Green Finance Info

Author: Mathias Lund Larsen

Disclaimer: Below article has been created as a result of cooperation with Z/Yen.

Introduction to Green Finance

Green finance can be defined as “prioritizing the environment in investments and financing sustainable development programs.”

Green finance is a complex term because the meaning is always evolving, and its definition varies slightly in the America, European, and Chinese context. Generally, green finance aims to direct capital towards economic development that protects the environment.  This can include financing projects to prevent pollution (e.g. air pollution, water pollution), climate change, loss of biodiversity, or preserving water systems. Green finance is only one element of sustainable development and needs to be matched by commitments from society and the government.

Green financial instruments support a wide range of projects such as:

• renewable energy, such as wind or solar
• energy efficiency
• sustainable transport, such as public transport, rail transport, electric mobility
• waste and waste-water treatment
• re-forestation
• soil remediation

An overview of the projects that can be supported through green finance instruments can be found in the Chinese green bond catalogue and the Climate Bonds Taxonomy of the Climate Bonds Initiative (CBI).

Instruments of Green Finance

There are many green finance instruments including:

• green bonds – where capital is raised on public markets in the form of bonds and the proceeds are earmarked for funding climate and environmentally friendly projects
• sustainability-linked loans – where the interest rate of the loan is linked to the ESG performance of the borrower
• green loans – where capital is given between the lender and the borrower without a public market
• green insurance – which covers economic compensation liabilities caused by environmental accidents. Mandatory insurance can increase returns and lower risks on green finance

Green Finance in China

Green finance has developed rapidly in China, beginning with the 10`6 G20 meeting in Hangzhou. Prior to that, the first Chinese policy relating to “green finance” was issued by the People’s Bank of China (PBOC) in 1995 – the “Notice on Credit Policy for Environmental Protection”. In 2007, the Banking Regulator CRBC released the “Green Credit Guideline”, encouraging banks to promote environmental objectives and consider environmental risks in their lending. In 2016, the “Guidelines for Establishing the Green Financial System” were published with the endorsement of China’s State Council – the highest governing body.

The Green Finance System in China is regulated by NDRC, which publishes the “Guidance on Green Bond Issuance” for corporate issuance, and the PBOC, which publishes the “Green Bonds Endorsed Project Catalogue” for Chinese banks bond issuance.

In 2019, China was the largest market for green bond issuance with about 23 billion USD according to Refinitiv, ahead of the United States with about 20 billion USD.

Progress and Prospects

Green finance in China has developed rapidly over the past few years. Great strides have been made in the wholesale adoption of green bonds and green loans as well as innovation in green fintech and the adoption of mandatory environmental reporting.

However, in common with other systems around the world, the Chinese financial system continues to provide capital for environmentally damaging activities such as coal mining and high-carbon energy generation. This suggests that despite recent progress, there is still a long way to go to green the financial system as a whole.

This supplement provides an overview of the current progress of green finance in China, as well as examining how the field may develop in the future.

Using Top-Down Governance to Speed Up Implementation

China has made substantial progress in green finance over recent years. This is based on strong commitments from central government which have been implemented through a top-down governance model.

In 2015, the Central Party Committee of the Chinese Communist Party and the State Council launched two groundbreaking policy documents which have underpinned green policies in China[1]:

• The “Opinions of China’s Central Party Committee and the State Council on Accelerating the Development of Ecological Civilization” and;
• The “Overall Plan for the Structural Reform for Ecological Civilization”.

These policy documents guide China’s sustainable development goals across fields as diverse as energy, transport, urbanization, and financial services. Figure 1 illustrates the relationship between the national committee and the branches of government responsible for delivering these goals.  From central to local levels, through the Chinese administrative levels, concrete tasks being passed down through the system.

Figure 1: Top-Down Governance Model Of Green Finance[2]

China’s current policy framework on green finance was shaped by three landmark developments:

1. The 2007 launch of the ‘Green Credit Policy’ by the China Banking Regulatory Commission (CBRC), People’s Bank of China (PBOC), and the Ministry of Environmental Protection (MEP)^*. The result was that banks were the primary focus of green finance efforts early on.

• The establishment of the Green Finance Task Force in 2014 by the PBOC and the UN Environment Program played a critical role in developing a consensus on green finance both at ministry level and among the most senior policymakers[3]
• The launch of the ‘Guidelines for Establishing A Green Financial System’ in 2016 (jointly developed by the PBOC and six other ministry-level agencies) established a roadmap for action which not only had high-level support but created performance targets and progress indicators for ministries.

Chinese green finance developed rapidly after the launch of the guidelines, which stimulated the development of the Chinese national carbon trading scheme, the green bond market, and mandatory reporting for Chinese listed companies.

As part of the guidelines, the PBOC established the Green Finance Committee (GFC) which became the main body for coordinating the implementation and roll out of the guidelines. The GFC is supported at a local level with over 20 regional Green Finance Committees playing a similar role on the ground.

China’s two leading financial centres, Shanghai and Shenzhen, have taken a leadership role in green finance. They have established regulations and processes to facilitate green bond trading, deepened the product offering on green finance through index-linked green-bond wealth management products, and have worked in partnership with other international financial centres to develop benchmarks, standards and indices (such as the Shanghai and Luxembourg stock exchanges’ joint launch of green bond indexes.[4]).

Carbon Risk

Currently carbon pricing between the seven regional carbon trading pilots in China is uneven, with prices ranging between 9 and 63 RMB per tonne. The European Emission Trading Scheme (EU ETS), the worlds other major carbon trading platform, currently trades carbon at 40 Euros (April 2021).

According to analysis  there is carbon price sensitivity for the 300 largest companies listed in Shanghai and Shenzhen. Should the Chinese pilots be consolidated for a national roll out, and the price of carbon were to reach parity with the EUETS, the market capitalisations of these companies could be affected by between 4% and 10%.  This would mean a potential loss of value at RMB 1tn-2.5tn of at total RMB 25tn of market capitalization.[5]

This demonstrates the risk of stranded assets in Chinese markets, a topic which has recieved increasing attention in the last couple of last years[6]. One 2017 report by Oxford University estimated that stranded assets in coal alone could amount to between 4.1% and 9.5% of China’s GDP. Because most of these assets are on the books of companies listed on Chinese exchanges, this gives another indication that a significant proportion of market capitalization is still based on fossil fuels[7], although it remains difficult to derive precise figures for this exposure.

Frontiers of Green Finance In China

Financial systems, like supertankers, take time to change direction. Although a new course may have been laid by the guidelines, progress in some areas has been more rapid than others. These ‘frontier fields’ are leading the way and provide important lessons for those that are yet to catch up. Pilot schemes at city or province level are a powerful tool that can be used to develop certain areas of the financial system in a controlled environment, before rolling out at the national level.

Four of these pilot schemes are examined in detail below, but it is also worth noting the efforts currently taking place in provincial pilots around mandatory environmental liability insurance and green funds, as well as noting China’s carbon trading scheme which is currently moving from a pilot scheme to a national scheme.

Green Bonds: From Zero to Hero

Green Bonds are the single most successful example of China’s green finance ambitions. The Chinese green bond market went from essentially no issuance in 2015 to becoming the world’s largest green bond market by the end of 2016, assisted by the strong top-down push from the government, which is the main shareholder of many of the financial institutions that issue green bonds.

China’s annual issuance of labeled green bonds reached RMB 231 billion in 2016 and exceeded RMB 361 billion by the end of 2019 with more than RMB 1.1 trillion in the pipeline. However, the issuance of non-labeled green or climate aligned bonds was four times larger than the labeled green bond market, reaching total RMB 1.63 trillion[8]. (see box 1 and figure 2).

However, impressive as these numbers are, they should be considered in the context of China’s entire bond market, which had an annual issuance of RMB 45.1 trillion in 2019, of which green bonds made up 0.54%.

Figure 2: Annual Labeled Green Bond Issuance In RMB[9]

Chinese green bonds’ use of proceeds must go towards the purposes defined in either of the market’s two standards, the PBOC or NDRC standard, of which the PBOC standard makes up the majority of issuance. Figure 3 details the allocation of capital for green bonds categorized under the PBOC standard.

Figure 3: Green Bond Use of Proceeds Allocation 2019[10] (PBOC Standard)

In 2019, almost half of issuances allocated capital to ‘multiple purposes’.  The explanation for this is that financial institutions made up 34% of issuers – down from 62% in 2018-  and issue bonds for investment across multiple projects.  This can be compared with companies issuing bonds for specific types of projects, which will often be within a single category.

One of the main obstacles to the continued development of China’s green bond market is confusion generated by overlapping and sometimes conflicting standards. China green bond market is governed by two standards: PBOC covers most issuers and the NDRC covers a portion of the state-owned enterprises. Clarifying this will go a long way in ensuring the longevity of the market.

This leads to confusion for investors, particularly international investors.

To address this issue, a committee has been established to standardise Chinese green bond regulations and it is expected that the committee will launch a single Chinese green bond standard towards the end of 2020.

At the international level, China and the EU have issued two white papers focusing on how to harmonise green bond standards between the two regions.[11]  A complicating factor is that clean coal is included in the Chinese standard, which is a major concern for most international green bond investors, but a logical inclusion, given China’s desire to reduce emissions from thermal power plants in line with its Ultra-Low Emissions (ULE) Standards Policy.  A standard with great effect on air particle pollutants such as in the PM 2.5 category, but with limited effect on CO2 emissions.

As both China’s and EU’s standards evolve over time, there is hope that such issues such can be resolved in the future. With China launching a new version of the PBOC green bond standard and the EU launching its sustainable finance taxonomy in 2020, this could mark a major step forward on developing a global common language on green finance.

Green Credit: Guiding Banks to Increase Green Lending

The China Banking Regulatory Commission (CBRC) issued its Green Credit Policy in 2007, making this one of the earliest green finance policy interventions in the Chinese financial market.

Targeting credit is particularly important in China, which has a bank-led financial system, with bank loans making up about 85% of all financing (the remainder made up of approximately 10% bond and 5% stocks).

The 21 largest Chinese banks are required to disclose details of their performance on green credit to the China Banking and Insurance Regulatory Commission (CBIRC, former CBRC). In 2019, outstanding green loans amounted to RMB 10.9 trillion, making up an impressive 9.6% of total lending.[12] An analysis of the lending in 2017 reveals that banks prioritized transport, water, and renewable energy projects (see figure 4).

Figure 4: Green Credit Balance By Green Categories 2017[13]

Focusing on banks, China is rolling out policies to incentivise green credit:

• At the end of 2017, the PBOC introduced a green macro-prudential assessment (MPA) system, which ranks banks on their performance, and where banks that have a higher proportion of green loans and that have issued green bonds are given higher MPA scores. Incentivisation systems, linked to this ranking, are currently under development. 
• In June 2018, the central bank expanded the guarantee scope of its medium-term lending facility (MLF) to include green finance instruments as suitable collateral. The new types of guarantees include collateral, such as highly rated loans from small companies, agricultural financial bonds, and green bonds.
• China is also in the process of adopting lower risk-weights for green assets on the basis of financial stability considerations of the banking system. So far, no country has lowered their risk weights for green assets mainly because most still do not have a green loan definition and are thereby unable to calculate the default rate on green loans. Conversely, on the funding side, this incentivises green bond issuance.

Reporting: Pioneering Mandatory Environmental Disclosure

As environmental, social, and governance variables are being mainstreamed in investment decisions, in 2020 China will become one of a handful of pioneers to mandate environmental disclosure for all listed companies.

This step is underpinned by regulations launched in 2017 by the China Securities Regulatory Commission (CSRC) and MEP, which sets out a roadmap towards mandatory environmental disclosure for China’s more than 3,000 listed companies. This builds on a baseline of around 60% of listed companies voluntarily disclosing ESG performance in 2017.[14] 

The roadmap is based on three steps, with recommended disclosure in 2018, a ‘disclose or explain’ policy in 2019, and complete mandatory disclosure in 2020 (although exchanges and companies have not yet received concrete guidance on the disclosure format from CSRC, suggesting that full compliance by the 2020 deadline may not be achieved).

Although the focus of this regulation is on environmental information, the policy thrust is a strong step forward for ESG development in China, and underlines the proliferation of ESG products and services such as ESG indexes and databases, as more companies disclose on all three variables.

This prioritisation of environmental information is based on two trends. First, China wants to attract international investors to participate in its bond and stock markets. These investors are interested in sustainability and expect or even require ESG variables information. Second, while sustainability awareness is still limited amongst Chinese investors, it has grown rapidly over the last few years.

Research by the Global Sustainable Investment Alliance (GSIA) shows that in Asia (excluding Japan) only 0.8% of funds were managed with strategies including sustainability components, (compared with 21.6% in the United States and 50% in Europe).

As a result, over 90.7% of global sustainable investment (around USD 20 trillion), is located in either Europe or in the United States. By increasing access to information on the environmental performance of Chinese assets, it hoped that a proportion of this capital could be attracted to Chinese markets.[15]

Sustainable assets as a proportion of total managed assets in Asia only grew by 16% a year between 2014 and 2016.  By comparison, over the same period, the United States saw over 30% growth, whilst in Europe, despite its high starting point sustainable assets grew by 12% annually. A global survey conducted by HSBC in 2017 confirmed that only 68% of Asian investors are willing to increase their efforts to achieve SRI status, compared to 97% of European investors.^[16]

Green Fintech: Broadening, Deepening, and Scaling up Green Finance

With the increasing digitisation of both the economy and financial system in China, the rapidly evolving field of green fintech has the potential to make a significant impact.  China has underscored the importance of the topic by including it in both the Belt and Road Forum and the 2018 Argentina G20 Green Finance Study Group (co-chaired by China and the UK).

The principal driver behind fintech’s importance to green finance is its ability to overcome barriers for scaling up solutions. Big data, artificial intelligence, blockchain and other fintech solutions help surmount information asymmetry, identify green investment opportunities, and simplify   environmental risk management. Reducing costs unlocks new client bases to green finance products, particularly retail customers and small and medium enterprises. New green products such as crowd-funding and peer-to-peer lending enhance inclusiveness especially when they are used in conjunction with micro-finance services such as green deposit, credit, and insurance services.

Taking Chinese Green Finance Efforts to The Global Stage

In addition to its efforts to green its domestic financial systems, China is working with a wide range of international partners to deepen and broaden green finance at a global level. When China hosted the G20 in Hangzhou in 2016, China established the green finance study group, which it co-chairs with the UK. The group was so successful that it continued its work in Germany and Argentina the following years, creating global political momentum which integrated a number of existing green finance initiatives, as well as launching a number of new ones.

One of the most significant outcomes of this momentum has been the greening of the Belt and Road Initiative (BRI). The Ministry of Ecology and the Environment (MEE) published the ‘Guidance on Promoting Green Belt and Road’ in 2017, stressing the importance of sustainable development, green design resource efficiency, and environmental protection. In 2019, this led to the establishment of the BRI International Green Development Coalition composed of transnational and national policymakers, financial services organisations, businesses and NGOs, to share research and develop solutions to delivering sustainability for the BRI.[17] The BRI Green Investment Principles were established at the 2019 BRI Forum by the China Green Finance Committee and the City of London Corporation’s Green Finance Initiative, with 27 of the world’s largest financial institutions as members. This initiative works both to increase designated green projects in the BRI as well as to better manage climate and environmental risks for all BRI projects.

China and Chinese organisations are actively participating in a range of other global multi-stakeholder green finance initiatives, including:

• The Central Banks and Regulators Network for Greening the Financial System (NGFS), where China was a leading co-founder, and in which China is spearheading the implementation of green finance into monetary policy.
• The World Bank’s Sustainable Banking Network, where emerging countries learn from each other’s experience in green finance through knowledge sharing, events, and dialogue. As both a mature case and as an active participant China is supporting a number of other countries to, develop their green bond markets.
• China has also played a key role in developing a global Sustainable Development Goals (SDG) finance standard, which is managed through the Chinese Ministry of Commerce and the United Nations Development Program in Beijing . This standard will be launched by mid-2020 and will provide a global taxonomy of projects that can qualify as supporting sustainable development.[18] Once launched, it is expected that Chinese and global financial markets will use the standard as a basis for a wide range of financial products from credit, to bonds, insurance and funds.

China is also promoting green finance through a number of bilateral relationships. These include relationships with the United States, European Union, France, and in particular the UK. With respect to the latter, in addition to co-chairing the G20 study group and launching the BRI Green Investment Principles, the two countries are working together on:

• The UK-China Green Finance Taskforce, which has published a number of reports on ESG investing, green BRI, and environmental risk management.[19]
• Collaboration in the implementation of the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (led by HSBC and ICBC).

The Future of Green Finance in China

Despite impressive progress on green finance, non-SDG aligned investment continues to dominate the Chinese financial system. For further progress to be made, a number of key challenges have to be addressed:

• Standards remain an important obstacle. Multiple standards exist within China and in many cases differ from global standards. This adds complexity to the labeling of green financial assets and restricts market access by increasing uncertainty and reducing the confidence of investors.  Efforts are under way to address this issue, and the National Development and Reform Commission (NDRC) issued a green industry catalogue in 2019 which consolidated existing domestic green standards in line with the China Green Finance Committee priorities.[20] These efforts will increase clarity for green standards, while efforts expand beyond green in 2020 with the launch of the Chinese government’s new climate finance standard and sustainability finance standard.
• Mainstreaming and developing expertise in green finance amongst stakeholders in the Chinese financial system. This includes regulators, banks, and asset owners and managers, as well as organisations outside the financial services industry such as business and policymakers. The scale of this challenge is enormous, as there are approximately 7 million financial professionals in China, all of whom will need to learn how to integrate environmental concerns into their work. This is a task that will take time, but a number of current initiatives will help contribute to the transformation. This includes mandatory environmental disclosure by all listed companies in 2020, the establishment of 20 local green finance committees, and an increasing research focus on the topic from universities, think tanks, and NGOs. A lack of green finance mainstreaming and expertise amongst China’s overseas partners poses an extension of this problem, especially under the BRI. Efforts for addressing this issue are being delivered through initiatives such as the Green Finance Leadership Program hosted by Tsinghua University, and the efforts of the World Bank in taking the Chinese green finance lessons to other developing countries.

Despite these challenges, the prospects for a continuation of the rapid growth of green finance in China look encouraging. The development of unified standards for ‘green’, as well as new standards for ‘climate’ and ‘SDG’ finance, as well as continued innovation within new green financial products, such as green asset-backed securities, hold exceptional promise.  ESG investing is continuing to mature, and the success of the five provincial green finance pilot schemes, means other provinces and cities are likely to roll out their own pilots.

Two key areas show particular promise:

• The green bond market – with labeled green bonds only making up RMB 361 billion of issuance and 0.54% of the total bond market in 2019, and given that China’s annual green investment needs are RMB 3 to 4 trillion a year, there is enormous scope for further issuance.[21] As 85% of the financing required to meet China’s environmental ambitions will need to come from private capital, using capital market instruments like bonds is an excellent way to access private sources such as institutional investors, private banks, and retail investors. Although in its infancy, the Chinese green bond market was primarily created by state-owned commercial banks, but the pool of issuers has grown to include more corporate bonds. As bond markets always evolve from the high credit rated and government-backed organizations, we expect this trend to continue past corporate issuers and on to special purpose vehicles and project bonds. Given the continued scale of Chinese infrastructure investments, this an area of tremendous potential for the green bond market.
• Internationalisation – In the four years since the launch of the Guidelines, China has made enormous strides in growing its domestic green finance markets, but the internationalisation of these efforts remains in its infancy.  As China gradually opens up its financial system, and as Chinese financial institutions increasingly participate in global financial markets, the internationalisation of green finance will become a key trend.  The first steps in making this a reality are already starting – green panda bonds (non-Chinese organizations issuing RMB denominated green bonds in China) are making an appearance. With increasing volumes allowed under the Hong Kong and London stock connect programs as well as the revision of the Qualified Foreign Institutional Investors schemes, we expect to see increasing amounts of foreign capital in Chinese green assets. Including Chinese A-shares in the MSCI Emerging Market index is an indication that Chinese assets could be including in global sustainable indexes.[22] Greening the BRI through the initiatives listed above is another concrete way Chinese green finance is currently internationalising.

In conclusion, China has made substantial progress in greening its financial system driven by a strong political commitment and implemented via a top-down governance model.  China has not only begun to make serious inroads into existing green finance markets, such as green bonds but is also a pioneer in new areas in green finance governance such as in monetary policy. Looking forward, China needs to speed up its gains in this field in order to finance an increasingly ambitious climate and environmental agenda. Only by driving cultural change, which moves green finance from niche to mainstream within the financial system can these goals be achieved. What remains to be seen is the pace at which this transition can be made, in a financial system that faces many other challenges.

[1] People’s Bank of China (2016). The People’s Bank of China and six other agencies jointly issue “Guidelines for Establishing the Green Financial System”.Retrieved from: http://www.pbc.gov.cn/english/130721/3131759/index.html

* Later developing into the  ‘Green Credit Guidelines in 2012’ and the ‘Green Credit Statistics System’ in 2013

[3] People’s Bank of China & UN Environment Program (2014). China Green Finance Task Force Report: Establishing China’s Green Financial System.

[4] Luxembourg Stock Exchange (2020). SSE domestic green bond index series launched. Retrieved from: https://www.bourse.lu/sse-green-bond-index

[5] International Institute of Green Finance (2018). Environmental Stress Testing for the Chinese Asset Management Industry

[6] Z/Yen (2019). Value And Values In A Warming World: Divestment Supplement To The Third Edition Of The Global Green Finance Index

[7] University of Oxford (2017). Stranded Assets and Thermal Coal in China: An analysis of environment-related risk exposure

[8] International Institute of Green Finance (2020). Green Bond Database

[9] International Institute of Green Finance (2020). Green Bond Database

[10] International Institute of Green Finance (2020). Green Bond Database

[11] China Green Finance Committee & European Investment Bank (2018). The Need for a Common Language in Green Finance

[12] Xinhua Finance (2019). 银保监会：国内21家主要银行上半年绿色信贷余额10.6万亿. Retrieved from: http://greenfinance.xinhua08.com/a/20191023/1894434.shtml

[13] China Banking Regulatory Commission (2017). Statistics on Green Credit of 21 Major Banks.Retrieved from: http://www.cbrc.gov.cn/chinese/files/2018/8E392703618F4CB283AACB07A391FBDE.pdf

[14] United Nations Principles for Responsible Investment (2019). ESG Data in China. Retrieved from: https://www.unpri.org/download?ac=6500

[15] Global Sustainable Investment Alliance (2017). Global Sustainable Investment Review 2014-2016. New York, USA: Bloomberg

[16] HSBC (2017) Growing Investor Appetite for Green Assets Puts Pressure on Companies to Explain Their Climate Strategies. London, UK: HSBC

[17] United Nations Environment Program (2020). The Belt and Road Initiative International Green Development Coalition (BRIGC). Retrieved from: https://www.unenvironment.org/regions/asia-and-pacific/regional-initiatives/belt-and-road-initiative-international-green

[18] United Nations Development Program (2020). UNDP holds Consultation on SDG Impact Practice Standards for Private Equity & Use-of-Proceed Bonds. Retrieved from: https://www.cn.undp.org/content/china/en/home/presscenter/articles/2020/undp-holds-consultation-for-sdg-impact-practice-standards-for-pr.html

[19] City of London Green Finance Initiative & China Green Finance Committee (2017). Turning Green Momentum into Action: Interim Report.

[20] Paulson Institute (2019). The Fourth Anniversary of the China Green Finance Committee. Retrieved from: https://www.paulsoninstitute.org/green-finance/green-scene/the-fourth-anniversary-of-the-china-green-finance-committee/

[21] Project Syndicate (2016). The G20 Embraces Green Finance. Retrieved from: https://www.project-syndicate.org/commentary/g20-embraces-green-finance-by-ma-jun-and-simon-zadek-2016-09?barrier=accesspaylog

[22] MSCI (2019). Third Step in the Weight Increase in China A Shares in the MSCI Emerging Markets Indexes in 2019. Retrieved from: https://www.msci.com/documents/1296102/12275477/China_A_Further_Weight_Increase_QA_Feb_2019.pdf/601ed226-477d-13e5-c6ea-6d9c12640641