China`s G20 initiative to build-up green finance and incentive mechanism for investment

At the G20 Summit held in Hangzhou in September 2016, green finance and climate change were included on its agenda as major topics. Green finance became the first key point of discussion among the leaders. It fully reflects the aim to develop an environmentally sustainable society and to solve the problem of green sustainable development and climate change by increasing green investment financing.

The communique of the summit emphasized "strengthen the ability of financial system and mobilize private capital to engage in green investment". The purpose is essentially in line with the WTO principle of sustainable development of trade and the United Nation Conference on Trade and Development's principle of improving private investment and environment protection.

However, the establishment of green finance system faces a lot of challenges. From the perspective of global governance, the main task is to recognize the principal barriers of green finance development, then to analyze and find solutions that can strengthen the capacity of financial system to mobilize private capital to engage in green investment based on the summary of international experiences and best practices. The aim of such a sound financial system is to promote global economic transition to green economy. China as a leading global manufacturing and trading country is under increasing pressure on resource and environmental problems. Transition to a green economy plays an essential role in this situation. Developing green finance and setting up incentive mechanism for private investment will stimulate the potential to create green technology, which is helpful to the economic structural transition and creating new economic growth point.

Green finance has been developed for a long time in Western countries, and German model is the typical one. Both the government and society in Germany are devoted to developing green finance. For example, Germany established the world's first Eco-bank for operating natural and environmental credit in 1974, which provided soft loans to preferential environmental projects. Generally, banks are reluctant to provide loans to this kind of project. Transmittal Fur Defrauder ("KFW bank") also transferred from the traditional credit business into operating green credit products. Compared with other banks, one of the significant differences is that the Eco-bank will take full account of the financial activities potential impact on the ecological environment, the potential costs and the ecological environment-related benefits, risks and rewards included in the investment and financing decision-making, by directing economic resources so as to promote economic, ecological and social sustainability.

The "EPs" was taken as guidance in order to develop a series of green credit products with the mutual efforts of the German government and banks, including low-interest loans for the environmental protection and energy conservation projects, by playing the role of financial institutions in the allocation of resources to make green credit become andfinancial leverage. Therefore, green credit has become an important economic means in pollution control and environmental protection. The German government supports the national policy of banks.

KFW Bank mainly sells green credit products. Through financing in the international capital market, the government is responsible for funding and financing its discount bundling into green credit products. KFW bank estimates the profit rate and the prime rate and then makes the funds develop into long-term, low-interest financial products sold to commercial banks, commercial banks which supply end-users green financial products and services supporting environmental protection, energy efficiency and greenhouse gas emissions with preferential interest and loan. The bank's data show that its loan in 2013 was 72.5 billion euros ($80.7 billion), of which 27.8 billion euros of financing environmental protection, which was 38.34% of the total investment, environmental protection and finance investment has 4.79-fold increase over 2008. The world's biggest green bond was issued in 2014, reaching 1.5 billion euros.

From the German credit bank's introduction on financial products, it could be said that there are no government intervention from the raising capital to the later sales of financial products; government is mainly to provide subsidies on interest payment and set up relevant management measures through discount. This transparent and open credit mechanism guarantees a fair, transparent and effective use of funds in the bidding process. Finally, energy conservation project should be cleared by the local German or superior environmental protection departments if applying for the government subsidized loans.

By studying the experience of Western countries and promoting financial innovation, Chinese green finance has been greatly developed. In July 2007, China officially launched the green credit policy, through the use of the loan varieties, interest rates and the amount and other means to support environmental protection and energy saving projects and enterprises. To those projects or enterprises which violate the law or regulations of environmental protection, energy conservation and other aspects, they take the method of forbidding lending, delaying loan or even recovering loans and other penalties. If a borrower is unwilling or unable to abide by the social and environmental policies proposed by the "EPs", the bank will refuse to provide loans to its projects. Industrial Bank was the first one to join the "EPs" of Chinese banks, led in the domestic banking industry, set off a green financial innovation, and achieved results.

It should be mentioned that green finance in China has developed rapidly in past one or two years. China issued green securities hit 120 billion in the seven months of 2016, accounting for the world earlier issued 40 percent green credit; the Central Securities Depository and Clearing Co Ltd. cooperated with Climate Initiative issued a climate debt index on September 2, 2016. In addition to the government`s promotion, public participation is also essential. "Ant payment service" has established a personal account which is the world's largest carbon platform, launched the "ant forest" program and combined with other countries of Internet financial enterprises to set up the Green Financial Alliance financial science and technology enterprises, to promote the development of green financial innovation.

Although China launched the green credit in 2007, Chinese green financial system construction is relatively late, in September 2015, the CPC Central Committee joined the State Council issued the "Integrated Reform Plan for Promoting Ecological Progress", which first proposed to build Chinese green financial system. "The 13th Five-Year" plan also clearly emphasized to construct a green financial system. On August 31, 2016, before the G20 Summit held, the seven ministries, including People's Bank of China, issued the "Guiding Opinions on the Construction of Green Financial System", all of these papers showed that Chinese authoritative supporting. At present, in author's opinion, there are still some problems in the construction of domestic green financial system.

First, China is promoting the "top down" model,which creates some shortcomings of implementation transparency and enforcement. The construction of green financial system is planned to encourage the enterprises to consider the environmental factors into the process of investment, and to make the environmental protection and investment directly related. It is different from the traditional investment. As to the investigation of enterprise investment, they now put emphasis on "pollution forbidding" in the task of law enforcement. Frequently stopping large projects, regional restrictions, watershed restrictions and others means to protect the environment.

To the enterprise, general financing credit investigation is only required to provide environmental information, it is clearly unable to guarantee the integrity of information; from the current local government's performance assessment measures in energy-saving emission-reduction, and environmental protection measures are still focused on the forbidding and prevention of pollution. In addition, it is hard to implement environmental protection policy. There are no transparency mechanism and local protectionism in the release of environmental violations information. From the perspective of the development of green finance, financial institutions are lack of professional knowledge of environmental protection, and the cost of their access to information is also expensive, so, whether put the project into a corporate green credit is depend on the professional assessment of the local environmental protection agency.

Second, Chinese Banks are still insufficient in the design of green financial products. At present, from the main banks` website, China's banks in the green financial products and service object is limited, only the Industrial Bank launched the "Environmental Finance" services, and only applies to the energy services company. By contrast, in the service object, German Renaissance services credit bank for privates, enterprises, and construction or expansion, land clean or repair of public infrastructure, as long as the applicants meets the requirements of energy-saving and environmental protection, banks would provide the green credit support. Besides, the banks also review the international project financing in accordance with "EPs".

Third, large-scale private investment will be need for the transition to a green economy. Because of the huge cost of ecological environment restoration and management, the government is difficult to meet the urgent needs of the ecological environment restoration and management immediately such as people, funds, and material. The development of green finance cannot be separated from the participation of social capital, especially private investment, including domestic and foreign private investment.

Fourth, the applications of international standards still need to be improved. At present, the "EPs" has become a new standard of international significant bank financing projects , covering 70 percent international loan projects in the emerging economies, while Industrial Bank is the only one who adopts the "Equator Principles" in China, this situation needs to be improved.

The development of green finance in china is of great significance to adjust economic stricture and to deal with the environment pressure. However, solving long-term funding problems should be in the first place to develop green finance practically. Due to the huge demand for funds, the green economic growth model also need the participation of social capital. But taking the low return of the environmental protection industry into account, the development of the green industry needs more government support. Efforts could be made to encourage the development of green finance by laws, policies and institutional arrangements. The government is supposed to provide green investment projects with interest discount and preferential tax via a series of laws and policies which make it possible for green industry fund to promote policy advantage to the public openly and transparently while raising funds, in order to encourage and attract private capital as well as the green industry fund.

Apparently, relying on "top-down" policy of government is not the best choice. Banks should take a positive part in the field of green finance, filter out the authentic finance products, and integrate environmental assessment to issue preferential soft loans. Besides, banks can also manage finance by raising foundation publicly or privately. Investors merely take risks within the scope of investment fund. Green finance should play an important role in constructing the international financial center in Shanghai. As a part of project financing principle, generally accepted by international banks nowadays, "Equator Principles" should also be the adaptive principles of investments abroad of domestic banks. Not only Asian Infrastructure Investment Bank and The Silk Road Fund, but also other commercial banks are ought to pursue the principles, should bear the social responsibility, and promote international cooperation of green finance.


The author is Jiang Qingyun,a researcher at Shanghai Center for Global Trade and Economic Governance, Associate Professor of School of WTO Research and Education, Shanghai University of International Business and Economics.



Source: Global Value Chain and China Trade in Value Added Database,Ministry of Commerce