Finance Sector Reforms are Key to a Greener Economy in China

GENEVA—September 28, 2015—China’s ambitions for a greener economy require broad use of its finance sector to drive the necessary investment, according to leading financial and environmental experts in an IISD report released today.

The report highlights the myriad ways in which China is already leveraging market-oriented policies to accelerate the transition to a sustainable economy. This was exhibited most recently with China’s announcement on Friday that it will introduce a nation-wide cap-and-trade system, placing a price on carbon emissions.

But more is required to ramp up investment in clean energy, industrial energy conservation and efficiency, and environmental pollution control. According to the Development Research Center of the State Council, a partner in the “Greening China’s Financial System” report, China needs US$460 billion per year from 2015 to 2020, or about US$2.8 trillion, in green investment from now to 2020.

“China recognizes that a sustainable economy won’t emerge by focusing solely on environmental and social policy,” said Mark Halle, Executive Director of IISD-Europe. “The solutions demand economic reforms, including to the finance sector.”

“Greening China’s Financial System,” which features contributions by experts from around the world, offers points of global consensus that can inform the development of a Chinese approach. These include:

• Better information for making intelligent risk assessment and investment decisions when it comes to green development;
• Financial institutions need to incorporate environmental and social factors into decision-making;
• “Stranded” projects—projects that, because of high environmental costs, are losing favour—need to be monitored;
• Greening debt markets through product innovation, unified standards, regulation and tax incentives and advance green investment flows;
• Monetary policies need to take greater account of environmental and sustainable development objectives.

Specific recommendations by contributors include:

“Policy action that introduces strict disclosure of carbon and other environmental risks is urgently needed in China,” said Sony Kapoor, Managing Director of Re-Define, in his chapter on “Internalising Climate Mitigation for Financial Policymakers.” Kapoor advocates adoption of a “strict carbon stress regime [by China], modelled on the EU-wide bank stress tests carried out by the European Banking Authority.”

Stanislas Dupre and Jakob Thoma of the 2^o Investing Initiative noted that “there is an increasing call for investors and banks to align their activity with climate goals and target-setting in this area.” They see better metrics in climate performance and risk as driving capital “towards financing the transition to a low-carbon economy [in China]” and advocate “involving the finance sector (both public and private) as a key stakeholder in the climate change negotiations process.”

“Green finance, in addition to providing a green benefit, can assist in implementing and enforcing financial reforms that address imbalances in China’s financial system,” said Sean Kidney, Padraig Oliver and Beate Sonerud of Climate Bonds Initiative in their chapter on “Greening China’s Bond Market.” They also note that “providing support to kick-start a green bond market can allow China to assume a global leadership role in capital markets financing for green growth.” China’s low-carbon economy transition needs huge amount of funding, they say, and “China’s financial markets can and should play a key role in that transition.”

Pierre Monnin and Alexander Barkawi of the Council on Economic Policies noted that “monetary policy has been largely neglected in the discussions on green finance worldwide” and in the case of China recommend steps such as analyzing historical and international experience with credit guidance, identifying and mitigating biases against green economy objectives in current monetary policy, expanding central bank reporting to reflect environmental considerations and developing a better understanding of the impact of interest rate levels on long-term investments in energy, water and resource security.

“Greening China’s Financial System” was co-sponsored by the Financial Research Institute of the Development Research Center of the State Council of China, and Fridtjof Nansen Institute of Norway. The report was conducted in association with the United Nations Environment Programme (UNEP) Inquiry into the Design of a Sustainable Financial System.

The Chinese language version of the report was released earlier this year at the China Development Forum.

Download the full book and individual chapters here: http://www.iisd.org/publications/greening-chinas-financial-system

For more information please contact Sumeep Bath at sbath@iisd.org or +1 (204) 958 7740 (in Canada) or Damon Vis-Dunbar at dvis-dunbar@iisd.org or +41 22 917-8848 (in Switzerland).