As the European Commission works to elaborate its Sustainable Finance Action Plan; with the aim of encoding sustainability into the DNA of the European financial system, it is useful to look to the experience of China, which has become a leading case study in greening a national financial system over the past years. Green finance has moved from a niche concept to the mainstream over the last decade, with China leading the way through the establishment of a sweeping 14 principle plan to create a domestic green financial system.
The People’s Bank of China (PBoC) estimates that an annual investment of at least RMB2tn-4tn (USD320bn-640bn) will be required to address environmental and climate change issues. This investment proposition is clearly related to China’s challenges and emergent solutions related to fostering economic growth and development in the face of pressing environmental and resource concerns, framed by urbanization, governance and financial market development initiatives.
A major element in the evolution of China’s role has been its recent nurturing of a massive green bond market, which functions in parallel to the green loan operations of the principal state development and commercial banks. As an indicator of the scale and pace of change, the Chinese green bond market has become the fastest growing and largest globally with over USD 90 billion of issuance since the PBoC moved to create a green financial system in 2015.
Chinese issuance peaked in 2017
An analysis of moving Last Twelve Months (LTM) of green bond issuance shown in Figure 1 visualizes how over the last years the Chinese green bond market has featured around USD 30 billion of issuance per year (from Chinese domiciled issuers). Chinese issuance peaked twice at USD 34 billion in 2017 but has been falling since, dropping back through the USD 30 billion level over the summer as deleveraging efforts increased domestically.
At the same time, cumulative LTM figures for Europe (ex-Nordics) have been rising continuously over the last two years to reach USD 53 billion before dipping over the summer back to USD 51 billion, and the Nordics have almost tripled their contribution since October 2017 to USD 17 billion. This has been driven by European corporates, financial institutions and sovereigns, alongside increasing policy attention; as the European Commission adopted its sweeping Action Plan on Sustainable Finance and the Technical Expert Group on Sustainable Finance (where SEB is a member) started its work in July on making proposals in relation to the priorities of its Action Plan on sustainable finance.
At the same time, as can also be seen in Figure 1, LTM issuance from Asia-ex China has almost tripled over the last year, briefly passing Supranationals as a category to touch USD 14 billion in June, with Japan, South Korea, Indonesia, Hong Kong, Singapore, Malaysia and others making increasingly significant contributions as some of these economies add policy incentives to stimulate the market, following China’s lead.