Chinese green finance solutions prove their worth

Shifting to new environmentally friendly growth drivers has helped set the country on the path to sustainable growth

China has become one of the biggest economies in the world, but the economy is under pressure to adopt a new development model given that environmental issues such as air, water and soil pollution can hit sustainable development.

A business-as-usual approach, which involves high energy consumption and high carbon emissions, has become untenable in the wake of global warming. Hence, the transition toward a low-carbon future is inevitable for a responsible stakeholder such as China.

This requires us to shift to new growth drivers that provide effective solutions to environmental pollution. Green finance has become an effective tool for tackling environmental and climate change issues, galvanizing economic upgrading and transformation and an alternative way of participating in international governance.

In my book The Economics of Air Pollution in China, I argue that China's economic structure is the reason for our environmental pollution issues. For example, most of our production facilities in northern China are heavy industries such as coal, steel and chemical industries; our transportation systems are dependent on roads, while railway, subway and other greener transportation modes that release 90 percent less carbon dioxide and pollutants only account for a small share of overall transportation.

In 2015, the Chinese government, through a document titled Integrated Reform Plan for Promoting an Ecological Civilization, called for building a green finance system. In August 2016, the People's Bank of China, together with the National Development and Reform Commission and other ministries, promulgated the Guidelines for Establishing a Green Financial System.

The guidelines recommended 35 concrete measures, such as designing green finance products like green bonds, green credit, green insurance, green ABS, green funds and incentive systems.

China issued its first green bond in 2016, and is now home to the world's biggest green bond market. By June 2019, over 900 billion yuan ($126.5 billion) worth of green bonds had been issued domestically and overseas by Chinese financial institutions and companies. The green credit system was implemented even earlier, in 2013.

By early 2019, more than 10 trillion yuan worth of outstanding green credit had been issued by major Chinese financial institutions. Other green finance products such as green funds, green indices and green asset back securities have also seen rapid growth.

According to the China Banking and Insurance Regulatory Commission, by June 2017, loans to energy efficiency projects, environmental protection projects and services were estimated to have saved 215 million metric tons of standard coal and 491 million tons in carbon dioxide emissions. That's equivalent to taking 70,000 taxis off Beijing's roads alone for 336 years, or the emission reduction by the Three Gorges Dam power plant over a period of 8.4 years.

When green finance was first proposed, some were concerned about its potential drag on the economy and employment, especially on heavy industries. However, green finance has proven to be an important driver of economic growth and transformation. Statistics show that green credit and bonds in China have mainly channeled investments into green transportation, renewable and clean energy, as well as energy and water conservation projects. These have provided significant support to energy conservation and environmental protection, renewable energy and alternative fuel vehicles.

By the end of 2018, China had boosted its installed wind power capacity by 185 GW and its installed photovoltaic capacity by 176 GW, which are four and 200 times larger than their respective capacities in 2010. Between 2013 and 2018, China's production of alternative fuel vehicles grew from 17,000 to 1.25 million, an annual growth rate of nearly 400 percent.

Industry and Information Technology Minister Miao Wei said in a speech in January that alternative fuel vehicles had received an overall investment of over 2 trillion yuan spread across their supply chain.

Thanks to green finance, China has become a global leader in renewable energy, high-speed rail and electric cars. According to a report by Bloomberg New Energy Finance, the costs of photovoltaic (PV) systems have fallen by over 85 percent since 2010. China is also one of the biggest producers of PV systems and home to one of the largest installed PV capacity.

Green finance has also created numerous business opportunities for financial institutions. For example, China's Industrial Bank was the first Chinese financial institution to sign up to the Equator Principles and the first Chinese bank to set up a green finance department.

The Industrial and Commercial Bank of China has been ramping up its investment in green finance since 2015, and is the first large commercial bank in the world to begin conducting environmental stress testing. The Bank of Huzhou is regarded as one of the "greenest" local banks, with over 30 percent in average annual growth rates in green loans over the past three years.

China is also actively involved in international cooperation. For example, the G20 Green Finance Study Group was launched during China's presidency, co-chaired by the People's Bank of China and the Bank of England. The Study Group has put forward seven policy recommendations for the development of green finance, which have been incorporated into the G20 Leaders outcomes document.

In the following two years, Germany and Argentina decided to keep green finance on their agenda during their respective G20 presidencies. Over the past three years, China has contributed its own solutions to green finance and sustainable development.

Additionally, China was a founding member of the Central Banks and Supervisors' Network for Greening the Financial System. The People's Bank of China chaired the supervisory work stream in conducting research on the risk differentials between green and brown assets and led the drafting of a handbook on environment risk analysis for financial institutions.

In 2018, the Green Finance Committee of China Society for Finance and Banking teamed up with the City of London to formulate the Green Investment Principles for the Belt and Road, calling on investors around the world to strengthen their management of environmental and social risks and enhance disclosure of environment-related information.

By August 2019, over 30 financial institutions from 14 countries and regions including China, the United Kingdom, Germany, France, Switzerland, Japan, Singapore, Mongolia, Kazakhstan, Pakistan, United Arab Emirates, Hong Kong, Morocco and Thailand had signed on to the principles.

The Global Green Finance Leadership Program, a joint initiative launched by Tsinghua University and the International Finance Corporation, has been providing support in green finance capacity building to over 60 countries, mostly developing countries along the Belt and Road, sharing best practices from developed countries and contributing "Chinese solutions" to the reform of the international environmental and climate governance.

The author is chairman at the Green Finance Committee of China Society for Finance and Banking and director of the Research Center for Green Finance Development at Tsinghua National Institute of Financial Research. 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.