With the world’s largest carbon trading exchange, huge green bond market and plethora of green private equity funds, China has shown that well-crafted regulatory, policy and financial frameworks can spur private interest in green finance
BY Deborah Lehr, Vice Chairman and Executive Director
Green investing has turned out to be both a good deed and good deal. China, which is now one of the world’s largest markets for green finance, is showing how investing in sustainability is not only important for saving the Earth but can bring about
excellent returns for the investor. Other countries should take note.
Chinese President Xi Jinping has made environmental protection one of the
top three priorities
of his second term and launched an extensive green finance initiative. The intention is to use market mechanisms combined with government policy – and some government financing – to promote green growth and better environmental protection.
Without private sector financing, China will be unable to muster the estimated US$1 trillion needed to meet its ambitious environmental goals. Government financing will only cover about 15 per cent of the total price tag.
As China has discovered, stimulus spending does not always ensure that government money is used effectively. Governments cannot command that private money be used to promote green development. Instead, they must create vehicles to attract these funds through a combination of good policy, incentives and disincentives, and a regulatory structure that promotes investment and green development.
Only through creating the right regulatory, policy and financial frameworks can China attract the needed private-sector financing to meet its goals.
China is moving full speed ahead in creating this structure – and it is having some success. It now has the
world’s largest carbon trading exchange, which, when fully launched, is expected to set the price of carbon globally. Meanwhile, China’s pilot carbon zones continue to operate and provide pricing trends to help inform the national carbon market.
With these experiences, China’s bigger strategy is to build economies of scale by providing assistance to
Belt and Road Initiative countries in setting up domestic carbon exchanges and allowing them to trade on China’s national exchange. Discussions have already started with countries in Southeast Asia and the Middle East to support their efforts to develop domestic exchanges with links to China’s.
China will inevitably have outsized influence in setting the standards on carbon given its massive size and scope, which in turn will allow it to develop innovative financing mechanisms for trading in this sector. If this path on carbon is successful, China intends to develop the means to price air, water and
soil pollution, and promote trading in these natural resources. The goal is that once the pollution is “priced”, a market will exist for trading. The incentive to pollute will be reduced as the price of doing so increases.
China is also accelerating its issuance of green bonds to spur sustainable development, tapping into the global need to finance green growth. Its first renminbi-denominated green bond was listed in 2015 on the London Stock Exchange and by 2018, China had issued close to
US$31 billion in green bonds, coming in
second after the United States, but accounting for about 18 per cent of all new global green bond issuances.
As a result, green indices have developed to rate these bonds, including Standard & Poor’s, which has
just been approved to be the first foreign firm allowed to rate domestic Chinese bonds. These ratings will give investors more confidence in and provide information on investing in China’s green development.
These opportunities have also caught the eye of private equity funds. Today, there are over 500 green private equity funds in China and the market is growing rapidly. One of the first such funds, and one of the few approved at a national level, is the US-China Green Fund, which is helping to integrate American technology with the China market and which recently celebrated its second anniversary. To date, its rate of return is higher than most regular private equity funds in China. [The Paulson Institute is a non-commercial adviser to the fund.]
China is promoting the growth of domestic funds, but also exploring the creation of other bilateral funds, including one with Africa, drawing on the country’s rapidly growing environmental goods, services and technology market.
As a global
leader in fintech, China is taking sustainability online. Fintech companies are able to use their online platform to support and promote sustainable behaviour, which leads to commercial opportunities, and this is an important key to unlocking larger green finance potential in capital markets.
Ant Financial, for example, created Ant Forest, an online game that encourages players to reduce their carbon footprint. Based on the data collected, it can strategically market sustainable products to its 350 million users based on players’ interests and goals. [Ant Financial is the financial arm of Alibaba Group, which owns the Post.]
Other fintech companies are increasing
microlending to sustainable projects or to companies at preferential rates to spur additional green habits. These are just some of the current examples being tested in the market, but there are far more digital opportunities to look forward to as the fintech ecosystem continues to develop.
Over the past five years, China has built the most innovative and competitive market for green finance globally. It is using the framework of the financial system and market mechanisms to promote and finance sustainable development as well as to change consumption patterns towards more green products. As other countries consider their plans for economic growth and development, there is a lot they can learn from China on how to combine green development while still stimulating the economy successfully.
This article was originally published by South China Morning Post.
