Entering the first year of the 13th Five-Year Plan (2016-20) period, the Central Government has laid a focus on pushing forward supply-side structural reform, promoting new breakthroughs in green development and speeding up the expansion of green finance. In other words, bolstering green finance gives a push to green development, which is an effective component of the supply-side reform. Therefore, financial institutions should grasp the opportunity.
Green finance, or carbon finance, serves financial institutional arrangements and trading activities targeted at reducing greenhouse gas emissions, and has evolved into a major financial measure taken by countries to tackle climate change, carry out environment management and attain sustainable development. Green credit issued by commercial banks worldwide in combination with separate carbon finance markets in the European Union, the United States, Australia and others, have provided important support to global green development.
Meanwhile, the agreements reached at the UN climate change conference held in Paris last December have propelled banking institutions, large international financial institutions in particular, to expand green credit business.
In contrast to their overseas counterparts, domestic commercial banks' recognition of green finance is a gradual process. Entering the 21st century, to facilitate economic transformation and environmental protection, domestic banks have set out innovating green finance products, restraining loans issued to polluting enterprises and supporting sustainable development. As of June 2014, loans going to energy conservation and environmental protection services and projects from 21 major banking institutions reached 4.16 trillion yuan ($632 billion), accounting for 6.43 percent of the total.
Green finance in China, by and large, is now in its infancy. Unfortunately, some problems still exist which are hampering its development.
Banks have not fully realized the strategic significance of tackling climate change and developing green finance. They tend to view developing it as a social responsibility financial institutions have to shoulder, a part of a performance evaluation or a kind of nice-looking innovation. They fail to pay enough attention to the new business.
Improvement should be made in supporting policies. Green finance is an innovative service, and therefore, features large investment, slow effect and a low rate of return at the preliminary stage. Complicated with the absence of supporting finance and taxation policies, financial institutions are not yet motivated to explore green finance business.
Professional ability needs to be enhanced. Green finance development cannot go on without professionals specialized in environmental protection, low carbon and clean development mechanisms. Apparently, domestic commercial banks severely lack such human resources.
Without even needing to consider the international commitments to fight climate change or domestic commercial banks' inner call to undergo transformation and upgrading, banks should prioritize green finance as a new source of growth. To that end, this year, financial institutions should make efforts in the following aspects:
First, the People's Bank of China, the central bank, should take an initiative to establish a green finance system framework. In the proposals regarding the 13th Five-Year Plan, the Central Government made it clear that efforts should be made to ensure the development of green finance. As Ma Jun, Director of the Green Finance Committee of China Society for Finance and Banking, put it, a green finance system is requisite to effectively gear investment and economic structure toward greenness. On this front, efforts should be made to set up green banking, financial market, financial policy and financial rating systems.
Second, commercial banks should develop green credit business. They should optimize credit structure by keeping or dropping projects based on their individual merits, make clear the direction and key fields of green credit, and adopt differentiated and dynamic credit granting policy. Beyond that, banks should create green financial product systems encompassing intellectual property mortgage loans, emission permit mortgage loans, energy efficiency revenue mortgage loans, green equipment buyer's credit, green financial leasing and integrated financing solutions for a clean development mechanism. To cope with the direct financing demand from green projects, banks should probe into new investment banking products, such as carbon-revenue-backed notes, green industrial debt financing instruments and carbon project yield bonds.
Third, commercial banks should give full play to Internet finance platforms, which are an important force for the development of green finance. Internet finance is favorable because of its low cost, less geographic limitations and strong flexibility. Therefore, Internet finance should promote green finance in policy support, product innovation, institution cooperation and risk management.
This is an edited excerpt of an article written by Wang Yong, a professor from Zhengzhou Training College of the People's Bank of China, and published in Securities Times
Copyedited by Mara Lee Durrell
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