Opinion: The Year Ahead for Green Finance

By Liu Suyang and Yun Zhiting

2020 will be the year when China achieves the stated goal of being a “Moderately Prosperous Society”. It will also the be the year when the 13th Five Year Plan ends and the 14th begins. It’s a crucial tine for China going forward; choosing what kind of goals should be strived for in the coming years of economic development will set the tone for decades to come. At the Fourth Plenary Session of the 19th CCP Central Committee, green finance will be listed as an important piece in the advancement of modernizing the governance system and its capabilities. This is important: Given its countercyclical attributes in the current economic environment, the green finance tools could provide high quality inputs to the creation of the Ecological Civilization.

China was one of the first countries to implement green finance wording in its financial policy system. Going back as early as 2006, green finance related policies was introduced by the central government. On august 31, 2016, the People’s Bank of China and seven ministries issued the “Guiding Opinions on Building a Green Financial System.”

Since then, green finance has become an important tool for the advancement of pollution control. China’s construction of a green financial system is inseparable from its commitment to remedy and fix the complex and serious environmental issues brought around by four decades of rapid economic growth.

This clean-up cannot be achieved by simply getting rid of the existing issues. Green finance is an opportunity to stifle the pollution upstream, at the company and creditor level, by making these internalize the environmental destruction that their activities bring about.

Green finance has effectively mobilized more social capital investment and thus helped spur technological progress of a green, low-carbon, environmental transformation of the Chinese economy. Green finance has also, via the pilot zone program, helped to support regional development of the industry at the local level. Each pilot zone has successfully built sound provincial level or city level green finance systems by strengthening and leveraging local needs and expertise to fit in the grander scheme of green finance development.

Going forward

Green finance also reflects China's changing role in global governance. China is playing an increasingly important role in sustainable development, climate change and environmental governance agenda on the world scene. China actively implements international agendas such as the Paris Agreement and the 2030 Agenda for Sustainable Development, while fully embodying the responsibility of a big country, through the raising of billions of dollars by issuing overseas green bonds to support the Belt and Road Green infrastructure construction and renewable energy development in countries along the route.

Green finance should further aim to become a counter-cyclical adjuster for economic development. For the long-term development of China, the transition of the population from quantitative dividend to qualitative dividend provides a long-term basis for high-quality development.

Supply-side reforms and countercyclical arrangements of the industrial structure should become the most powerful variables in hedging against downward pressure and inadequate monetary policy. Green finance should foster new growth drivers for China's high-quality economic development through targeted support for green infrastructure construction and green upgrade of existing infrastructure.

Through the guidance of resource allocation, green finance should guide the development of investments from conventional industry to the green industry, guide the transition of the economic development mode from extensive to intensive, and guide the upgrading of science and technology from low-tech to high-tech, thus helping to achieve the societal goal of increasing total factor productivity.

Risk prevention

The development of green finance should further enhance the role of financial risk prevention and control. At present, China's monetary policy is dominated by credit control, and interest rate marketization control measures are still in place. While ensuring high-speed development, this has also led to structural problems such as over-investment and capital flows to low-productivity sectors.

Green finance should give full play to the role of the market, by channeling the flow of capital to high-productivity sectors that meet the needs of long-term sustainable development. In addition, financial risks due to environmental issues and climate change have become issues that the entire financial system are starting to wake up to. Green finance has natural countercyclical mechanisms as well as forward-looking arrangements to alleviate pressure on environmental resources and deal with climate change.

Going forward

Green finance is not a blunt hammer, but a sophisticated tool box to help guide future development of high-quality economic growth. Focusing on economic and environmental benefits, tapping the inherent value of ecology, developing environmental productivity, and guiding the transformation of economic development methods are just some the tools a disposal.

This article puts forward the following suggestions on how to leverage green finance in future development:

First, build a financial governance mechanism that is more cognizant of climate and environmental risk financial adaptation. Chen Yulu, deputy governor of the People's Bank of China, recently pointed out that climate change has become one of the major factors leading to structural changes in the economic and financial systems because of its "long-term, structural, and global" characteristics. With sufficient foresight, we should promote the construction of an effective framework of financial systems and macro policies to deal with financial risks caused by climate change.

On the one hand, environmental information disclosure policies and environmental risk management mechanisms that are currently being promoted should be elevated on a large scale. On the other hand, legislation in the field of green finance could spur the organic connection between finance laws and environment laws, thus creating a system that better internalizes the havoc brought on by climate change.

In addition, effective database construction and green financial management system construction and the exploration of blockchain technology in the field of green finance should become the starting point for future governance.

Second, enhance the regulators role of green monetary policy and macro-prudential supervision system. At present, the green finance practices by 24 systemically important banks in China has been incorporated into the macro-prudential assessment system. The People's Bank of China proposed at the 2020 Economic Work Conference that it will accelerate the improvement of the macro-prudential management framework and gradually expand the scope of prudential policy coverage.

In addition, the People's Bank of China has included green assets in the scope of eligible collateral for monetary policy instruments such as medium-term loan facilities (MLF), standing loan facilities (SLF), and mortgage supplementary loans (PSL). This could be further expanded.

Third, expand the supply of green finance products. When you look at market share, the existing green finance products are mainly green credit and green bonds. Green insurance need to be enriched and the environmental equity trading infrastructure is still only in the blueprints. With the limited variety of green financial products on offer it is difficult to meet the diversified needs of the market. Without expanding the overall credit risk exposure, we should further guide capital market innovation, enrich the supply capacity and the diversity of green financial products. This could facilitate the real economy's use of multi-level capital markets to meet green financing and transaction needs.

Fourth, the green finance pilot zones should lead the way in the national transformation. In 2020, the PBOC said that it is necessary to comprehensively improve the level of financial services and financial management, and deepen the pilot reform of green financial innovation. At present, nine green finance reform pilot zones have been established in six provinces in China. From the past practice, the pilot zones have established a top-down policy system to promote green credit and green bond issuance and explore the establishment of environmental equity markets. These pilot zones are at the leading edge in areas such as in-depth implementation of the concept of green development, the construction of a perfect green financial system, and the continuous innovation of green financial products. In the future, regional trials should be further promoted to increase the level of high-quality local development while expanding the coverage and implementation of green finance.

Fifth, strengthen the coordination of green financial policies and industrial policies. For local governments, industrial policy is of big importance for guiding financial institutions and capital flows. At present, China's green financial products have provided support to a number of industries including energy conservation, pollution control, and clean energy. However, poor financing and difficult borrowing hurdles still exists. Industrial policies should be deployed in accordance with local green development needs, an industrial fund should be created, and a feedback mechanism from local to central and business to government should be established in order to provide industrial support.

In addition, various localities should continue to provide credit support to enterprises through fiscal policies, further reduce the tax burden of environmental protection enterprises, and coordinate industrial policies to enhance green development capabilities.

Sixth, promote the introduction of relevant ESG policies and guide enterprises to improve their modern governance capabilities. The implementation of environmental, social and corporate governance (ESG) concept at the enterprise level is critical to long-term economic green growth and the improvement of market behavior. In the future, it is necessary to further strengthen the disclosure of information on the implementation of environmental and social responsibilities by enterprises, and conduct evaluations on the performance of their social responsibilities.

Credit growth

Green finance should further try to leverage the increase in environmental governance. Today, the green credit stock of the 21 major Chinese commercial banks have exceeded 10 trillion RMB and the issuance of domestic labeled green bonds has reached nearly 800 billion RMB. The funds raised have been invested in energy conservation, pollution control, resource recycling, clean transportation, clean energy.

In many areas, such as the protection of ecological diversity, the scale of green assets has consistently ranked first worldwide. The development of green finance should further promote the "bottom-up" market practice while continuing to explore innovative methodologies through the "top-down" to leverage the synergies between of China's socialist system and the effectiveness of modern governance.

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