Advancing sustainable growth in the United States and China

A Critical Imperative: Building a New Global Infrastructure for Green Finance


By Deborah Lehr

Workers maintain the planted rooftop of a building in Beijing. (Luo Xiaoguang/Xinhua)
Workers maintain the planted rooftop of a building in Beijing. (Luo Xiaoguang/Xinhua)

 

“The world is facing serious environmental challenges. We need to make stronger commitments to addressing them,” said China’s central bank governor, Zhou Xiaochuan. “We have tried many ways, including environmental regulations, pricing reforms, and fiscal policies. These have all worked in some way in controlling pollution and slowing the pace of global warming but they are not enough. The financial system should also play an important role in promoting the green transformation of our economies.”

This call to action kicked off the Paulson Institute’s symposium, “Green Finance: A Growing Imperative,” on April 16. A diverse group of leading thinkers on finance, economics and the environment came together on the margins of the spring meetings of the IMF/World Bank to provide input into the critical efforts of the G20 Green Finance Study Group to develop mechanisms to promote the financing of environmentally sustainable projects. China launched this initiative as part of its Presidency of the G20.

China has already launched an ambitious plan for its own domestic green finance efforts, including the issuance of the first catalogue for green bonds at the end of last year. “In China, establishing a green finance system has become a national strategy,” Governor Zhou noted at the conference. In the first quarter, China’s issuance of green bonds amounted to about 50% of the world’s green bond issuance. China is rapidly becoming the world’s largest green bond market, which is essential to meeting the financial costs necessary for implementing China’s commitments in the Paris Climate Summit.

China estimates that it will cost between $600 billion to a $1 trillion annually for the next five years to green its economy, but the government is only capable of covering 10-15% of those costs. China’s position is not unique. While the scale may be larger given the size of China’s economy, the biggest challenge to the international community’s ability to attain targets set at the Paris Climate Summit will be the ability to finance energy-efficient technologies and the transition to low-carbon economic models.

It is essential therefore that innovative funding products and vehicles be developed to help governments cover these costs. “The issue is not that capital is scarce. It is rather that the abundant capital that exists globally needs to be allocated appropriately to low-carbon sectors that can also generate new sources of economic growth and create new jobs,” said Paulson Institute Chairman Hank Paulson at the event.

Experts estimate that trillions of dollars could be channeled into green project financing if effective and appealing financing structures are created. But to move the green investing community beyond a “cottage industry,” as eloquently stated by one symposium attendee, a new financial infrastructure must be built. To attract capital on a consistent basis, the infrastructure must include agreed upon definitions of “green,” creation of green indices, increased coordination and cooperation among multilateral development banks, and the identification of appropriate green projects.

Governments have a critical role to play as well. Policy leadership is needed to create the right regulatory structure for green finance, establish incentive programs for promoting green methods and devise and implement standards that encourage the development of a broad variety of green projects.

The Green Finance Committee of the People’s Bank of China, SIFMA, Bloomberg Philanthropies and UNEP co-hosted this important project with the Paulson Institute. It is one aspect of a broader Paulson Institute green finance initiative, which includes capacity building for the Chinese government on green finance, creation of a Green Building Energy Efficiency Fund, and support for the G20 Green Finance Study Group.

Deborah Lehr is a senior fellow at the Paulson Institute.

Topics: Green Finance