environmental risk in their asset allocation decisions. China is planning to force progress in this area, as a few other countries have done, by making disclosure of environmental risks on the part of banks (which dominate China’s financial system) mandatory. They are also considering requiring liability insurance against potential environmental damage. Both would incentivize the building of capacity in banks to treat environmental risks the way they would financial risks.
Second, financial markets, and especially banks, are highly conservative in their lending practices, giving preference to investments and technologies that are familiar. But now it is the innovative and unfamiliar that needs finance. Building bankers’ confidence to lend for new, greener technologies takes time, and can be encouraged by setting mandatory targets for green investments or through carefully designed subsidies, such as through differentiated discount rates at the Central Bank. Relatedly, our Task Force recommended setting up a large Green Development Fund under the leadership of the Peoples’ Bank of China. By investing equity in major green investments and providing risk management instruments (such as guarantees) and new instruments (such as green bonds), the Fund can be valuable in tapping new asset pools, all of which are encouraged by a changing regulatory and tax regime in China.
The above excerpt is from an article by Andrew Steer, WRI President & CEO, “Greening Finance: A View from Beijing” published on WRI’s website on 12 November, 2015


China Active in the Game Change

Interest in greening China’s financial sector is growing. Since 2007, China has been trying to channel bank loans away from resource- and emissions-intensive industries to green sectors through its Green Credit Guidelines. More recently, a task force led by the People’s Bank of China participated in the UNEP Inquiry into the Design of a Sustainable Financial System. Following the release of the report, the Bank established a Green Finance Committee to organize activities such as developing a green bonds standard, facilitating environmental stress tests for the banking sector, publishing papers on international green finance practices, and organizing discussions on greening China’s overseas investment.
And earlier this year, the Chinese government established the CCICED Green Finance Task Force to push the financial sector even further forward. The Task Force’s recommendations for the Government of China include priority policy changes such as:

  1. Create enabling legal conditions to encourage behavioral change. These legal measures include changing commercial banking laws to make lenders liable for environmental damages caused by borrowers; mandate environmental information disclosure for listed companies and high-polluting entities; and make environmental insurance compulsory for sectors with high probability of damaging the environment.
  2. Use fiscal and tax incentives to leverage public finance. This entails establishing an interest rate subsidy for green credits, creating a loan guarantee mechanism supported by public funds for green projects, and using tax incentives to generate revenue from green bonds.
  3. Set up institutional infrastructure to facilitate green investment. These infrastructure additions include a credit rating system that incorporates environmental factors, a network to move investors towards green investments, a national database on companies’ environmental records, and more.
  4. Provide financial tools and instruments to scale up green investment. The most important ones in this category are setting up a National Green Development Fund, scaling up green credits from the banking sector, and issuing green bonds.
  5. Green Chinese overseas investment and China’s emerging investment banks. In addition to encouraging environmental and social risk management with Chinese corporations investing beyond China’s borders, this entails greening the Asian Infrastructure Investment Bank, the New Development Bank, the Silk Road Fund, and the Belt and Road Initiative.

A Prime Time to Go Green

These recommendations come at a critical moment when China is at the center of several changes. China has been selling the Belt and Road Initiative to neighboring countries, and is poised to fast-grow its overseas investment along the routes. China is central to the creation of a number of multilateral institutions and new funds, including the Asian Infrastructure Investment Bank, the New Development Bank and the Silk Road Fund. And in 2016, China will host the G20 Summit. By adopting a greener financial regime, China can influence the outcome of these institutions and is better positioned to spread best practices internationally.

China has an unprecedented opportunity to promote green finance globally

At this historic juncture, China has an unprecedented opportunity to promote green finance globally. The question now is: Will the country capitalize on the opportunity before it?

Further Reading

  • Climate Finance: Who Pays? – A Paris Agreement was made but a lot of it and our future climate resilience comes down to money – north of USD100 bn. Xu Nan from Central University of Finance & Economics takes a look at who could pay what
  • COP21: What Paris Means For China – All eyes are on China, the largest contributor to global emissions as it transitions to a low carbon future. See what Paris means for China from carbon trading, peak emissions to carbon-intensive industries
  • COP21: 5 Takeaways from Paris – The Paris Agreement signals that the threat is real. Time is running out, especially for water. Inaction means growing costs and with financial risks across sectors also on the rise, CWR’s Thieriot shares key takeaways from COP21
  • Paris Water Pact: Feeling Blue – The rise of water at COP was evidenced by the Paris Pact for Water and Adaptation, Delta Coalition & the Megacities Coalition on Water. However, we are still feeling blue, CWR’s McGregor expands

Water & Finance

  • 2015 World Water Week: Key Takeaways – What’s water’s role in sustainable development? How can we ensure water for all? China Water Risk’s McGregor on this, how Asia is fairing, the Sustainable Development Goals & more from World Water Week 2015
  • China’s New Era of ESG – China’s economy is slowing with challenges arising from ESG factors. MSCI’s Chew & Wang on pollution fines, anti-corruption crackdowns & more from their report. Investors need to be prepared
  • Investors Can No Longer Ignore Water Risks – Ceres warns that water – or lack of it – is becoming a bigger financial issue for investors. Monika Freyman shares key points from their report on how to integrate water analysis into investment decisions
  • Bloomberg’s Views on Water – Bloomberg’s Liu & Bullard, discuss the importance of ESG analytics and why water use & efficiency data is crucial in the face of an increasingly water-insecure future in identifying portfolio risk
Zhu Shouqing
Author: Zhu Shouqing
Shouqing Zhu is a Senior Associate and Head of China Sustainable Finance Program at WRI's Beijing office. He leads and coordinates WRI’s work related to promoting sustainability with the financial system in China, which focuses on improving the environmental and social performance of Chinese investments, both overseas and domestic. He has served as a team leader for the Green Finance Task Force of the People’s Bank of China and the international coordinator for the Green Finance Task Force of the China Council for International Cooperation on Environment and Development (CCICED). Prior to joining WRI, Shouqing worked with multinational corporations, national governments, multilateral institutions and non-profit organisations in Asia, Europe, Australia and North America to develop and implement programs in areas of cross-border investment, regional economic development, greenhouse gas management, capacity building, and commercialization of cleantech. Shouqing holds an M.A. degree in World History from Peking University and an M.Phil. degree in Development Studies from the University of Cambridge. He also pursued doctoral research in banking regulation and management at the University of Melbourne. He is a certified Project Management Professional (PMP) and Greenhouse Gas Inventory Quantifier (GHG-IQ).
Read more from Zhu Shouqing →
Andrew Steer
Author: Andrew Steer
Dr. Andrew Steer is the President and CEO of the World Resources Institute, a global research organization that works in more than 50 countries, with offices in the United States, China, India, Brazil, Indonesia and Europe. WRI’s 450 experts work closely with leaders to address six urgent global challenges at the intersection of economic development and the natural environment: food, forests, water, climate, energy and cities. Dr. Steer joined WRI from the World Bank, where he served as Special Envoy for Climate Change from 2010 - 2012. From 2007 to 2010, he served as Director General at the UK Department of International Development (DFID) in London. Dr. Steer serves on the Executive Board of the UN Secretary General’s Sustainable Energy For All initiative; is Co-Chair of the World Economic Forum’s Global Agenda Council on Natural Capital; and is a member of the China Council for International Cooperation on Environment and Development (CCICED), the Leadership Council of the Sustainable Development Solutions Network, and IKEA’s People and Planet Positive Advisory Group. Prior to joining the UK Government, Andrew held several senior posts at the World Bank, including Director of the Environment Department. He also has directed World Bank operations in Vietnam and Indonesia and served as Chief of the Country Risk Division and Director and Chief Author of the 1992 World Development Report on Environment and Development. Andrew was educated at St Andrews University, Scotland, Cambridge University, and the University of Pennsylvania, where he received his PhD in economics.
Read more from Andrew Steer →