Green Finance in China and Beyond

Green finance is becoming a major player in China's economic landscape. The Chinese government has set a goal to increase green finance to 50% of the country's total financial assets by 2025.

China's green finance market has grown significantly, with green bond issuances reaching 1 trillion yuan in 2020. This is a major milestone in the country's efforts to transition to a low-carbon economy.

The Chinese government has also established a number of green finance initiatives, including the Green Finance Committee and the Green Finance Task Force. These organizations aim to promote green finance practices and develop standards for sustainable finance.

Green finance is not just limited to China, however. Other countries around the world are also starting to adopt green finance practices, with many countries establishing their own green finance initiatives.

Green finance is a loan or investment that supports environmentally friendly activity, such as purchasing eco-friendly goods and services or creating an eco-friendly and sustainable infrastructure.

It can be expensive to make the necessary modifications in lifestyles and business, but green financing makes it easier to deal with the cost of switching to electric vehicles or attempting to increase your home's energy efficiency.

Green finance can be broadly defined as any aspect of the financial industry that is related to environmental concerns, initiatives, goals, outcomes, or impacts.

The term "green finance" is more complicated than the traditional term of finance, but awareness of green investment is growing rapidly among many organizations and people.

In 2021, the issuance of green bonds has raised more than US$ 500 billion, and is forecasted to grow to reach US$ 5 trillion by 2025.

Green finance offers market-oriented solutions to address the gap between the supply and demand for sustainable economic transition, mobilizing financial resources to facilitate the use of green technologies and clean energy.

China's green finance policies promote investment in a wide range of assets, including renewable energy projects, water treatment plants, recycling facilities, and mass transit.

Green finance enables a smooth transition towards a low-carbon and sustainable future, making it easier for people and entrepreneurs to make good purchasing and investment decisions for both themselves and the environment.

Key sectors for green credits in China include green transportation, emerging industries, renewable energy, and industrial energy saving, with 37% of green credits going towards green transportation.

The financing gap to achieve the SDGs is estimated to be $2.5 trillion per year in developing countries alone. This gap has been magnified by the COVID-19 pandemic, which has caused unprecedented debt crises and fiscal deficiencies in many countries.

The pandemic has made the SDG financing gap even more daunting, increasing it by 70% to $4.2 trillion. This highlights the urgent need for collective action to address both short-term and long-term strategies.

Mobilizing capital for green investments has been limited due to several microeconomic challenges, such as maturity mismatches between long-term green investments and the relatively short-term time horizons of investors.

The financing gap to achieve the SDGs is estimated to be a staggering $2.5 trillion per year in developing countries alone.

The COVID-19 pandemic has caused unprecedented economic strain, with the SDG financing gap magnifying by 70% to $4.2 trillion, according to the OECD 2021 report.

Mobilizing capital for green investments is a major challenge due to maturity mismatches between long-term green investments and the relatively short-term time horizons of investors.

A harmonized definition of "green" and a taxonomy of green activities are needed to help investors and financial institutions efficiently allocate capital and make well-informed decisions.

The Green Finance Platform and the United Nations Environment Programme’s Inquiry have launched the Green Finance Measures Database, a global compendium of green finance policies and regulations across over 100 developed and developing countries.

An estimated €6.3 trillion of investment in climate infrastructure is required by 2030 to limit global warming to 2 degrees, according to the OECD 2017 report.

Standards and rules for disclosure would help develop green finance assets, and a common set of minimum standards on green finance is essential to redirect capital flows towards green and sustainable investments.

China is opening its market to foreign investment and expertise to match international standards, with an estimated US$450-570 billion required to achieve the country's green targets.

Foreign investors now have unlimited access to the Chinese securities market, a move that's positioning China's green bond market for further expansion, which only accounted for less than 1% in the overall bond market in 2020.

Strategic investment opportunities lie in the green infrastructure and clean energy sectors, such as the development of wind and solar power generation, where green finance is expected to play a bigger role in the near future.

China has unveiled its Common Ground Taxonomy – Climate Change Mitigation with the EU, providing a framework to compare and identify commonalities and differences between some features of the two taxonomies, revealing China's enthusiasm to participate in the international marketplace.

Foreign investments could be a strong boost to China's portfolio to demonstrate the attractiveness of its green finance market, making it an attractive option for foreign investors.

The significance of green finance can't be overstated. Worldwide investment in renewables and energy efficiency fell by 3% in 2017, and it's possible that it will decrease even more.

Fossil fuels still dominate energy investments, which jeopardizes the growth of green energy that's essential for achieving clean air and climate goals. This is a major concern.

If we want to achieve sustainable development goals, we need to prioritize green projects and increase funding initiatives that provide environmental benefits. Green finance can help us do just that.

Green bonds, green banks, carbon market instruments, fiscal policy, green central banking, and financial technologies are all instruments of green finance that can be used to support sustainable development.

Green finance is on the rise, with a projected market size of $24 trillion by 2025, driven by increasing demand for sustainable investments.

Investors are increasingly looking for ways to align their portfolios with environmental and social goals, with 75% of institutional investors now considering ESG factors in their investment decisions.

The European Union's Sustainable Finance Disclosure Regulation (SFDR) is a key driver of this trend, requiring financial institutions to disclose their ESG risks and opportunities.

ESG-themed funds have seen significant growth, with assets under management increasing by 23% in 2020 alone.

The shift towards green finance is also being driven by regulatory requirements, such as the EU's Green Bond Standard, which aims to increase transparency and consistency in the green bond market.

Green bonds have become a popular tool for companies to raise capital for environmentally friendly projects, with issuances reaching $555 billion in 2020.

Investors are also turning to impact investing, which aims to generate both financial returns and positive social or environmental impact.

China's green finance market is rapidly growing, with a total balance of RMB 1,727 billion (US$270 billion) in green bonds as of December 31, 2021. This is the second largest green bond market in the world, after the U.S.

The country's green finance sector has a huge growth potential, with the green bonds accounting for less than 1% of China's overall bond market in 2020. To achieve China's carbon peak by 2030 and carbon neutrality target by 2060, it is estimated that RMB 3-4 trillion (US$ 450-570 billion) of green investment is needed annually.

China's central bank is laying the ground for the green finance framework by supporting a national carbon accounting system and improving green finance standards. This will be a critical period in achieving China's carbon pledges, and the market size of China's green finance sector will grow further.

Some key policies concerning green finance in China include:

China's green finance pilot zones are part of the country's efforts to build a robust green financial system, with the first set of green finance pilot zones launched in Zhejiang, Jiangxi, Guangdong, Guizhou, and Xinjiang in June 2017.