BEIJING, January 8, Chinadaily -- Pilot program shows that China's policymakers are eager to understand the links between the financial sector and low-carbon development
When the 24th Conference of the Parties to the United Nations Framework Convention on Climate Change concluded in Katowice, Poland, on Dec 14, the world was awaiting signs of hope that the climate change challenge could be met. The encouraging 200-country deal notwithstanding, some reports show that not enough is being done to limit the global temperature increase to 2 degree centigrade, which experts consider necessary to prevent the worst effects of dangerous climate change. In addition, the Donald Trump administration in the United States has rejected climate science and wants to blow off the Paris Climate Agreement, threatening to undermine the international cooperation that is critical to addressing one of the 21st century's most urgent and complex global problems.
Other countries (and US subnational actors), however, have not given up. Policymakers, researchers, and advocacy organizations around the world are pressing forward with the design and implementation of new climate solutions. One of the most promising of which is green finance - the effort to ensure that public and private investments in financial assets are both profitable and environmentally friendly.
It is estimated that China's green investment demand during the 13th Five-Year Plan period (2016-20) ranges from 6.6 trillion yuan ($957.6 billion) to 14.5 trillion yuan, but China's national and local governments are only able to provide a fraction of this capital. To meet the need for green financing, China needs policies that allow the market to provide clear signals of the environmental opportunities and risks of new products.
In 2016, the People's Bank of China, the National Development and Reform Commission, and five other ministries jointly issued the Guiding Opinions on Building a Green Financial System. In June 2017, a State Council executive meeting chaired by Premier Li Keqiang tasked five provincial-level regions - Zhejiang, Jiangxi, Guangdong, Guizhou and Xinjiang - to develop green finance reform and innovation pilot zones.
After slightly more than one year of implementation, the green finance work in the pilot zones has been fruitful. According to China's central bank, as of the end of March 2018 the balance of green loans in the five pilot zones had reached more than 260 billion yuan ($37 billion), with a 13 percent increase since the initial approval of the pilot zones. This rate of increase is higher than other loans in the pilot zones. As the total volume has expanded, the nonperforming rate of green credit assets was only 0.12 percent, 0.94 percent lower than the average nonperforming rate in the pilot zones.
Each pilot zone has tailored its policies to unique local conditions. For example, Huadu district in Guangzhou, Guangdong province, is highlighting overseas investment cooperation, especially financial cooperation with the Hong Kong and Macao special administrative regions and the support of overseas investment in local green finance. While in Guizhou province, the green financial products and services are focusing on modernizing agriculture, rural water conservancy projects and sewage treatment.
The pilot areas have established leading groups, and many have established robust policy frameworks consisting of provincial, municipal, district and industry regulations. But it is important to note that green finance involves not only the financial industry and regulatory authorities, but also the departments of the environment, development and reform, agriculture, housing construction and transportation. Policy formulation requires information sharing and cooperation among these departments.
Some pilot zones have set up special funds, as well as talent guarantee mechanisms and subsidies to attract new professionals to careers in the green finance industry. They have also given support to local green financial research institutions or platform institutions to strengthen exchanges and cooperation with other regions.
So far, so good. But what comes next?
Low-carbon considerations do not currently play a prominent role in the pilot area work plans. Although some pilot zones have proposed carbon actions - forest carbon sinks, carbon stock assessment, carbon inventory, carbon emission rights collateral, and carbon funds - these ideas currently lack the ambitious scale and comprehensiveness of green credit measures.
Low-carbon infrastructure should be divided into purely public welfare projects, quasi-public welfare projects, and commercial projects, depending on the products and services provided by the infrastructure and charging implemented based on the services used.
Certification methods also need to be unified and environmental performance emphasized. Almost all the pilot zones have developed certification methods and established green projects/enterprise catalogs, but the standards have not yet been nationally unified. Additionally, public information about regional standards is limited, making it difficult to fully understand the specific conditions of each pilot zone. This diversity of standards is hampering market integration, coordinated development, and international cooperation.
The Financial Industry Standardization System Construction and Development Plan (2016-20), released in 2017, lists green finance standardization as a key project. Standardization will lead to the adoption of product standards, information disclosure standards, and financial institution green credit ratings. The goal should be to build a complete green financial standards system, including national standards, industry standards, group standards, and corporate standards. From this perspective, the standards system adopted by Huzhou city of Zhejiang province stands out as relatively complete, with certification methods and specifications including green projects, green enterprises, and green banks already established.
Pilot zones also lack adequate access to environmental information, and lack knowledge about environmental protection, energy conservation, and emission reduction. During the 13th Five-Year Plan period, the core objective of China's environmental governance is good performance in environmental indicators. Green finance pilot zones should incorporate environmental indicators into their performance appraisal systems.
Green finance is off to a promising start in China. The implementation of a pilot program shows that policymakers are eager to understand the links between the financial sector and low-carbon development. The challenge now is to ensure that these pilots succeed - and pursue the right goals - so that China's leaders feel confident in issuing a robust national-level green finance policy framework in the coming years.
Li Ang is a senior analyst; and Diego Montero is a strategic adviser of innovative Green Development Program, an independent Beijing-based think tank dedicated to identifying China-specific solutions toward a zero-emissions future. The author contributed this article to China Watch, a think tank powered by China Daily. The views do not necessarily reflect those of China Daily.