China: A global powerhouse for sustainable finance

Sustainable finance is a rapidly expanding movement. The power of the global financial system is now putting its weight behind this sector, nowhere is this more evident than in China

11 August 2017

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    Once considered a niche, alternative or exotic form of investment, green finance is fast becoming part of the mainstream.1 There’s now growing interest from investors and issuers as countries across the globe bolster their efforts to tackle climate change.2, 3 Changes in government policy, rapid developments in technology, evolving business and consumer sentiment, as well as a shift in investor appetite, are giving this movement fresh momentum.

    “This is one of the biggest structural changes taking place in the global economy at the moment. The transition from a relatively high- to a low-carbon economy over the next 30 years will represent a major change,” explains Michael Ellam, Co-sponsor of Sustainable Financing for Global Banking and Markets at HSBC. “We are also seeing significant adjustment in investor appetites.”

    An HSBC survey at the end of last year found that over three quarters of global investors are concerned that the Paris Agreement to limit climate change will result in a loss of value for certain types of assets and that there are barriers in terms of credible investment opportunities, and a lack of access to quality research.4

    It helps that green finance topped the agenda at the G20 Summit in Hangzhou, China, last year. This was instrumental in pushing green finance forward, according to Yao Wang, Director-General of the International Institute of Green Finance.

    “In China, our environmental issues are very pronounced, the utilisation of resources is inefficient and pollution is serious. China is also the biggest carbon emitter globally,” she stated at the recent HSBC Financial Institutions Conference in Shanghai.

    “China signed up to the Paris Climate Accord and made a commitment to meet these goals; we must now work on reducing emissions. Therefore, as we shift towards greener development, finance must play its part.”

    This is reflected in the growth of the green bond market, which almost doubled to USD81 billion in 20163; this is expected to increase again to USD120 billion in 2017.4 In the last few years, China has become the world's largest green bond market. It accounted for nearly 40 per cent of all global green bond issuance last year.4

    “China is also taking on a political leadership role with respect to the Paris Climate Accord. China has committed itself to the agreement,” explains Frederic Neumann, Co-Head of Asia Economics Research at HSBC.

    Changing times

    This comes at a time when the US has withdrawn from the landmark worldwide agreement to tackle climate change and a time when green bond issuers from China have come to dominate the global market.

    “One of the reasons why this has happened is that China’s policymakers have recognised the importance of making sure that their economic policies take greater account of environmental degradation in China,” states Leslie Maasdorp, Chief Financial Officer of the New Development Bank.

    The People's Bank of China (PBOC), together with the Beijing government, has now published green bond market guidelines. This was a major policy push that helped lure investors. These have laid out Chinese standards in a bid to align and harmonise them with international ones.5

    China needs at least USD290 billion of investment annually over the next five years in order to tackle environmental issues and reduce chronic pollution across the country.6

    A significant opportunity

    Globally, it’s an even bigger opportunity, as 189 countries submitted plans under the Paris Accord. This could open up nearly USD23 trillion in opportunities for green investments in emerging markets up to 2030, according to a report by the International Finance Corporation (IFC).7

    Currently, 1,500 companies and financial institutions manage more than USD60 trillion in assets under the United Nations (UN) principles for responsible investment. This shows that environmentally friendly and climate change-focused investments have reached an unprecedented scale.8

    Sustainable financing also looks set to become relevant to more financial products going forward, including the development of green loans for large corporations. This involves money from banks that are ring-fenced specifically for green, climate-focused or low-carbon investments.

    Led by the PBOC, China is rapidly developing green finance. The ‘Guidelines for Establishing the Green Financial System’ was released before the G20 meeting last year. “This is a significant political push. All relevant departments will have to release detailed plans and submit regular reports,” says Ms Wang.

    “As our economy shifts towards greener development, it brings a lot of investment opportunities,” explained Ms Wang. “For financial institutions, the sooner you begin financial innovation, the sooner you will benefit from the business opportunities.”


    References

    Bond Connect – onshore access, offshore infrastructure
    The new scheme creates a comprehensive offshore platform to access the world’s third largest bond market that covers registration, trading, and settlement.
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