A UK blueprint on going green

By Wang Yao and Jiang Beibei for China Daily ( China Daily )

Updated: 2015-06-26

At the 2009 Copenhagen Climate Change Conference, China vowed to cut its carbon emissions per GDP by 40 to 45 percent and raise the percentage of its total energy mix supplied by clean energy to 15 percent by 2020.

China needs at least an extra 2 trillion yuan ($320 billion) to achieve those goals. One of the reasons why is that there is a limited number of domestic institutions that invest in environmentally progressive projects; the other reason is that market prices do not offer promising returns to potential nongovernmental investors.

What is truly needed is a national green financial system in which the government plays a leading role. Considering China is inexperienced in this field, it is necessary to refer to the experiences of developed economies.

Let's take a look at the United Kingdom. The UK government is the sole investor in the Green Investment Bank, which is aimed at attracting more private capital into the green investment market.

In October 2012, the UK government established the bank with an initial vow to invest 3.8 billion pounds ($5.9 billion) before March 2016. In the future, the bank said it will try to drum up more private capital.

The bank hopes to accelerate the transformation of the UK economy into a more environmentally driven one by encouraging more private capital into green sectors.

Although the UK government is its sole investor, the bank is an independent commercial institution and all of its investments must both be green and generate a profit.

For this reason, it has a risk evaluation system to manage green investments. In the two years since its founding, the bank has accrued a portfolio of 140 million pounds that includes 41 green programs and six project funds located in as many as 200 places nationwide.

With an investment of 1.8 billion pounds, the Green Investment Bank has mobilized about 6 billion pounds of private capital into green sectors.

The fact that the bank is funded by the UK government not only lowers investment risks, but it also sends the market a clear signal that green investments have the potential to make a profit.

The bank accurately analyzes market demand to decide which investment fields should be given higher priority. It also rallies its social resources to find the best partners and diversifies its programs.

China can start by setting up a green financial department within the China Development Bank to specify which green sectors the nation not only needs to develop but also which lack private capital. Initially, the department should stay with the China Development Bank for support, though it can consider independence if it expands.

Another vital lesson from the Green Investment Bank is that it has successfully encouraged private enterprises to join the common effort mostly because more private capital funds trust their professionalism in managing risk.

China can take a similar measure by founding joint-ventured green banks in various provinces to promote regional green investments. The China Banking Regulatory Commission can also help by propelling the reform of financial institutions toward a path of joint ventures.

Data shows that private capital accounted for over 50 percent of over 100 small and medium-sized banks nationwide, some of which are fully supported by private capital. This year, with the CBRC further encouraging private capital to enter the banking sector, it is advisable for the commission to simplify procedures and allow more private capital to enter banks that support green businesses.

At the same time, the nation's high-level authorities could also encourage major commercial banks to follow the example of Industrial Bank, headquartered in Fuzhou, Fujian province, by establishing financial departments that introduce environmental risk evaluation systems in analyzing programs and enterprise loans. Specifically, favorable loan periods are needed for green programs because they usually require a long time to develop.

Wang Yao is the director of the Research Center for Climate and Energy Finance at Central University of Finance and Economics and Jiang Beibei is an analyst at the China Platform for Dialogue on Financing a Cleaner Development Pathway.