Polaris solar PV net news: many green industries are medium-and long-term projects, such as sewage, solid waste, energy, subway, railway, the repayment period of the project is ten or even 20 years. Many countries rely on the banking system to finance green projects, but the banking system will be restricted by the maturity mismatch.
Due to the lack of definition of green financial products, investors do not know what green projects and green assets, even if it wants to invest in this area, it is difficult to identify investment targets. A case study of green credits, only three countries in the world have a clear definition.
27th June Ma, Chief Economist for the Bureau of people’s Bank of China research by the Chinese finance 40 Forum and its northern new finance Institute jointly organized the first “green Finance Forum in Tianjin”, said many countries around the world will require massive investment in green, to address environmental and climate challenges, but fall far short of the demand for investment in green investment. He summed up the global green five challenges for financial development, and considered measures to cope with challenges from four aspects.
Green Investing is far from meeting the investment requirements
Ma said that as Chair of the 2016 G20 countries, China will green the financial G20 issues, and promote the establishment of green finance research group, research on how to promote green finance for development according to its own characteristics, improve the greening of global financial institutions and capital market to the green industry’s ability to allocate resources. In July 2016, green finance team to Chengdu G20 Finance Ministers and Central Bank Governors of the G20 green comprehensive financial report was submitted.
In this process, green finance team did a series of works. First of all, why promote green finance in the world. As in China, many countries around the world will require massive investment in green, to address environmental and climate challenges. Actually happened so far fall far short of the demand for investment in green investment.
From the Green credits in terms of size, there are only three countries have a formal green credit statistics, China is one of them, the other two are Brazil and Bangladesh. Green credit in the proportion of China’s total loan balance is 10%, Brazil is 10%, Bangladesh is 5%; from the green scale in the bond market, the current “labeling” green bonds of less than 1% of total global bond. The size of the assets from the Green, while the current global statistics are not complete institutional investors how much assets into low-carbon green, but in some statistics from countries, such as Australia, only 2%-3% of the assets are held by institutional investors of “low carbon”.
Five major challenges facing global green finance development
Green finance has tremendous potential for development. It is imperative that figuring out what Green challenge for the financial development is, and propose measures to meet the challenge. Ma believes that green finance faces five major challenges.
A green project internalization of the externality problem. To cite an example, a clean energy project’s effect is to reduce air pollution, within 300 kilometers of residents can benefit. But the residents do not have to pay for this project to benefit, so the positive externalities of this project have not been completely endogenous, making the project rate of return is not very high, probably less than the required rate of return in the private sector. Therefore, the private sector less willing to participate in such positive externalities are not endogenous green projects.
The past few decades, countries have used many ways to deal with external issues. Fiscal instruments such as direct subsidies to the project or projects use regulatory means to limit pollution, forcing financial institutions to devote more resources to the green industry. But the last more than 10 years, we found that field there is a lot of financial means available to help the externalities internalization of green investment. Are some green projects can, for example be subsidized to reduce its financing costs, thereby improving yields; guarantee for green projects, reduce their risk premium, thus reducing their financing costs and improve yields; or by means of PPP, higher yielding around project bundling operation with low yields of green projects, improve their overall investor returns.
Second, green project maturity mismatches. Green industries are medium-and long-term projects, such as sewage, solid waste, energy, subway, railway, a lot of the repayment period of the project is ten or even 20 years. Rely on the banking system in many countries provide financing for green projects, but the banking system will be restricted by the maturity mismatch. For example, China’s banking system average debt maturity of six months, so its very limited capacity to provide medium-and long-term loans, which hinders its medium-and long-term financing green projects capability, easy or medium green project financing, financing an expensive problem.
Many approaches to international development, such as green bonds market. Green bond market last year, China had not, but this year it has become the world’s largest. It was a very important way to resolve the maturity mismatch, and can have long-term projects in both direct the issuance of three-, five-or ten-year bonds, also enable the banks to issue medium-and long-term green of green bonds to support the medium-and long-term loans. There is a method in the United States is more popular, similar to real estate REITs, the proceeds from future Green most of the assets are in the form of dividends paid to shareholders on a regular basis an equity tool, you can also access to medium and long-term financing for green projects. Another approach is the proceeds of future green projects, including energy efficiency contract revenues, gains, emissions and emission of carbon, as collateral and collateral to obtain bank loans or bonds.
Third, lack of green definition. Due to the lack of definition of green financial products, investors do not know what green projects and green assets, even if it wants to invest in this area, it is difficult to identify investment targets. A case study of green credits, only three countries in the world have a clear definition. Green bonds aspects, global currently only several defined, a is GreenBondPrinciples, II is CBI of defined, third is China financial learned green financial professional Committee of green bonds support project directory (2015 version), national NDRC recently also developed has a 12 a category of green project directory, but many national of green debt market also no himself of defined, also no clear to used GBP, international standards. In a sense, leading the efforts made in connection with the definition of China, but have not done enough in this regard. Efforts in this respect has only just begun.
Four is the asymmetry of information. Some investors want to find obvious environmental benefits of green investing, but lack of judgment of the related enterprise and project level, because these companies tend not to disclose, such as carbon dioxide, sulfur dioxide, sewage discharge and energy consumption information. If you have quantitative data, capital markets will be able to identify which project or enterprise is dark green, which are light green, which is Brown, which is black. Only the disclosure of these data, capital markets for these companies can use a variety of methods of environmental benefit assessment, sorting or green. So, must strengthen the disclosure of environmental information to meet the challenge of asymmetric information. So far the world over more than 20 stock exchanges issued guidance on environmental information disclosure of listed companies, but mandatory disclosure of stock exchange is not.
Five is the lack of environmental risk analysis capacity. For example, some financial institutions have underestimated the investment in polluting industries to pose a risk. Such as steel, cement, chemicals, glass and other industries that, since there is no estimated rate may exceed expectations in the coming years, which caused some financial institutions to provide loans to polluting industries too much. In addition, since there is no estimate on the Paris agreement required by global carbon reduction target will result in the value of oil companies have oil reserves will fall dramatically, some institutional investors may be overly invested in oil companies, a high carbon intensity of enterprises. For example, some institutional investors and banks have not fully estimate the potential long-term benefits of investment in green industries, but overestimate these risks to the project, so the Green there is excessive risk aversion, not willing to invest. Faced with these problems, it is necessary to strengthen research and promotion of environmental risk analysis methods.
Financial development challenge of dealing with green measures
Ma introduced the Green finance team proposed specific measures to address these challenges.
First, it provides a policy signal. Research Group’s response is called for policies to support green investment signals provided by States. The world’s two largest green investment signals is SDG (sustainable development) and the Paris agreement. These are the States a principled commitment to sustainable development and climate change. However, these principled commitment should be translated into country-specific programmes of action in the future. If major countries to release five years, ten years or 15 years implementation of the action programme of the Paris agreement, green investment will play a significant role in boosting confidence. China can be considered the first to do this thing.
Second, the principle of promoting green finance. First of all, the Equator Principles. The main contents of the Equator principles are guiding the banking industry how to manage environmental risk in project financing. In addition there is also a United Nations principles for responsible investment, an important element of which is institutional investors in the investment decision must take into account the environmental impacts arising from their investment, to evaluate its investment environment is conducive to environmental protection or increase the pressure. Meanwhile, institutional investors as shareholders of listed companies, has a responsibility to require the invested enterprises to fulfill their corporate social responsibility, the economic activity of the enterprise must take into account the impact on the environment.
Third, the development of green of local currency bond markets. Green bond market maturity mismatch problem can be solved. Internationally there are one in the OECD countries and some developing countries through open green market, the majority of the market participants follow GreenBondPrinciples. Capital projects in these countries are basically open, easy financing in the same market. But there are also many emerging-market countries, capital projects are not completely open, and some national environmental policy priorities with OECD countries are not the same, definition of green bonds need to be localized. These countries need to develop their own green of local currency bond markets. Now, India, and Indonesia, some Latin America and other countries and regions are planning to develop their own green of local currency bond markets.
Finally, to strengthen capacity-building. Many green jobs in the financial sector requires financial institutions to have strong environmental risk analysis and management capacity, as well as the ability to develop new products. Some countries in these areas is quite strong, and there are a lot of countries relatively late, so international experience sharing and enhanced capacity-building for global green finance will play an important role in promoting development. IFC operates a sustainable Bank network (SBN), have been trained in the past few years more than more than 20 State banking regulators and Banking Association, helped them to form the country’s green credit principles, it is very important for green credit capacity-building. Green finance team believe can continue to expand the role and influence of SBN, to cover more countries, more financial institutions.
Original title: financial development urgent need to deal with five global green challenge