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UPDATED: July 6, 2015 NO. 28 JULY 9, 2015
Green for Green
China pushes for green bond directives
By Wang Fang

On May 6, a clerk from the Fuzhou branch of Industrial Bank (first right) visits Fujian provincial subsidiary of AVIC Tianxu Hengyuan Energy Saving Technology Co. Ltd. to track the progress of an energy-saving lamp renovation project financed by the bank's green funds (XINHUA)

The world may be no stranger to green finance—finance that pays special attention to environmental health, but when it comes to China, the country remains—well, green to the concept. In recent years, it has become a hot topic in China, particularly at the Third Shenzhen International Low Carbon City Forum held on June 17-18.

"Green finance means that banks establish supporting energy-saving and emission reduction as well as environmental protection as an important part of their business strategies, set up effective green credit promotion systems and sound risk control systems," said Lin Boqiang, Director of the China Center for Energy Economics Research at Xiamen University. "Compared with traditional finance, green finance emphasizes more on environmental benefits of the human society, and stresses protection of ecological environment and development of green industries in their investment behaviors."

In China, green finance mainly includes green credit, green securities and green insurance, with most of the focus on the banking industry, especially bank credit.

According to figures from the China Banking Regulatory Commission, major Chinese banks granted 5.72 trillion yuan ($936.17 billion) of green credit in 2013, accounting for 7.95 percent of the total 71.9 trillion yuan ($11.77 trillion) of credit. In the first half of 2014, major Chinese banks granted 5.2 trillion yuan ($851.06 billion), accounting for 6.7 percent of the total 77.6 trillion yuan ($12.7 trillion) of credit granted.

Early in 1974, former Federal Republic of Germany set up the world's first policy bank for environmental protection, offering preferential loans for environment-related projects that commercial banks are reluctant to offer. In 2002, the World Bank Group's International Finance Corp. and Dutch state-owned bank ABN AMRO developed the Equator Principles, a banking industry framework for addressing environmental and social risks in project financing that could be applied globally and across all industry sectors. Adopters of the Equator Principles are called Equator Principles Financial Institutions (EPFIs). Currently, there is only one EPFI—Industrial Bank Co. Ltd.—in China.

Embracing the green

As it becomes more and more imperative that the world reduce its pollution emissions, multiple countries have developed economies based in green and low-carbon strategies, promoting the conservation of energy and carbon footprint reduction.

China faces huge challenges from the pollution of air, water and soil as well as a financial demand for green urbanization drive, said Sean Kidney, CEO and co-founder of the Climate Bond Initiative in England and Wales.

Figures show that green economy will demand a huge amount of capital.

A report on China's climate financing in 2013 released by the Central University of Finance and Economics estimates that, to achieve the target set at the Copenhagen UN Climate Change Conference of reducing China's carbon intensity by 40-45 percent by the year 2020, 2 trillion yuan ($327.33 billion) will be needed each year.

At the Third Shenzhen International Low Carbon City Forum, Ma Zhong, Dean of the School of Environment and Natural Resources of Renmin University of China, said by 2020, China will need 20-26 trillion yuan ($3.27-4.26 trillion) in green finance, including both budgetary funds and loans.

Over the years, China's investment in environmental protection has remained quite low compared to its GDP and fixed assets investment. China's GDP surpassed 63 trillion yuan ($10.31 trillion) in 2014, but its budgetary funds in environmental protection stands at only 1 trillion yuan ($163.67 billion) in 2015.

"China must significantly increase the level and scale of green finance to reach the targets of environmental protection," said Ma.

According to Ma, demand for China's green finance funds mainly comes from sectors of energy, infrastructure, environmental restoration, industrial pollution control, and conservation of energy and resources. For instance, environmental restoration will need a huge amount of funding, and restoration of farmland alone will need 6-9 trillion yuan ($0.98-1.47 trillion). In infrastructure, urban rail transit has been growing very rapidly in recent years and will continue growing. By 2020, it will need a total of 3.8 trillion yuan ($621.93 billion).

Green bonds, verdant growth

As an important prerequisite and guarantee to promote China's green economy, financing is indispensable, and green bonds have a lot of potential as a financing channel.

In China, although the size of the environment-related bond market has reached 1 trillion yuan ($163.67 billion), there are very few real green bonds, and few foreign investors have participated.

As one of the largest bond markets in the world, China should further open its bond market, said Spencer Lake, global head of HSBC's Capital Financing. He thinks this will offer more opportunities for foreign investors, and China must develop green bonds to diversify its capital market.

Kidney said the issuance of Chinese green bonds requires international investment to tap its full potential.

"In the past three years, the size of green bonds in the international market has tripled to reach $37 billion. This is driven by international institutional investors of insurance and pension funds, who well understand the risks of environment and pollution, he said.

He estimates that the size of global green bond market will reach $70 billion in 2015 and $100 billion in 2016. "China has surpassed Japan to become the second largest bond market in the world, so it has huge potential," said Kidney.

However, growth of green bonds requires more transparency. For the assets and the quality of the whole environment in particular, there must be very clear standards, said Kidney, who hopes China can realize such transparency for the growth of green bonds.

Improving the green

China needs innovation to solve the financial bottleneck in green economic growth. How can it balance the relationship between the government and the market to support a new round of sustainable growth?

"China's environmental protection faces a lot of difficulties, such as limited administrative measures, inadequate government input and insufficient financial support," said An Guojun, an associate researcher with the Institute of Finance and Banking of the Chinese Academy of Social Sciences. An expects the country can effectively solve these difficulties through establishment of a green financial system, so as to support sustainable development of environmental protection industries.

Ma said funds from the government and financial institutions jointly support China's green finance and government input will be very important. "Government input can guide private investment," said Ma.

An agreed. "Green industrial funds can guide more private investment into green industries, being an important supplement to green credit," she said. "However, the development of green industrial funds needs more governmental support. Therefore, we must establish green industrial funds in public-private partnerships (PPP) to promote the development of these funds."

In her opinion, China must formulate regulations on green industrial funds in the model of PPP as soon as possible and local governments should guide the implementation of policies related to the raising and using of funds.

"Developed countries have gained experience for several decades in the system of green finance," An said. "Through loans, industrial funds, green bonds and stocks, insurance and other financial services, the green financial system guides private investment into the green industries of environmental protection, energy conservation, clean energy and transportation."

She adds that China is now accelerating the establishment and improvement of a green financial supervision system.

The People's Bank of China, the country's central bank, has completed green bond directives and two to four big green bonds are expected to be issued by state-owned banks in September.

International effort

Climate change is a big challenge for the whole world. To address climate change and develop a green economy, both need investment.

"The world needs sound fiscal and financial systems to effectively address or support sustainable green economic development," said Espen Rikter-Svendsen, Norwegian Consul General in Guangzhou.

He said the green securities market is growing more mature and private investment in green climate funds is a very good example. "Some institutional investors and private investors are more aware that investment in low carbon and low emission industries will be crucial in the future, and must know more about how to address environmental risks," he said.

Green investment is a big opportunity, and difficulties do exist. With high risks and large initial inputs needed, green investment usually has slower returns than investment in traditional sectors.

Europe has gained rich experience in promoting green economic development using green financial tools, and Norway is a leader in this aspect.

In 2009, Norway, which has the most successful sovereign wealth fund in the world, declared it would allocate 1 percent of its investment for green and sustainable development, making it the first sovereign wealth fund to support environmental protection with investment.

"Recently, our fund has made an important decision to withdraw the investment in coalmines. I think this will remarkably advance the development of the global green economy," said Rikter-Svendsen.

It is hoped that China will be able to follow Norway's footsteps.

The author is a reporter for China Report magazine

Copyedited by Kylee McIntyre

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