As green finance gains wider recognition as a driving force for the sustainability of the global economy, China has emerged as a global leader in this domain, and transactions in its green and sustainable financial markets have grown exponentially in recent years. This article aims to explore China’s green finance framework, major green finance instruments, local initiatives, and developments, as well as their impacts on global sustainability.

Green Financial System Guidelines

As mentioned in our previous article, 《ESG in China: Opportunities and Challenges for Foreign Investors》, China’s green finance development is characterized by a top-down policymaking approach. In 2016, sustainability efforts in China gained significant momentum when the National Development and Reform Commission (“NDRC”), the People’s Bank of China (“PBoC”), the China Securities Regulatory Commission (“CSRC”), and other Chinese regulatory authorities jointly launched the Guidelines for Establishing a Green Financial System (《关于构建绿色金融体系的指导意见》) (“Green Financial System Guidelines”), which marks the adoption of a comprehensive green finance approach within China’s financial markets.

Standards and Boundaries of Green Finance

The Green Financial System Guidelines defines “green finance” as financial services provided for project investment and financing, project operation, and risk management in the fields of environmental protection, energy conservation, clean energy, green transport, green building, etc. These guidelines, in theory, allow local governments some latitude to interpret or redefine the scope of their implementation.

To further clarify “green” standards and boundaries, the NDRC, the PBoC, and five other regulatory authorities jointly promulgated the revised Guidance for Green Industry Catalogue (2019 Edition) (《绿色产业指导目录（2019年版）》) (“2019 GGIC”), which covers six categories, namely energy-saving and environmental protection industries, clean production industries, clean energy industries, ecological and environmental industries, infrastructure green upgrades, and green services. Local governments and relevant regulatory agencies are requested to base their investment, price, financial, and taxation policies and development priorities on the 2019 GGIC. If a company operates in any industry covered by the 2019 CGIC, it may be more eligible for related preferential policies than its peers which are not in the industries covered by the 2019 CGIC.

On February 29, 2024, the NDRC, the PBoC, and the CSRC, in collaboration with seven other regulatory authorities, further released the 2024 Edition of the Catalogue of Industries for Green and Low-Carbon Transition (《绿色低碳转型产业指导目录（2024年版）》) (“2024 Green Industry Catalogue”), which is developed upon the 2019 GGIC but reflects a strategic shift towards prioritizing high-tech industries and environmental concerns. The 2024 Green Industry Catalogue is a key reference document for regulatory authorities to devise supportive policies for the advancement of green sectors in China and offers guidance for banks and financial institutions on facilitating green financial tools and instruments, such as green loans and green bonds.

Green Finance Instruments

China has established a fairly comprehensive system of green financial instruments, which encompasses well-established instruments such as green loans, green bonds, green funds, green trusts, green insurance, etc., as well as other emerging financial products, such as green leasing and secured financing using discharge or emission allowances as collateral. Among them, green loans and green bonds are two major types of financial instruments.

Green Loans - Green loans, have been and are expected to remain, a primary driving force in shaping the current green financial market. The PBoC conducts quarterly assessments of twenty-four major banks on their green finance performance, currently focusing on green loans (including green credits), with potential to expand to other areas of green finance in the future. Such assessments are incorporated into the PBoC’s ratings of the banks, on top of the PBoC’s assessment based on other policies and management tools.

Green credits, as one of the major forms of green loans, are the earliest, largest, and most mature green instruments in China. In 2012, the then China Banking Regulatory Commission (“CBRC”), which has been restructured and renamed the National Financial Regulatory Administration, unveiled the Green Credit Guidelines (《绿色信贷指引》) (“GCG”), which sets out the first normative document of the green credit policy in China. The GCG requires banks and other banking institutions to integrate environmental risks into their credit decision-making processes and to strictly regulate the flow of capitals into industries characterized by significant pollution and substantial energy consumption. In addition, it requests banks to conduct full-scope evaluations concerning green credits and submit a self-evaluation report to the CBRC at least every two years, and it also encourages banks to obtain third-party assessments and audits when necessary.

After the release of the GCG, the CBRC further promulgated a number of policies and guidelines to enhance the oversight and regulation on green credits, which include the Supervisory Guidelines for Performance Appraisal of Banking Financial Institutions (《银行业金融机构绩效考评监管指引》), the Green Credit Statistic System (《绿色信贷统计制度》), the Key Evaluation Indicators for the Implementation of Green Credit (《绿色信贷实施情况关键评价指标》), etc. These documents further set the groundwork for a green credit statistics system in China that mandates banking institutions to report green credit statistics regularly.

Green Bonds - As a source of long-term financing, bonds enable green industries and projects to spread their liabilities over entire life cycles of projects, providing enduring support. Since its launch in 2016, China’s green bond market has grown significantly in size and is currently ranked as the second largest in the world, exhibiting consistent growth over the years, partly due to the increasingly sophisticated standards established by the regulatory authorities regarding the definition and classification of green projects that have ensured that funds raised through green bonds are actually channeled into green initiatives.

Notably, the PBoC, the CSRC, and the NDRC jointly released the revised version of the green bond catalogues in 2021 - Catalogues of Projects Eligible for Green Bonds Endorsement 2021 (《绿色债券支持项目目录（2021年版）》), in which “clean coal” projects were removed from the list of sectors eligible for financing through the issuance of green bonds, compared with the previous version of the catalogue.

In September 2022, the Green Bond Standards Committee, the administrative organization formed by the PBoC, the CSRC, and other competent authorities responsible for the evaluation and certification of green bonds, designated 18 agencies as China’s first officially approved green bond evaluation and certification institutions. The goal is to establish a cohort of independent, professional, and market-reputable third-party institutions to help promote the standardization of green bonds and effectively combat activities such as “greenwashing”, thereby boosting market growth. In practice, green bonds that are assessed and accredited by a third party are more likely to attract funds, due to their green credentials.

Local Initiatives and Developments

China has designated nine green finance pilot zones in six provinces in 2017 and 2019. Located across different regions of China, the pilot zones are intended to experiment with different policies and identify which can be implemented nationwide. These pilot zones represent further efforts to incorporate localized, bottom-up pilot projects into China’s traditional top-down policy design.

One fine example of the green finance pilot zones was the pilot zone located in Guangzhou’s core area Huadu District. The pilot zone was set up in 2017 and mainly designated with the following tasks:

1) exploring the establishment of the green financial business system and rating system for financial institutions and encouraging banking institutions to adopt the “Equator Principles”, which are a set of voluntary guidelines adopted by financial institutions worldwide to ensure that large-scale development or construction projects give appropriate consideration to the associated potential impacts on the environment and communities;

2) developing green financial products and services, especially green credit products in the areas of ecological agriculture, city construction, and polluted water; and

3) improving the capacity to identify new risks in green finance and emphasize early alert, prevention, and resolution of risks.

Other pilot zones, such as those in Zhejiang Province and Xinjiang Uygur Autonomous Region, are also equipped with their own development focus, serving as both innovative regional development models and benchmarks for China’s green financial progress.

Concluding Remarks

Overall, China’s green finance market is at a nascent stage but is supported by the development of its green finance system, which is currently characterized by top-down policy design and bottom-up local initiatives. As China continues to prioritize the development of a green and low-carbon economy, more regulatory guidelines and policies are expected to be formulated to intensify the oversight on financial institutions to ensure that funds genuinely flow into sustainable projects and to better align domestic regulations with international standards in the green finance market. Thus, with environmental risk management becoming an integral part of China’s green finance framework, foreign investors are strongly advised to stay alert and assess and manage environmental risks in their investment portfolios to ensure full compliance with the green financial criteria incorporated into the supervisory frameworks of China.