Index > Briefing
Thursday, December 24, 2020
Green Finance Supports Carbon Emission Reduction and Economic Development in China

China now has formulated new emission reduction targets, which not only reflects the country's increasing emphasis on environmental governance, but also shows that it hopes to use emission reduction targets and environmental protection as policies and systems to promote its industrial upgrading and structure adjustments. Of course, many aspects are involved in the implementation of this goal, though one of the most crucial aspects is that environmental protection and governance needs to be promoted as the main theme of economic development. This is the practical significance of China's new emission reduction goal.

The new emission reduction targets and environmental development strategies have also provided financial capital with a new investment theme and a new model of green finance. Although China has made many attempts in green finance in the past, such as carbon trading, green credit, green bonds, green insurance, etc., it has yet to form a systematic green financial system to improve investment efficiency and achieve an in-depth integration with economic development. The most crucial points for green financial systems are to establish a new investment reference and evaluation mechanism, integrate green development into the new investment and financing model, develop the market, promote the development of the green economy, and establish a new development pattern.

In recent years, Environmental, Social, and Corporate Governance (ESG) models have been recognized by the market and investors in developed countries. In the financial market, as of the end of June this year, there have been more than USD1 trillion in ETFs tracking ESG indicators worldwide, and green bond issuance has exceeded the USD1 trillion mark. As far as China is concerned, green finance has developed rapidly as well. Until the end of the third quarter this year, China's green loan balance was RMB 11.55 trillion, ranking first in the world; while at the end of June, the stock of green bonds was RMB 1.2 trillion, ranking second in the world. The non-performing loan rate of green loans is much lower than the non-performing loan rate of national commercial banks, and there are no default cases of green bonds. It is clear that green finance and green investment will become new sectors with great potential.

The most direct benefit from the development of green finance is naturally to meet the investment needs of energy, environmental protection and other related industries. From environmental governance to industrial upgrading, a large amount of capital is required, and huge amounts of investments are needed in infrastructure construction, equipment update, and new technology research and development. Statistics show that the annual investment demand for green industries is about RMB 2 trillion, and fiscal funds can only meet 10%-15% of the investment demand. In addition to policy guidance, these investments and financing needs still require the support of the entire capital market and financial system. At the same time, the development of a green economy also requires a new and higher standard as well as more transparent investment models. In fact, many international companies, including non-energy companies such as Apple, Toyota, and TSMC, are issuing green bonds. These companies participate in green finance because they hope to occupy a leading position in the development of green industries while establishing a good social image. Taking TSMC as an example, its green bonds are mainly used to build green factories with the theme of energy saving and environmental protection and to achieve the goal of reducing energy consumption as well as emission reduction. In this regard, the development of green finance not only has direct significance for energy companies, but also produces "green" and economic benefits for many fields such as the construction industry, infrastructure and urban renewal.

In addition to meeting the actual needs of green industries and emission reduction projects, the development of green finance and green investment actually plays an important role in industrial upgrading and economic structural transformation. For example, the green bonds issued by Toyota Motor of Japan are used to purchase new energy vehicles, invest in a circular economy such as shared cars, and establish new business models. The funds invested by Apple in green bonds are used for technology research and development to recover rare heavy metals used in mobile phones. More importantly, Apple not only develops resource recycling logistics and related technologies, but also requires low-carbon transformation of the supply chain by setting up green thresholds, which is equivalent to driving green innovation and transformation in other industries other than its own technology industry. This not only has an impact on the industry itself, but also has a spillover effect on upstream and downstream industries through the supply chain system. Through such effect, the development of green bonds and green finance has strong externalities for economic development. It not only has direct benefits for the environmental protection industry and new energy industry, but also affects the green transformation of the entire industrial system and achieves the goal of sustainable development.

In terms of China's long-term development, ANBOUND has proposed two major driving factors for its development, namely the Yangtze River Economic Belt and the construction of a hydrogen energy-based society. In the new urbanization construction, green finance can perform the function of resource allocation, as well as to lead new standards and new models in energy conservation and emission reduction, smart cities, and smart transportation. All aspects of the hydrogen energy-based society, including the research and development of related industries as well as the production and consumption of hydrogen energy-related industries are wholly and fully supported by green finance and is reliant on it in order to develop. In the process of realizing new development goals and building a new development pattern, the establishment of a new green financial system is even more crucial.

Final analysis conclusion:

China's commitment to new emission reduction targets to achieve low-carbon and sustainable development is full of challenges, where large amounts of capital and technology are required. A new green financial system is also needed to realize the transformation of green investment and financing, so as to promote economic transformation and structural reforms. Therefore, China needs to conduct systematic research and policy layout to strengthen green finance and economic transformation.

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