How a think tank is helping scale up green finance initiatives in China

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A legally protected ancient tree surrounded by tree plantation plots in Red Earth County, Dongquan County, Yunnan Province, China. CIFOR / Louis Putzel

The global environmental challenges facing the world require multilateral solutions involving public and private actors. Increasingly, there is a push to develop green financial systems that provide incentives for businesses to reduce carbon emissions, invest in clean energy sources and prioritize the conservation of natural resources.

Over the past five years, China has made headlines for its approach to green finance aimed at pursuing an “ecological civilization” capable of achieving the dual goals of development and environmental protection, which is part integral to its national objectives.

In September 2016, the central bank of the People’s Bank of China issued Guidelines for establishing the green financial system set the tone for the widespread implementation of environmentally friendly banking practices. It is hoped that these financial policies will encourage more investment in renewable energy projects, recycling plants, public transportation and water treatment facilities, to name a few.

Parallel developments in financial technology – such as online banking and big data collection – have made green investing much simpler globally, according to an article by the International Institute for Sustainable Development (IISD) . In China and the Philippines, for example, fintech has facilitated nationwide tree planting initiatives like Ant Forest and GCash Forest through gamified apps linked to users’ mobile wallets.

For these initiatives to generate sustainable environmental benefits, however, green finance must become widely accepted as a model for national and international markets, said Mathias Lund Larsen, director of international cooperation at the International Institute for Green Finance ( IIGF) in Beijing. – a think tank founded on the occasion of the 2016 G20 summit in Hangzhou to help research and develop China’s green finance strategy.

“Green finance should not be seen as a secondary niche in the market; instead, green finance should strive to make the whole financial system more sustainable, ”said Larsen

However, Larsen also recognizes the challenges of defining “green” economic activities on a global scale. For example, one green finance standard may encourage investment in electric cars while another does not due to pollution created during the manufacturing process.

Larsen believes that these different standards must be harmonized, or at least compatible, in order to reap the greatest benefits for the economy and the environment.

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Forest News is joined by Larsen to answer questions about China’s efforts to boost its green finance sector and its convergence with landscape and forest conservation.

Q: How do you define green finance?

A: Green finance is about changing the incentive structures of the financial system to channel more capital into environmentally friendly projects that help mitigate climate change; it is also about ensuring that less capital is directed towards unsustainable projects. Therefore, green finance should not be seen as a secondary niche of the market; instead, green finance should strive to make the entire financial system more sustainable. Green financial systems should encompass all regulations, all financial tools and all stakeholders.

Q: What is the International Institute for Green Finance doing? What are its main objectives?

A: We cover the entire continuum, from pure academic research to practical advisory work for financial institutions. Much of our job is to work with Chinese regulators to implement policies, regulations, and guidelines that influence financial institutions. In this advisory role, we provide underlying research, collect data for analysis and provide policy recommendations. We do it both in China and abroad, but always from a Chinese perspective, because we are a Chinese organization.

Q: What are the main issues facing green finance in China today?

A: A key problem, to name a few, is finding better ways to discourage funding for unsustainable projects, such as coal-fired power plants. While green finance instruments such as green bonds and green credit have made substantial progress, we can do more to tackle environmentally harmful business practices. In China, for example, regulators are starting to require mandatory disclosure of environmental information for all listed companies, implement a national emissions trading system, and include green factors in macroprudential policies, policies that ensure the stability of the financial system as a whole.

Q: How does the IIGF assess whether an economic activity is “green”?

A: At the IIGF, we don’t have our own definition, but rather do an analysis based on a number of existing standards. China now has a central standard for green economic activities, which was established by the National Development and Reform Commission (NDRC), and forms the basis for all green standards in China once the related standards have been updated. At the international level, the European Union deploys its own set of standards based on performance thresholds; International Capital Market Association standards are abstract and principled, while the Multilateral Development Bank-International Development Finance Club (MDB-IDFC) standard is project-based. Such differences in both standard coverage and approach further complicate the situation. Our work mixes these different standards and tries to harmonize them so that they are compatible.

Q: How (if any) do trees and sustainable forestry practices intersect with the work you do at the IIGF?

A: Sustainable forestry and forestry practices are included in the old Chinese standards as well as the new NDRC Green Standard, although only a small proportion of green funding goes towards these goals. Another way we are working on sustainable forestry at the IIGF is in terms of green trade finance. Green trade refers to the ability of financial institutions to set requirements for forest preservation mechanisms when they facilitate trade in commodities like soybeans, beef and palm oil, for which China is most important. large world importer.

Q: Besides carbon credits, are there other ways to monetize forest conservation?

A: Monetizing natural assets is always difficult, and carbon credits are a primary means of doing it around the world. Another way to place financial value on natural resources is through sustainable tourism, a path that is also promoted in China’s green standards. In general, China has increased its canopy cover for several years, but this is mainly due to regulations banning logging and public funding for tree planting.

Q: Would you say that China’s green finance strategy is unique in the world? If yes, why?

A: This Chinese green finance strategy is indeed unique. In China, regulators of the financial system do not limit themselves, as in the West, to orthodox objectives of inflation, employment and financial stability. Instead, Chinese regulators have more tools to achieve national goals such as climate change mitigation and other environmental goals. This means that China can take a very strict approach, which has been a key part of its success in becoming one of the largest green bond markets in the world in a matter of years.

Q: Do you think green financial technology projects like Ant Forest or other green business innovations in China could be implemented in other countries? Why or why not?

A: Ant Forest – a tree-planting financial technology (fintech) project sponsored by the Alibaba Group and affiliated NGOs (non-governmental organizations) – is indeed an initiative that could be rolled out in other countries. However, given the philanthropic nature of the program, it does not have a broad enough mandate to access large amounts of capital or provide the kind of incentives that are necessary for a truly green financial system. However, fintech as a general method can certainly help in the creation of a green financial system by increasing the efficiency of data collection and project evaluation; this includes economic projects related to forestry.

For example, today many small farmers who want to introduce sustainable practices on their farms would not be able to get a loan from a local bank or elsewhere. Fintech in China promotes financial inclusion by providing access to rural banking services; farmers can get loans and transact directly through their phones. If fintech continues to promote awareness of ecological issues through projects like Ant Forest, it is more likely that funding will be made available for other forest conservation and tree planting initiatives in the areas. rural.

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