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China Joins the World on Green Finance, But Domestic Standards Remain Problematic

Nov 08, 2019

On October 18, a group of countries representing nearly half of the world’s GDP--and its carbon emissions--announced the formation of the International Platform on Sustainable Finance (IPSF). Led by the European Union, Argentina, Canada, Chile, China, India, Kenya, and Morocco, all countries agreed to enhance their cooperation in promoting green finance. 

Green finance is a rapidly-growing field that identifies and incentivizes investment in environmentally sustainable projects. This can take a variety of forms, including green bonds, dedicated green banks, and direct investment in environmental projects. 

IPSF’s primary objective is to promote environmentally sustainable investment by catalyzing private investment in, for example, renewable energy projects instead of coal plants and oil pipelines. All told, the UN estimates that it will take $12.1 trillion in new investments over 25 years to reach the targets laid out in the Paris Agreement. Public institutions can only provide a fraction of this. Instead, governments must find ways to encourage private financiers to pivot to green investment. 

As might be obvious, the issue remains what counts as “green.” At the moment, countries each have their own definition for what qualifies, and many have yet to set any sort of standard. This makes it possible for projects and investors to claim green credentials they do not deserve, and leaves the door open for a confusing mix of standards that would serve to slow the growth of an industry essential for addressing climate change. Without consistent standards, each potential investor is burdened with the cost and risk to reputation of having to decide for themselves what counts as environmentally sustainable investing. 

In China, the central government released the Guidelines for Establishing the Green Financial System in 2016, and the National Reform and Development Commission (NDRC), along with six other agencies jointly published the Green Industry Guidance Catalogue on March 6, which clarifies the definition for green goods and services. China includes “clean” coal on this list, arguing that since the country remains reliant on coal for the majority of its energy, it is important to encourage the adoption of more efficient ways to burn it. “Clean coal,” however, refers more often to reductions in air pollutants rather than carbon emissions, making it far from environmentally-friendly. In 2018, the Climate Bonds Initiative reported that 26 percent of the country’s green bonds do not meet best-practice standards that exclude fossil fuel technologies and limit to 5 percent what can be used for working capital. That number increased to concerning 49 percent in the first half of 2019. 

The EU has so far been the other major player to develop green finance guidelines. In June, the European Commission released the EU Sustainable Finance Taxonomy, a list of economic activities that count as “green.” Fossil fuels only count if they employ carbon capture technology, which sequesters emissions underground and is still prohibitively expensive in most places. In September, however, the European Parliament agreed to delay their implementation until 2022 over concerns that they could damage the coal sector important to Eastern Europe’s economy and France’s nuclear power industry. This is a significant blow to investors, who rely on consistent standards in the bloc to make certifiably environmental investments. 

Even when Europe’s standards come into effect, issues will remain regarding how to reconcile them with China’s and others. The IPSF is designed to help address this problem by creating a forum for economies on nearly every continent to exchange best practices, scale up sustainable finance, and enhance international cooperation. This is an exciting development for what, if the Paris Agreement is fully implemented, will be a multi-trillion-dollar industry. 

IPSF is not the first instance of cooperation on green finance between China and the EU. On the sidelines of the 2017 UN Framework Convention on Climate Change conference of parties, the European Investment Bank and the China Society for Finance and Banking jointly released a white paper comparing international green bond standards. In 2018, they agreed to formulate a translation mechanism for their standards to streamline the international green bonds market and facilitate investment. These are very promising steps, but the language in the founding documents of the IPSF remains full of qualifiers: “in addition, where appropriate, some willing members could strive to align initiatives and approaches.” 

It is unrealistic to expect a global set of standards on green finance to appear overnight, but a few large markets need to take the lead to establish best-practices that everyone else can then adopt. China has the speed and enthusiasm, but it is worrying to still see fossil fuels included anywhere near environmental standards. The EU has a set of well-thought out standards, but 2022 is too late for implementation; the world needs to see billions of dollars in investment by then to develop and implement bold climate solutions. Hopefully, IPSF can act as a Goldilocks convener, bringing together much of the world’s economy to promote green finance and giving investors both the confidence and the tools they need to start funneling money towards the future.

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