Caixin
Mar 03, 2021 06:47 AM
FINANCE

China Works to Refocus Standards for Green Finance

China’s 2020 revision of the Green Bonds Endorsed Project Catalogue removes all coal-related projects.
China’s 2020 revision of the Green Bonds Endorsed Project Catalogue removes all coal-related projects.

China’s financial industry is on the hook to help address the nation’s role as the world’s top emitter of climate-changing greenhouse gases. Now it needs to sort out just what assets or investments will actually help achieve the national goal of carbon neutrality by 2060.

Banks and other financial institutions face a welter of standards for green finance issued by top regulators. Until last year, these still designated some fossil fuel projects as qualifying for green finance. From 2017 to June 2019, China issued at least 13.9 billion yuan ($2.15 billion) of green bonds for 34 coal-related projects, according to data compiled by Greenpeace. Under international standards, coal-related projects don’t contribute to the goal of lowering emissions of carbon dioxide, the main greenhouse gas.

“Judging the nature of economic activities and financing only by the criteria of ‘green’ or ‘not green’ is actually quite vague, incomplete and nonsustainable,” said Lu Zhengwei, chief economist at Industrial Bank. “The current standards fail to fully reflect the whole picture of the green transformation of the whole economy.” He said a more appropriate approach would be to assign a green value, such as carbon footprint, to each type of economic activity.

The China Financial Standardization Technical Committee is leading efforts to revise standards for green bonds, Caixin learned. Some industry participants suggest establishing a separate standard for climate bonds. At present, there is no unified international green finance classification standard, said Zhu Jun, director of the International Department of the People’s Bank of China.

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Cover Story: The Green Finance Challenge Facing China’s Banks

Over time, China has developed several sets of standards for green finance. The Green Industry Guidance Directory was issued by the powerful National Development and Reform Commission (NDRC). The central bank and the NDRC jointly set up the Green Bonds Endorsed Project Catalogue. And the China Banking and Insurance Regulatory Commission created the Green Credit Guidelines. In addition, the central bank set up a specific statistical system for green loans.

But green finance is not the same as carbon finance, where the international emphasis is on designating projects that address climate change. China’s green finance system has focused on improving the environment, pollution prevention and treatment, and resource conservation and energy efficiency — leaving room to include certain fossil fuel investments.

A 2019 revision of the Green Industry Guidance Directory established an overall framework for green financing standards. It classifies green economic activity into six categories, including energy conservation and environmental protection, clean production, clean energy, green ecology, infrastructure upgrades and green service. The 211 types of specific economic activities under these six categories also include fossil energy projects.

China’s green financing standards began to emphasize climate change in May 2020 when the central bank, the NDRC and three other ministries jointly issued an updated Green Bonds Endorsed Project Catalogue. The revision removes controversial coal-related projects, meaning that China’s green bonds can no longer support any such investments, including those related to the manufacture of thermal power units.

The revision was hailed as a breakthrough for China’s green finance and brought China into closer alignment with international standards. However, the current standard is still far from sufficient to achieve the goal of carbon neutrality, industry experts say.

Other guidelines, including the Green Industry Guidance Directory and the Green Credit Guidelines, should also be revised to adapt them to the goal of carbon neutrality, suggested Ma Jun, a member of the monetary policy committee of the People’s Bank of China (PBOC) and director of the Green Finance Committee of the China Society of Finance and Banking.

The PBOC is working with the European Union on a common classification standard for green finance that is expected to debut this year. In October, China’s central bank set up a Taxonomy Working Group with the EU’s International Platform on Sustainable Finance, aiming to study and propose common standards and future convergence pathways to lay a foundation for the formation of internationally accepted green classification standards. Countries including Canada, Japan and Singapore have also joined the working group.

Contact reporter Denise Jia (huijuanjia@caixin.com) and editor Bob Simison (bobsimison@caixin.com).

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