Green finance gets newfound incentivization

China will make it easier for international investors to access the country's green finance market by promoting the harmonization of domestic and global green standards as part of its efforts to achieve net-zero emissions by 2060, central bank officials said on Tuesday.

The green finance industry in China needs to learn from the asset management experiences of foreign investors, such as multinational pension funds and insurance companies. Large capital injections are also needed to finance many green and low-carbon projects, said Wang Xin, head of the research bureau of the People's Bank of China.

The PBOC defines "green finance "as economic activities that can support the improvement of the environment, tackle climate change challenges, and effectively use and save resources. It also refers to financial services for project investment and financing, project operation and risk management in environmental protection, energy conservation, clean energy, green transportation, green building and other fields.

Regulators are working on streamlining the green finance standards, making them much closer to the international level, as well as enhancing information disclosure. These measures will make foreign investment easier in a more transparent environment, said Ai Ming, deputy head of the international department of PBOC.

Ai said the central bank will improve investment standards for the domestic interbank and exchange bond markets in the next step.

Globally, only China and the European Union have clear standards for green finance. The China-EU Shared Classification Catalogue for Green Finance is likely to be completed later this year, Zhu Jun, head of the PBOC's International Department, said during a virtual seminar of the China Finance 40 Forum last month.

China and the EU are approaching the unified standards, and some economies are waiting for the results, which indicate that the two sides are at the forefront in this regard, said Zhu. If this work could be done on time, the world will see the first set of international standards for green finance in July.

In addition, the PBOC is working on an assessment system that will evaluate commercial lenders' performance of issuing green loans and bonds. It will also develop new monetary policy tools to support green and low-carbon projects. The relevant policies will be officially launched this year, said Wang from the PBOC research bureau.

Experts said that by leveraging various monetary policy tools, financial institutions' credit for green and low-carbon investment is projected to increase.

China's foreign exchange regulator, which manages the world's largest forex reserves, has included sustainable investment instruments in its portfolio, and a part of the reserves has already been injected into green bonds, said Wang.

In the central bank's monetary policy report for the fourth quarter of last year, which was issued late on Monday, it emphasized that monetary authorities will focus on structural monetary policy tools for serving the real economy effectively in the future, with stronger financial support for technology innovation, small businesses and green development.

As a next step, the report said, the PBOC will design incentive policies to sustain the country's carbon neutrality target and guide financial resources for green development.

"There were many net-zero emissions pledges from companies and governments last year, but how these will be achieved is unclear," said Mervyn Tang, senior director of sustainable finance at Fitch (Hong Kong) Ltd, a unit of global credit ratings agency Fitch Ratings. "We expect more detail in 2021. The policy paths will provide insight into long-term economic effects."

Greater policy incentives may cause financial instruments, especially with the labels of "green" and "social", to create a more meaningful difference in financing costs for issuers, said Tang.