The Chinese government pushed green finance onto the agenda of leading nations last week, and discussed its interest in attracting European asset owners to help support its ambitious plans to raise $300 billion of green finance a year.
China chaired the G20 Leaders’ Summit in Hangzhou on September 4 and 5, during which it unveiled a number of new green initiatives.
“For the first time the G20 said it was necessary to have green finance and there was a need to enhance the ability for green finance to mobilise capital for investment,” Ma Jun, chief economist of the People’s Bank of China (PBOC), subsequently told the 10th annual conference of the United Nations’ Principles for Responsible Investment agency in Singapore on September 7.
Speaking via video-link from China, Ma told the 600-strong audience how the G20 announcements followed president Xi Jinping's recent approval of guidelines to create a green financial system in China, with specific steps to be implemented across seven ministries.
This included incentives for green lending from banks, and a guaranteed programme for local governments to arrange green finance loans and funds. China has committed to raise $300 billion in green finance a year until 2021.To date it has made particularly impressive progress over the issuance of green bonds, the proceeds of which are specifically slated to be spent on environmentally-friendly projects.
“Domestically and overseas our issuance was Rmb120 billion, or $18 billion for the first seven months of this year, or 40% of global issuance of green bonds over the same time period,” Ma said.
“There is lots of demand for green bonds and investment and Europe has a lot of money, and 20% of its institutional investors' [asset under management] are green,” he added. “They are looking to green assets, and if we can build these investments and make them more convenient for investors to invest into emerging markets it could facilitate a level of green investment on a global level.”
China’s next plan is to launch a “nationwide green development fund to provide financing for green projects”, Ma said, as well as launching a carbon emission programme that covers an estimated 40% of China’s carbon output next year.
Devil in details
China has been putting serious thought into the future of green finance all year. The PBOC and Bank of England have co-chaired the Green Finance Study Group since the beginning of 2016. That group submitted a report for the G20 finance ministers and then leaders to consider.
The report identified five challenges, including the need to define what constituted green finance.
“Globally there is a principle to define green bonds but the local [Chinese] green bond market needs local standards and definitions that are universal,” Ma admitted.
In addition, Ma said the study group noted that many companies or projects might consider themselves to be environmentally progressive, but didn't disclose enough information to make investors comfortable.
“For example, our exchanges have introduced disclosure guidelines but most are voluntary, and only a few have introduced mandatory guidelines,” he said.
Another issue is that green projects such as reducing air pollution might benefit urban populations but it would be hard to charge them for it. “So returns would be lower than what the market expects. We need incentives from the government such as guarantees,” Ma said.
Both factors are likely to be required before international investors will be persuaded to put their money to work into what looks like an interesting new market.
Observers of Ma’s speech were largely approving, but some expressed caution. “It’s great that China is saying it wants to do all these things but they need to do more than talk about it,” said one observer of Ma’s speech.
“The country’s interest in promoting green bonds is interesting, but it might be hard for international investors to become comfortable with local governance standards as to what they mean by green bonds,” noted another fund manager representative.
Philippe Zaouati, chief executive officer of Mirova, the Paris-based fund manager, was encouraged by China’s active engagement in green finance development.
“What’s most important is that the Chinese are dealing with green finance,” he told AsianInvestor. “Clearly nobody knows exactly what green bonds mean; even Europe doesn’t entirely agree with what green means.”
Zaouati predicted China was unlikely to want to follow Europe-created standards of what a green bond should be, noting that under one PBOC definition, ‘clean coal' was one type of green project covered.
“You probably can’t create a world standard of green finance,” he said. “But perhaps we could create a few standards, for example China, Europe and the US have different green bond standards and issuers state which standards their bonds adhere to.”
He added that efforts by China to introduce green loans, bonds and a carbon emission scheme could help more European asset owners put money into emerging markets, too.
“A big problem has been that European investors don’t invest [enough] into emerging markets. Hopefully green finance [initiatives] will change that, particularly as European pension funds need yield and want to invest into infrastructure,” he said.