Green finance regulation in China

As global climate change accelerates, extreme weather events are expected to become more frequent. According to a report issued by Swiss Re, the global economy could lose 10% of its total economic value by 2050 due to climate change, and if no action is taken and global temperatures rise by 3.2°C, up to 18% of GDP could be wiped off the worldwide economy by the middle of the century. More and more economies have reached a consensus that climate change-related risks have become economic and financial risks.

To address the risks arising from climate change, governments have taken measures accordingly, and China is no exception. In September 2020, China announced that it would aim to reach a peak in its carbon dioxide emissions before 2030 and achieve carbon neutrality by 2060. Given China’s scale, and the need to balance economic development and emission reductions, the transition to net zero presents significant challenges. China has now prioritised the development of a green, low-carbon, and circular economy.

According to the UN Environment Programme, “green financing is to increase [the] level of financial flows (from banking, micro-credit, insurance and investment) from the public, private and not-for-profit sectors to sustainable development priorities”. For many years, green finance was only a small area of the investment world, but today, with the public’s focus on creating a sustainable economy, it is coming into the spotlight.

As one of the pioneers, China has been promoting and advocating the concept of green finance. The People’s Bank of China (PBOC), together with other state ministries, jointly issued the Guidelines for Establishing the Green Financial System (the Guidelines) in August 2016, which define green finance as “financial services provided for economic activities that are supportive of environment improvement, climate change mitigation and more efficient resource utilization. These economic activities include the financing, operation and risk management for projects in areas such as environmental protection, energy savings, clean energy, green transportation, and green buildings.”

Green finance provides solutions to bridge the gap between supply and demand for a sustainable economic transition and directs financial resources to facilitate green and environmentally friendly economic activities.

China has made substantial progress in green finance in recent years. China’s green finance development is characterised by a unique approach – a top-down policy framework initiated and guided by the regulatory authorities. The framework aims to compel financial institutions and markets to achieve a high standard of development in the field of green finance.

In recent years, regulatory authorities have continually issued and/or updated regulatory policies relating to green finance, promoted climate change finance and investment, and provided support for green finance reform.

In July 2007, the State Administration of Environmental Protection (now the Ministry of Ecology and Environment), the PBOC, and the China Banking Regulatory Commission (CBRC, now the National Financial Regulatory Administration, or the NFRA) issued the Opinions on Implementing Environmental Protection Policies and Preventing Credit Risks (the Opinions 2007), which marked the initiation of China's efforts to construct a framework for green credit policies.

The Opinions 2007 emphasises the need to:

• Enhance coordination between environmental protection and credit management;

• Strengthen the supervision of environmental protection and credit management;

• Strictly adhere to credit environmental protection requirements;

• Promote pollution reduction; and

• Mitigate credit risks.

Financial institutions are required to rigorously assess, approve, disburse, and supervise loans in accordance with national regulations for environmental protection in construction projects and information provided by environmental protection authorities. Any form of new credit support is prohibited for projects that have not received environmental impact assessment approval or passed inspections for environmental protection facilities.

In February 2012, the CBRC issued the Green Credit Guidelines, which provide the principal requirements for banking institutions to advance the development of green credit business.

The Green Credit Guidelines emphasise that banking institutions shall:

• Strategically promote green credit;

• Intensify support for the green economy, the low-carbon economy, and the circular economy;

• Mitigate environmental and social risks;

• Enhance their environmental and social performance; and

• Use these measures to optimise credit structures, improve service levels, and facilitate a shift in development patterns.

Furthermore, banking institutions are required to effectively identify, measure, monitor, and control environmental and social risks in credit activities; establish a comprehensive environmental and social risk management system; and refine related credit policies and process management.

The Guidelines provide a definition of “green finance” for the first time, and define a “green financial system” as “the institutional arrangement that utilizes financial instruments such as green credit, green bonds, green stock indices and related products, green development funds, green insurance, and carbon finance, as well as relevant policy incentives to support the green transformation of the economy”.

The Guidelines set forth several policy incentives aimed at encouraging and supporting green investment, including:

• Re-lending and specialised guarantee mechanisms for green credits;

• Financial discount support for green loan-supported projects;

• The establishment of green development funds; and

• The introduction of the public-private partnership model in green industries.

The Guidelines place a strong emphasis on the establishment and enhancement of unified rules and regulations governing green bonds, along with initiatives to mitigate the financing costs associated with these bonds. Additionally, the Guidelines aspire to develop standards for third-party evaluation of green bonds and green credit ratings, and actively support qualified green enterprises in obtaining financing through IPOs and secondary offerings. Furthermore, the Guidelines extend support for the development of green bond indices, green equity indices, and related financial products, and provide for the gradual establishment and refinement of a mandatory environmental information disclosure system for listed enterprises and bond issuers.

The Guidelines also emphasise the development of green insurance and different kinds of carbon finance products, and require a further expansion in international cooperation in the field of green finance, the two-way opening of the green securities market, and the ‘green level’ of outbound investment from China.

On June 1 2022, the China Banking and Insurance Regulatory Commission (now the NFRA) issued the Guidelines for Green Finance in the Banking and Insurance Sectors (the Green Finance Guidelines), which were developed based on the Green Credit Guidelines. The Green Finance Guidelines expand the green credit to green finance and provide comprehensive and clear guidance on ESG-related obligations of financial institutions.

Before the issuance of the Green Finance Guidelines, there were regulations providing guidance on the fulfilment of environmental and social responsibilities by insurance institutions. However, these regulations lacked a comprehensive and clear framework specifically tailored for insurance companies. The Green Finance Guidelines marked a milestone by, for the first time, incorporating insurance institutions into the green finance regulatory framework and outlining requirements tailored to their operations.

The Green Finance Guidelines broaden the scope of applicable business to encompass all categories of green finance activities conducted by banks and insurance institutions. They introduce ESG risk management for the financing of small enterprises, online financing, and other business. The Green Finance Guidelines also put forward explicit and detailed requirements regarding the organisational structure of banks and insurance institutions.

In contrast to the Green Credit Guidelines, which primarily concentrate on environmental and social risks, the Green Finance Guidelines introduce a broader perspective by mandating that banks and insurance institutions address environmental, social, and governance risks. Specifically, there is an emphasis on evaluating the hazards and risks arising from the construction, production, and operational activities of customers (financing parties), as well as their primary contractors and suppliers. These assessments are particularly geared towards identifying risks associated with corporate governance deficiencies and inadequate management practices.

Building upon the foundations set by the Green Credit Guidelines, the Green Finance Guidelines extend disclosure obligations to include green finance-related content. They require banks and insurance institutions to enhance information disclosure by referencing international practices, guidelines, or other commendable approaches.

Additionally, the Guidelines stipulate the necessity for financial entities to establish a robust assessment system and a mechanism for incentives and penalties for green finance, and require the implementation of relevant measures, the enhancement of due diligence practices, and the establishment of liability exemption mechanisms to ensure the ongoing and effective implementation of green finance.

Green bonds stand out as the most notable example of China’s green finance ambitions. The Chinese green bond market, which witnessed virtually no issuances in 2015, has rapidly grown to become one of the most active markets in the world.

In April 2021, the PBOC, the National Development and Reform Commission (NDRC), and the China Securities Regulatory Commission jointly issued the Green Bond Endorsed Projects Catalogue (2021 Edition) (the Green Bonds Catalogue 2021), which is an update of the Catalogue of Projects Supported by Green Bonds (2015 Version) and is aligned with international standards for identifying and selecting projects, while also enhancing compatibility with other existing domestic standards governing green economic activities.

In July 2022, the Green Bond Standards Committee issued the China Green Bond Principles (the Green Bond Principles), which is the first unified standard for China’s green bond market. The Green Bond Principles are formulated with reference to the International Capital Market Association’s (ICMA’S) Green Bond Principles and in light of the situation in China.

In terms of the four core elements of green bonds, the Green Bond Principles are consistent with the ICMA Green Bond Principles and the Climate Bonds Initiative’s Climate Bonds Standard, which include use of proceeds, project evaluation and selection, management of proceeds, and reporting.

With the introduction of the Green Bonds Catalogue 2021 and the Green Bond Principles, the domestic green bond standard system has been further improved.

Green credit is the earliest, largest, and most mature green instrument in China. As mentioned above, as early as 2007, China’s regulators issued the Opinions 2007 to strengthen the coordination between credit management and environmental protection, which, together with the Green Credit Guidelines and the Guidelines, constitute the basic policy framework for green credit. Additionally, the regulators issued several policies with respect to the evaluation of green credit, such as:

• Key Evaluation Indicators for the Implementation of Green Credit;

• The Implementation Programme for the Evaluation of Green Banks in China’s Banking Sector (Trial); and

• The Circular on the Evaluation of Green Credit Performance of Banking Depository Financial Institutions, which was replaced by the Plan for Assessment of Green Finance Provided by Banking Financial Institutions.

In recent years, commercial banks have consistently increased their green credit disbursements. The growth rate of green credit has significantly outpaced the overall loan growth rate, and the outstanding green credit volume maintains its position as the world’s largest.

In 2017, the State Council of the People’s Republic of China (the State Council) initiated a five-year green finance reform in several pilot zones; namely, Zhejiang, Jiangxi, Guangdong, Guizhou, and Xinjiang. In November 2019 and August 2022, Lanzhou and Chongqing were respectively added to the list.

The primary objectives of the establishment of pilot zones include:

• Strengthening the role of green finance in domestic financial institutions;

• Promoting the development of green instruments such as green bonds, green credit, and green insurance; and

• Developing mechanisms for green finance risk control.

The pilot zones provide a variety of replicable and scalable experiences for the construction of China's green finance system.

As early as 2011, the NDRC designated Beijing, Tianjin, Shanghai, Chongqing, Guangdong, Hubei, and Shenzhen as pilot cities for carbon trading market construction. Subsequently, Fujian and Sichuan also established their carbon trading markets, forming a total of nine regional carbon trading markets.

On July 16 2021, the national carbon trading market was officially launched, marking the beginning of nationwide carbon emissions trading. Under the carbon trading scheme, the key emission companies are allowed to emit a certain amount of greenhouse gas emissions each year. The national carbon trading market has been operating smoothly for nearly three years since then.

In February 2024, the State Council issued the Interim Regulations on the Management of Carbon Emissions Trading (the Interim Regulations), which state that no new regional carbon trading market will be established, and the existing regional carbon trading markets shall be regulated in accordance with the Interim Regulations.

With the increasing urgency of global climate change mitigation, China is set to formulate more regulatory guidelines and policies, and introduce additional incentives to support the development of green finance. These measures may include fiscal subsidies, tax benefits, loan guarantees, and others aiming to encourage financial institutions to provide financing for green projects.

Concurrently, regulatory authorities in China will continue to intensify their oversight of financial institutions, rigorously scrutinising the investment and financing of green projects. This is to ensure that funds flow into genuinely sustainable industries and projects.

Furthermore, regulatory authorities will establish more stringent criteria for assessing the environmental benefits of investment and financing, limiting support for green finance projects that do not generate significant environmental benefits or that may have adverse environmental impacts.

With the continuous development of China's green finance systems and policies, Chinese regulatory authorities are steadily increasing disclosure requirements and the quality of environmental information provided by financial institutions by introducing more specific and enforceable disclosure standards.

More financial institutions are disclosing environmental data and information on the environmental impact of their operations and their clients, enhancing transparency in green finance-related information and data. This provides investors and stakeholders with the necessary channels and information to understand the environmental performance and risks of financial institutions, as well as the effectiveness of implemented green finance projects.

The carbon market plays a vital role in the development of green finance. For a long period, China’s carbon market has faced challenges, including inactive trading, insufficient liquidity, and a lack of corresponding regulations. In 2023 and 2024, the Chinese regulators have issued several regulations on the voluntary carbon market and the compliance carbon market.

With the introduction of new regulations, the core regulatory framework for China’s carbon market has been established. Backed by a comprehensive legal framework, it is expected that the carbon market will grow in a robust and well-organised manner, and financial institutions will actively engage in carbon market transactions, offering financial support for reducing greenhouse gas emissions.

China has made significant progress in developing its domestic green finance markets, while the internationalisation of the green finance markets is still at an early stage.

Given the trend of China gradually opening up its financial markets and Chinese financial institutions increasingly engaging in global financial markets, it is necessary for China to further align with international standards. Notably, several newly issued regulatory policies drawing on advanced international practices have been observed and further internationalisation of the Chinese green finance market is expected.

Han Kun Law Offices would like to give a special thanks to Ms. Ye Li, who also made contributions to the article.