Advancing sustainable growth in the United States and China

The Green Team Speaks to…MO LINGSHUI


Lingshui Mo is the climate and energy policy expert, Asian Development Bank (ADB), working on carbon market, low carbon city development, green finance, low carbon technology transfer and finance. She provides technical advice and develops knowledge products to assist ADB in regional carbon market development, carbon finance, pilot low carbon city program, establishing climate technology financing mechanisms, and supporting implementation of NDCs in ADB’s Developing Member Countries (DMCs).

Before she worked for ADB, she was the Qualification Director at Camco Carbon Credit Limited (China), where she managed the team to develop the qualified China’s Clean Development Mechanism (CDM) projects portfolio. From 1991 to 2003, she worked in Guangxi Development and Reform Commission.

  1. What are three trends ahead for green finance?

First, there will be a move to find ways to internalize the positive externalities of green investment into higher financial returns to attract commercial financial institutions and private sector actors to invest in green projects. With institutional innovations and policy support, it is possible. For example, currently, green costs and benefits are incorporated in both income statements and balance sheets of enterprises. Change requires reform and innovation of the existing accounting system and the creation of tax incentives for green investment to ensure that green investors and financial institutions can expect returns from such investment.

Second, the standardization trend for green finance is beginning due to the rapid expansion of the demand and the market. It is needed to ensure long-term and sound development of green finance. The People’s Bank of China, the China Banking Regulatory Commission, and the Standardization Administration of China jointly issued the policy that designated “standardization of green finance” as a priority project in China’s drive to standardize the financial sector in the 13th Five-Year Plan period. This includes the harmonization of the standards defining the “greenness” of projects, commercial activities and assets, standardization of green certification and information disclosure, and the alignment of global green finance standards.

Third, increased private capital focused on green investment will drive the innovation of green finance products/services. The State Council has emphasized that green finance zones were to encourage small loan and financial leasing firms to get involved in green finance, to support domestic and international VCs and PEs to invest in green projects, to explore models of financing with environmental rights that use project income rights and pollution rights as the collateral or pledge. This mandate suggests innovations in green financial product/services should mainly serve SMEs in their green investments and channel private capital to green industries and projects.

  1. The BRI has been around for a few years now and the projects are really beginning to take shape. China has made clear that the BRI will be green, but as these projects develop, are there reliable ways to determine how compliant they are with green standards?

Countries along the B&R have different development levels, technology levels, environmental standards, environmental capacities, and governance priorities, which has led to disparate green standards and the discrepancy in pollution mitigation needs. Therefore, in measuring the greenness of investments, standards should be consistent, yet applicable to different conditions, and integrated for qualitative and quantitative indicators to ensure comparability.

Beyond that, BRI investments should be in compliance with the laws, regulations and environmental standards in destination countries and not supported by the industrial policies of the destination countries. Investments should also be in line with environmental protection and climate change strategies of the destination countries to help in achieving international commitments. As such, these investments increase the sustainability of destination countries—that is bringing extra environmental benefits to the country measured as the extra emission reduction on top of the average level of the industry in the country due to the investment. This criteria should be the only bar against which the greenness of investments is measured, but a quantitative framework is needed to assess and ensure the consistency and comparability.

As investments in the BRI proceed, the process of harmonization is important for standards governing how to measure green benefits and green rating methodologies. There is a need to unify the methods for identifying baseline scenarios and for calculating baseline emissions and project emissions to more accurately evaluate green benefits. Green rating methodologies are in a similar position, which institutions like the ADB are exploring.

  1. What do you see as the biggest challenge to green investment in B&R countries so far?

The first and biggest challenge is that B&R countries do not have a set of unified standards to define “green” investment. Without a unified definition, investors and financial institutions will find it hard to differentiate between green and non-green investments, causing environmental risks, and increased miscommunication between China and its B&R partners. China’s definition of “green” sometimes deviates from international norms—i.e. investment in coal-fired power plants.

A second challenge is the lack of a regulatory framework to provide a set of standards to define greenness and assess green benefits for stakeholders. For instance, integrating green asset evaluation with fixed assets evaluation would require firms to assess green benefits of projects and disclose relevant green returns. Financial institutions could require the disclosure of environmental and social risks, and green returns of financed projects. Projects and firms with flawed green investment assessment or none at all would not receive financing from financial institutions, or an investment license from the government. In parallel, incentives will be designed to encourage green investment, including low-rate or subsidized loans and tax credits.

The establishment of a common set of BRI green standards is an area of shared interest for China and B&R partners, and as such, there should be strengthened communication and cooperation channels to ensure the applicability and efficacy of such standards and methods and also a prioritized emphasis on green standards in important BRI infrastructure projects. Efforts such as leveraging international cooperation mechanisms and windows—existing bilateral, multilateral, and south-south cooperation mechanisms—and relevant international organizations and institutions to facilitate exchanges and dialogue among countries would greatly move the needle. Further, if green investment assessment could be applied to existing B&R infrastructure projects: industrial parks, industrial development bases, and economic corridors (such as the China-Pakistan Economic Corridor), then it would go a long way in addressing the challenges to greening the BRI.

Finally, capacity building in green investment should be strengthened. Besides building the capacity of China and B&R stakeholders to identify green investment, a green financial system should also be created to support such investment. Green finance is a relatively new concept. Many relevant financial instruments and products have only taken baby steps internationally. Experience in green finance products development, institution building, and policymaking is still concentrated in a handful of countries. Therefore, we need to boost international exchanges and share international experience in green finance to enable all countries to have sound green finance development, boost green investment, and facilitate economic green transformation.

  1. ADB is a leading advocate for blended finance mechanisms to encourage the use of public and private funds for green projects. Could you briefly explain the concept and provide your views on if it can be helpful in mainstreaming green finance?

The core of the blended finance mechanism is to bring together finances at different costs, including premier debt facilities, grants, public and private funds, to finance green projects or green operations, aiming to reduce the front-end capital cost and mitigate risks. It can be regarded as a form of joint-financing by both public and private sectors, to channel private funds into green projects by leveraging low-cost, even zero-cost public funds. Blended finance is feasible in many ways, such as the facility mechanisms at the pooled vehicle level and the project level. Moreover, ADB proposed to convert green benefits coming from the green projects into subsidies, to ensure a certain ROI (such as 12% of IRR).

This is helpful in mainstreaming green finance in three ways. First, it promotes diversified finance channels by trying to combine funds from different sources, at different costs, and with different expected returns to realize the full potential of each source of finance—creating an innovative form of joint-financing for green development. Second, by leveraging blended finance, a project can more easily satisfy both environmental and economic sustainable requirements—reducing capital cost, environment benefits tying to income subsidies—that not only help advance official green development goals, but also meet private sector desired returns. (Truly a green finance innovation!) Lastly, blended finance can fully leverage preferred financial instruments, including debt facilities, grants, and public funds to mobilize private funds for green project development.

  1. Which living person do you most admire and why?

I admire Dr. Lu Xuedu, who has always been committed to carbon cap-and-trade, climate finance, low-carbon urban development, and the transfer and extension of climate technologies. He participated in the negotiations for the United Nations Framework Convention on Climate Change and the Kyoto Protocol as a member of the Chinese delegation and is hailed as the living history of climate change negotiations. He also worked for 8 years as a member of the UN CDM Executive Council, where he was a leader in this endeavor, making tremendous contributions to the development of China’s carbon market. He led me into the fields of carbon trade, carbon market analysis, and green finance. I admire his great initiative and humility. Both in success and failure, he has always been calm and steady, a rare and admirable quality.

Topics: Green Finance