The challenges of greening the world's most populous nation are daunting. An estimated $247 billion-$468 billion of annual investment is needed between 2014 and 2020 to shift China's economy toward the government's vision of a more sustainable future. However, the opportunities are enormous too: up to 90% of the funding will have to come from the private sector.
With the US administration stepping back from the Paris climate agreement, China is emerging as a global leader in environmental policy.
"The whole economy is going green in the next one or two decades," says Guo Peiyuan, co-founder of SynTao, a leading sustainablity consultancy based in Beijing. "Green finance is growing in popularity because of this economic transition."
President Xi Jinping seized the opportunity to thrust China's ambitions into the global spotlight during the country's turn to head up the Group of 20 (G20) last year, claiming the nation a central role in determining the financial architecture of future development funding, asset management and financial services, as it seeks to push its Ecological Civilisation strategy, a colossal plan to green its economy.
This bold approach includes a coordinated series of initiatives to drive investment and industry onto a more sustainable path and is remarkable due to its proactive and unified approach, in contrast to most countries' patchwork progress.
Banking sector reforms proposed as part of the government's 13th economic plan seek to incentivize financial institutions to issue more green loans, utilizing interest subsidies, on-lending and loan guarantees to leverage public finance. This in turn will support the growth of green loans, in addition to expanding the range of green investment products.
With this in mind, in June, Beijing launched five pilot zones in the provinces of Guangdong, Guizhou, Jiangxi, Zhejiang and Xinjiang with financial institutions here offered a variety of incentives to provide credit to green industry.
Largest green bond marketThis has been matched by a huge uptick in green bond issuance, with China becoming the world's largest green bond market in 2016, issuing US$30.2bn in bonds, accounting for almost 40% of all new green bonds.
Meanwhile in 2017, the China Central Depository and Clearing company reported China issued 79.39 billion yuan (US$11.52bn) in green bonds in the first six months of 2017 – a 33.6% leap on the 2016 level.
China's financial companies are seeking leadership roles as they embrace the transition to green models of finance, says SynTao's Guo.
The nation's largest lender, Industrial and Commercial Bank of China, was the only Chinese financial firm that was a member of the G20 Financial Stability Board's task force on sustainable financial disclosure, and also sits on the Green Finance Study Group, established after a Chinese proposal and co-chaired by the nation's central bank and its UK counterpart.
"It should be clear to investors by now that the central government is gradually raising the cost of bad environmental performance," says Melissa Brown, a partner at Daobridge Capital, a China-focused direct investment and financial advisory firm. "For investors, this creates a major opportunity: it's now much easier than before to identify companies that are aligned with long-term government policies."
Mobilizing private capital"Harnessing private capital for green finance and clean energy projects is essential to ensuring the inevitable move away from fossil fuels," says Fiona Reynolds, Managing Director of the UN-supported Principles for Responsible Investment (PRI), whose more than 1,700 members manage or own over $73 trillion in assets.
The association has been working closely with policymakers – including the Green Finance Study Group – on ways to mobilize private capital.
Also in September, the Green Finance Committee of the China Society for Finance and Banking released a guidance note on overseas investment that called for its members to adopt the PRI's framework of sustainability governance and disclosure, among other measures.
"There is no lack of funds," says Rob Barker, Head of Sustainable Finance & Investment, Global Markets APAC at BNP Paribas in Hong Kong. "It's a question of finding the right mechanisms to allow that shift in capital to take place rather than a lack of funding. It's how do we get the right mechanisms to allow that capital to flow and satisfy the requirements of those stakeholders. What is the market return that needs to be satisfied in order to make that investment decision?"Rob Barker, Head of Sustainable Finance & Investment, Global Markets APAC, BNP Paribas in Hong Kong.
Regulatory changes that require greater and more stringent disclosure of environmental, social and governance (ESG) risks may help in the development of those models. So too will the spreading adoption of the G20 Financial Stability Board's recommendations on climate-related financial disclosure, which were published in December.
Meanwhile, China's development finance institutions – the Asian Infrastructure Investment Bank and the New Development Bank – plus its ambitious One Belt-One Road plan to build a series of interconnected trade routes linking Asia, Africa and Europe, provide a mechanism for this green finance strategy to spread further afield.
Derisking business modelsThe financing of environmentally sound industries represents an enormous potential market for investors globally. Renewable energy, for example, accounted for around 55% of all new capacity installed globally in 2016, according to the UN's Global Trends in Renewable Energy Investment report.
Still, there also remains a need to help legacy carbon-heavy sectors to manage their transition to the sustainable economic model, Barker says.
"That's a very important discussion to have with existing capacity providers: How do you derisk your business models and what's your strategy? What's the pace and the scale that is required? How does that work in practice from a funding perspective?"
The transition to a sustainable global economy will also be driven by technology, which is expected to provide a new driver of wealth creation, as well as improving inclusive growth.
In January, China's digital payments, banking and fund management giant Ant Financial not only became the first FinTech company to join the more than 200 members of the UN Environment Programme's Finance Initiative, it also set up the Green Digital Finance Alliance with the UN body.
"Green finance to date has been focused largely on top-down approaches to mobilizing funds for green investment," says Anna Wang, a spokeswoman for Ant Financial. "We believe there is great potential in using digital technologies in finance to address global environmental challenges."
Engaging the publicJust nine months after China's Ant Financial launched "Ant Forest" more than 200 million of its customers had signed up to use the mobile app that nudges consumers to make greener choices through a competitive game, averting 150,000 tons of carbon emissions and leading the company to plant more than a million trees.
"Such bottom-up and scalable approaches that engage citizens directly in green financing and behaviour shift need to be encouraged," she says.
China's policy framework sets a high bar for efforts towards attaining sustainable goals, according to Usman W. Chohan, an expert in policy reform at the University of New South Wales in Australia.
"Other countries in the developing world such as Pakistan are drawing from China's example rather than from OECD countries for this reason," he says. Ten years from now, "the contrast between China on one hand and the United States and Australia on the other will be so stark that these countries will end up playing 'catch-up' to Chinese renewable strategies and resort to its policy prescriptions - not to mention its green asset base and capital markets."