China is building momentum to incorporate green finance into its national development strategy, demonstrating a keen understanding that environmental protection requires significant investment. In 2013, China’s Third Plenum of the 18th Congress of the Communist Party of China (CPC) — a meeting held every five years by the highest governing body within CPC — recognized the need to establish “a market-based mechanism that channels private capital investments” into green projects such as pollution mitigation, clean energy, and energy efficiency.
Much progress has been made since then. Green bonds, a form of tax-exempt debt investment in which the government loans money to corporate or governmental entities for environmental projects, now account for 10 percent of all of China’s outstanding loans. With the 120 billion RMB (around 18 billion USD) of green bonds issued this year – 40 percent of the world total – China is now home to the world’s biggest green bond market.
Earlier this month, on the eve of the 2016 G20 Hangzhou summit — an international forum promoting global financial stability — seven Chinese government agencies approved the “Guidelines for Establishing a Green Finance System.” An exceptionally comprehensive suite of policies, these Guidelines cover development roadmaps for financial tools, including discounted interest rates, green bonds, and green stock indices that lower financing costs and enhance available funds for green projects. The set of policies mandates investors to disclose environmental information and proposes mechanisms that create barriers for polluting projects. Along with a national carbon financial market to be launched in 2017, China’s proposal for a green development fund – a key part of the Guidelines – sends private investors strong signals to help steer funds towards green projects.
As the Hangzhou summit came to a close, international leaders gathered with more than 300 financial experts in Shanghai on September 6 at the International Green Finance Forum, a conference where China showcased its progress in developing a green financial sector and disclosed best practices mainstreaming green finance into market operations. Co-hosted by eight agencies, the conference featured guest speakers such as the Vice President of the People’s Bank of China Gang Yi, United Nations Environment Programme Executive Director Erik Solheim, and the British Ambassador to China Barbara Woodward from organizations at the forefront of China’s green finance development.
The Forum included chief economist of the People’s bank of China Research Bureau, Ma Jun, who discussed major barriers to the growth of green finance in China. The lack of a clear definition for “green finance” and missing pollution emissions data from the private sector are both serious hindrances undermining investors’ ability to choose and invest in projects that are environmentally friendly.
Ma Jun (second left), China’s leading environmentalist, discussed challenges and opportunities for greening China’s financial sector.
The G20 Green Finance Synthesis Report was launched at the forum by the Green Finance Study Group, which is co-chaired by the United Kingdom and supported by the United Nations Environment Programme (UNEP). The report identifies major challenges facing green finance development in China and points to the challenge of asymmetric information among investors, companies, and government as an outstanding hurdle. Without high-quality data on companies’ environmental performance, investors face large “search costs” to identify and finance the best companies or projects with minimum environmental risks.
For instance, bigger does not equal better when it comes to hydropower plants. Micro hydropower plants with installed capacity under 50 megawatts that can power 400 to 900 homes in a year should in fact be favored over large plants. Large-scale hydroelectric dams can destroy local ecosystems, have mammoth embedded carbon footprints, and generate additional environmental risks while in operation. Investors may also shy away from green investments due to policy uncertainty underwriting the burgeoning sector as well as a lack of information on the commercial viability of green technologies.
A recent report shows that U.S. companies outperform Chinese companies in quantity and quality of disclosed environmental data. China has no independent environmental accounting standard while U.S. agencies, such as the Securities and Exchange Commission and Financial Accounting Standards Board, provide detailed accounting guidelines on capitalization of environmental pollution costs and environmental liabilities. Countries and stock exchanges the world over are making progress, however, towards better data transparency. At least 7 countries have mandated environmental information disclosure and more than 20 stock exchanges have released environmental disclosure guidance for their listed companies.
With a mediocre track record, China has recently taken steps to improve environmental disclosure. The national environmental law implemented in 2015 requires companies to disclose detailed information on emissions and concentration of primary pollutants, discharge method, and environmental management measures. The Ministry of Environmental Protection recently launched the Environmental Information Disclosure of Chinese Enterprises, a platform on which 755 companies have disclosed pollution discharges, including the mix of primary pollutants released, as of September 2016.
Achieving data transparency is a prerequisite to the growth and development of green finance. Even when data is abundant, it can be misleading and investors may have trouble distinguishing green projects from others that are merely “green washed.” Data reporting procedures need to be standardized and also be elegantly simplified to ensure the best global practices. By promoting a domestic green finance industry, China’s leaders have taken a crucial preliminary step towards realizing sustainable growth. The G20’s momentum has raised already high hopes among the international community for China to overcome barriers and fulfill its grand promises to lead the way for green growth.