Daily Times

In today’s world, China is experiencing severe environmental issues on account of significant industrial development. With a view of achieving the transition to environmentally sustainable economic growth, China spent enormous efforts in promoting “green finance” initiatives and pursued a comprehensive but coordinated approach to accelerate its integration of these initiatives into its financial system for the last decade and a half.

Green finance refers to the economic activities that support the improvement of the environment, which can help countries cope with climate change and optimally use the resources. In other words, it is the investment, financing and risk management of projects focused on environmental protection, energysavings, clean energy, green transportation and green building financial services.

The concept of green finance in China was introduced in 2007 when the China Banking Regulatory Commission launched its “guidelines on credit protection for energy conservation and emission reduction”to formulate a credit policy for high energy-consuming, high-pollution industries, and to support energy-saving and emission-reducing industrial projects.

In the preliminary development stage of green finance in China, green credit policies were formulated during the period from 2009 to 2014. In pursuit of these initiatives, green finance entered into a large-scale development. As a result, China announced a plan in 2016 to establish a national green finance mechanism, representing as the first country to step in a movement to help push green finance in the country and on the G20’s agenda.

According to the annual report of the Climate Bond Initiative, the green bond market grew from $36.2 billion in 2016 to $42.8 billion in 2018

The implementation process of green finance policies in China are categorised into three phases and summarised below:

As part of its strategy, China introduced various initiatives and reforms aimed at greening its financial system to increase investments in this space. Some of the important reforms that China made were to promote green credit, green development funds and a green bond market to speed up the country’s investment in sustainable infrastructure for energy, land useand urban development.

Among the various initiatives, green bonds have shown the most rapid progress since the release of the reforms. According to the annual report of the Climate Bond Initiative, the green bond market grew from $36.2 billion in 2016 to $42.8 billion in 2018. In line with the objectives, Chinese firms also raised funds through the issuance of green IPOs, which is still an underdeveloped area wherein the Chinese firms have the potential to generate funds.

(Source: China Financial News Green Bonds Database)

The experience of Chinese success in green finance can be used by other Asian countries. Pakistan introduced its green banking policy in late 2017 and currently, banks are at the infancy stage of implementation. It is important for regulator(s) to arrange training sessions for both banking professionals and borrowers to increase awareness of the terms and conditions associated with this mode of financing. Also, the State Bank of Pakistan should closely monitor the green financing industry and help devise more incentives for financial institutions to promote this type of financing.

Pakistan should formulate a strategy whereby companies can issue green bonds to financial institutions to raise funds. To achieve the desired objectives of green finance, the Securities and Exchange Commission of Pakistan (SECP) should also formulate a mechanism for the issuance of green IPOs for onward trading through the Pakistan Stock Exchange (PSX).

These initiatives will not only overcome the environmental issues in the country but also help provide an opportunity to raise funds under the green finance scheme. To formulate these strategies, Pakistan may collaborate with the Chinese government and experts to help build a framework for initiating green bonds and IPOs, respectively. Regulators should consider the risk management practices that may reduce the probability of default in new ventures.Under the financial literacy programme, SECP and PSX are also required to organise workshops for a better understanding of green finance.

Pakistan should look to incorporate many of the significant features of Chinese green policies to devise its own green finance mechanism with regard to its issuance of green bonds and IPOs, which will, in turn, help green companies raise funds and complete projects that are cognisant of the environmental impact of their actions.

The writer is associated with the School of Social Sciences and Humanities, National University of Sciences and Technology, Islamabad