20: Green Finance

China’s central bank—the People’s Bank of China (“PBoC”)—defines “green finance” as “financial services provided for economic activities that are supportive of environmental improvement, climate change mitigation and more efficient resource utilization.”¹

In 2021, more than $100 billion of green bonds and $600 billion of green loans were issued in China.² PBoC removed “clean coal” projects from its Green Bonds Endorsed Projects Catalogue, the Ministry of Ecology and Environment (MEE) issued rules requiring companies to disclose their carbon emissions, and President Xi Jinping and Premier Li Keqiang both spoke about green finance in high-profile settings.³

This chapter discusses China’s green finance policies and their climate impacts.

Background

The capital required to achieve the Chinese government’s climate goals is enormous. The investment bank China International Capital Corporation estimates that China needs $21 trillion of debt financing in the next four decades to achieve carbon neutrality.⁴ An influential study by the Institute for Climate Change and Sustainable Development (ICCSD) at Tsinghua University found that an investment of RMB 100 trillion (roughly $15 trillion) is needed for China to be on a path compatible with the 2°C (3.6°F) goal in the Paris Agreement.⁵

In recent years, green finance in China has exceeded trillions of RMB (hundreds of billions of dollars). From 2016 to 2021, green bonds totaling more than RMB 1.5 trillion ($240 billion) were issued in China.⁶ Overall green finance averaged RMB 2.1 trillion (roughly $320 billion) per year during 2017/2018.⁷

Green finance in China grew significantly in 2021.

• Green bond issuances more than doubled from 2020 levels.⁸
• China Development Bank issued one of the world’s largest green bonds—an RMB 20 billion (roughly $3 billion) issuance for carbon reduction projects including wind and solar power.⁹
• The amount of green loans outstanding grew by 33% to reach almost RMB 16 trillion (about $2.5 trillion), including RMB 10.7 trillion ($1.7 trillion) for projects with carbon reduction benefits.

In 2021, non-financial corporations issued 46% of China’s green bonds. Financial institutions issued 35% of the total.¹⁰

In 2021, several Chinese state-owned banks made commitments to increase green finance. China Development Bank announced that green loans will account for more than 5% of its credit assets by 2025 and 30% of its credit assets by 2030. Bank of China announced it will provide at least RMB 1 trillion in green finance during the 14th Five-Year Plan period and its proportion of green credit will increase each year.¹¹

Policy

Domestic

In 2016, PBoC became the first central bank in the world to issue green finance guidelines. According to PBoC’s Guidelines for Establishing the Green Financial System:

The establishment of the green financial system requires the internalization of environmental externalities by appropriate incentives and restraints with the support of policies, laws and regulations in the financial, fiscal and environmental areas. It also requires more innovations by financial institutions and financial markets in developing new financial instruments and services, to address the problems of maturity mismatch, asymmetric information and lack of analytical tools for green investment.¹²

PBoC’s Guidelines remain in effect and continue to play a central role in shaping green finance in China. They call for action in seven areas:

1. green bonds,
2. green lending,
3. green development funds,
4. green insurance,
5. markets for pollution control rights,
6. local government initiatives, and
7. International cooperation.

Green credit has been a particular focus. PBoC’s Guidelines call for “vigorously develop[ing]” green credit with tools such as central bank relending, guarantee mechanisms and securitization. PBoC includes green finance performance in its macro-prudential assessment system, giving extra points to banks with higher ratios of green credits on their balance sheets and recent records of issuing green bonds.¹³

PBoC’s original Green Bond Endorsed Project Catalogue included “clean utilization of coal” as an eligible project category. This raised concerns with some stakeholders, in part because international standards for green bond investments do not include coal projects among the eligible categories. In April 2021, PBoC updated its Green Bond Endorsed Project Catalogue, removing “clean coal” projects and making a number of other changes that aligned the catalog more closely with international green finance standards.¹⁴

In December 2021, China’s Ministry of Ecology and Environment (MEE) updated its rules on corporate environmental disclosures. The updated rules include a new provision requiring companies to disclose their carbon emissions. All listed companies and companies that issue bonds or other debt instruments are subject to the rules. Reports are due annually (by March 15 for the previous calendar year).¹⁵

Many Chinese provincial and local governments have issued green finance guidance documents. At least five pilot green finance zones have been set up, where financial institutions receive a variety of incentives to fund clean and low-carbon industries.¹⁶

In December 2021, the Ministry of Ecology and Environment (MEE) issued a notice launching a Climate Investment and Financing Pilot Work Plan. The notice asked cities and provinces to submit applications for pilot investment and financing programs to promote carbon peaking and carbon neutrality. In August 2022, MEE announced 23 pilot regions under this program.¹⁷

International

Since at least 2016, China has played a leading role in the international dialog on green finance.

• In 2016, as host of the G20, the Chinese government launched a Green Finance Study Group and included the topic of green finance in a G20 leaders’ communique for the first time.¹⁸
• In 2017, PBoC was one of the eight central banks that co-founded the Network for Greening the Financial System (NGFS).¹⁹
• At the Second Belt and Road Forum in April 2019, 28 financial institutions including China Development Bank, China International Capital Corporation, China Construction Bank and the Agricultural Development Bank of China endorsed the Green Investment Principles for the Belt and Road Initiative.²⁰

In a September 2021 speech to the UN General Assembly, President Xi Jinping pledged that China would “no longer build new coal power projects abroad.”²¹

In the past several years, central government ministries have issued several guidelines on green principles and practices in outbound investment, including the 2021 Green Development Guidelines for Overseas Investment and Cooperation (“2021 Guidelines”), the 2022 Guidelines for Ecological and Environmental Protection of Foreign Investment Cooperation and Construction Projects (“2022 Guidelines”) and Opinions on Jointly Promoting Green Development of the Belt and Road (“2022 Opinions”).²² These have shown an evolution toward more stringent standards.²³

China currently co-chairs the G20’s Sustainable Finance Working Group.²⁴

The Global Green Finance Leadership Program, co-hosted by the Beijing Institute of Finance and Sustainability (BIFS), China Council for International Cooperation on Environment and Development (CCICED) and other organizations, provides a platform for knowledge sharing on green and sustainable finance in emerging economies.²⁵

Relationship to Climate Goals

Climate mitigation is a priority within China’s green finance policies. PBoC’s Guidelines for Establishing the Green Financial System and other green finance policy documents specifically highlight the importance of climate mitigation and low-carbon development. China’s green finance policies have helped channel hundreds of billions of dollars into renewable energy and low-carbon transport projects in recent years and have the potential to channel trillions more.²⁶

Meeting the climate goals set forth in the Paris Agreement will require trillions of dollars of capital over several decades. China’s green finance polices are intended, in part, to help meet that need. These policies will play an important role in the world’s response to climate change.