The future of socially responsible investing in China
Climate mitigation and biodiversity protection are priorities within China’s green finance policies. Despite the dire economic impact of COVID-19, experts believe the Chinese government will not pull back on environmental targets.
Climate is top of mind as we look to the year ahead. Bill Gates told Bloomberg News of his plans to work more closely with Amazon Inc. CEO Jeff Bezos to tackle climate change. According to Gates, the climate crisis can dwarf COVID-19 in deaths and global impact, even if the former can sometimes feel some ways off. “It’s a real test of humanity to invest in advance for problems that come later,” he said in the interview.
The big money seems to be heeding this cry, recognizing both the urgency in climate — as well as its opportunities. Philanthropists and investors seem to agree. Bezos and Gates have both pledged billions of their fortunes to combat climate change. Earlier this year, Larry Fink — CEO of BlackRock, the world’s largest asset manager — wrote in his annual letter to CEOs that climate presents a “historic investing opportunity.”
In anticipation of the conversation next week on China’s environmental future with Wayne Silby and Peiyuan Guo, we wanted to provide a brief primer on green finance efforts in China.
Green finance is broadly defined as innovative financing mechanisms to bring about better environmental outcomes. An important area where green finance is helping bring about better environmental outcomes is biodiversity. Biodiversity is essential for the health of our planet, yet it is in a sharp decline, driven mainly by human behavior. If human society continues on this trajectory, we face a future where 30 to 50 percent of all species may be lost by the middle of the 21st century. To reverse the decline in biodiversity by 2030, a joint report by The Paulson Institute and The Nature Conservancy report suggests that, globally, an additional $711 billion per year needs to be spent over the next decade. The report concludes that this can be tackled through better deployment of existing funds and smarter policy and investment choices, shifting the flow of capital away from harmful behaviors and toward outcomes that benefit nature.
Climate mitigation and biodiversity protection are priorities within China’s green finance policies. The Chinese government increasingly promotes green finance, which the Chinese central bank defines as “financial services provided for economic activities that are supportive of environmental improvement, climate change mitigation and more efficient resource utilization.” 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. In 2018, China’s green finance policies helped mobilize hundreds of billions of RMB for qualifying projects.
Perhaps the greatest amount of green finance activity in China has been in the area of green bonds. In 2018, Chinese green bond issuances were roughly RMB 283 billion (approximately $43 billion). This was an increase of around 12% from 2017 and the second highest total of any country, behind only the United States. In 2018, approximately 28% of China’s green bond proceeds went to solar, wind, and other clean energy projects. About a third went to low-carbon transport, including for urban mass transit. However, nearly 26% of China’s green bond proceeds went to projects that did not meet international green bond standards, including for retrofits of coal power plants.
China’s use of green bond proceeds for coal-fired power plants, especially as part of the Belt and Road Initiative, has created controversy, and work is underway to harmonize Chinese and international green bonds standards. In January 2021, the People’s Bank of China, the nation’s central bank, announced that it would step up efforts to support green industries with innovative financial products and services by channeling more financial resources toward green development, as well as gradually improve green finance standards and continue promoting international green finance cooperation. Despite the dire economic impact of COVID-19, experts believe the Chinese government will not pull back on environmental targets. Those policies are relatively new and will continue to evolve in the years ahead. How they do so will could play an important role in the world’s response to climate change.
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