A couple of days ago in Lima I gave a speech at a UN Climate Conference event in the Chinese Government Pavilion, organised by my friend Prof. Wang Yao.
One of my themes was that innovation in green finance now was happening in places like China and Brazil – and that the fusty policy-makers of Europe, Japan and the US needed to catch up. Which in fact is crazy – the US and EU have now embraced so many ideas that were seen as loony only a few years ago, like quantitative easing; yet they seem scared of using the same tools to drive the green development we need to address climate change. Why aren’t they directing quantitative easing to buying green infrastructure bonds for example, giving a huge boost to that sector?
This is important at the COP – while we have endless arguments about marginal carbon pricing and economic theory, we’re missing the main game of how we shift money in the real world.
Some of you will have heard me talk of how People’s Bank of China Chief Economist Ma Jun has convened a whole series of multi-departmental working groups on green finance; Simon Zadek co-convened (see my blog of a few weeks ago). I’m a member of the green bonds working group. The groups have looked at ideas from around the world to shift China’s financial markets and economy to green, and do it within the broader objective of shifting to a market economy. That includes everything from programmes of discounted loans for energy efficiency to risk-weighting formulas for bank balance sheets to preference green lending. Climate finance activists will cry – with happiness – when they read the reports (coming soon).
Separately, I’ve been involved (also with Simon and IISD) with a Development Research Centre of the State Council of China project looking at proposals to green China’s financial reforms. We recently had a day-long workshop in Beijing to review the draft report. There’s a lot in it that would also make climate finance activists weep with joy. Three things of most relevant to our work:
- The report notes that while green development is a high priority for the Government, policy support is in place for other policy priority areas (notably rural development and small-to-medium enterprises) that is not yet in place for green.
This is exactly the point we hammer policy makers with: the tools to boost investment in specific areas are already there and in use – now, we just need to apply them for green.
As support for rural development and SMEs in China shows, the toolkit for Chinese policymakers is wide-ranging. It includes monetary policy, fiscal and taxation policy, insurance policies, capital market policies and credit policies.
- Green bonds are a focus. The report includes recommendations for:
- Pilot (or demonstration) issuance from government, or government-affiliated, entities.
- Interest rate support and tax incentives.
- A green bond accreditation system.
- Inclusion of green bonds in the China’s quota system for international investors (QFII).
This list ticks off several of the key policy tools we see as central to boost the growth of the green bonds market.
- On an accreditation system, the report looks at the lack of definitions and standards around what is green and a legal framework around green finance – an issue bankers in China keep raising with me. Standards are currently not provided at a level that is practical and easy to put into practice for financial actors.
Admittedly the China Banking Regulatory Commission has done some sterling work on the development of green criteria for the Green Credit Guidelines; but it’s not yet well known and their jurisdiction is limited to banks.
There’s also a lack of standards around information disclosure for adherence to green finance programs, which means there is no way to supervise implementation in a uniform and fair way.
China’s context for green bonds is different than that of the bonds markets in the West where the green bonds action has been so far. Regulatory direction will be important to giving comfort for investors and for promoting issuance.
The Development Research Council report is shaping up to be a landmark paper. And because it’s coming from a part of China’s State Council, its central organ of government, it will have impact.
Innovation in policy proposals is not yet implementation; but China can move quickly once a decision is made. It’s going to be a very interesting year for green finance in China.
