Jun Ma: Making green finance inclusive and greening inclusive finance

The green finance framework includes four pillars: green taxonomies, disclosure, products, and incentives. Green taxonomies are developed to differentiate green activities and assets from non-green ones so that regulators know where the green funds should go. To date, China has launched three different but complementary sets of taxonomies, covering green credit, green bonds (namely Green Bond Endorsed Projects Catalogue), and green industries. The three sets of taxonomies are essentially consistent. Green programs are required to disclose environment-related benefits and now more mandatory disclosure information is required. Green financial products include green credit, green bond, green fund, green insurance, etc.; by now a total of RMB 16 trillion of green credit have been offered. Various policy incentives are introduced at the national and local levels. For example, the People's Bank of China (PBoC) introduced Carbon Emission Reduction Facility (CERF) in 2021, and many local governments give interest subsidies and guarantees for green loans. Over the past seven years, China has established a green financial system. Now the outstanding green loans in China rank first globally, and the stock of green bonds ranks second. 

Financial inclusion has been gaining momentum; the coverage, availability, and satisfaction of financial inclusion have been greatly improved. One challenge we are facing now is that green finance is yet to be more inclusive, and inclusive finance to be greener.

Currently, green finance mainly focuses on mid- and large-sized green programs in fields such as energy, transport, buildings, and environmental protection facilities. These programs are usually undertaken by large and medium-sized enterprises (LMEs), mostly state-owned enterprises (SOEs), including central SOEs, and a few large private businesses, while the engagement of micro and small enterprises (MSEs) is rather limited. Our research has found that in small banks, green credit only takes a negligible proportion of their total credit, some even only account for about 1%, while that proportion is more than 10% or even 20% for large and medium-sized banks that excel in green finance. This tells us that the main inclusive finance clients of small banks are MSEs and farmers, who have not yet actively involved in green programs. The reasons for the extremely low proportion of green credit in small banks are complicated: limited engagement of small clients in green programs, a lack of clear green standards for MSEs and farmers, inadequate disclosure of MSEs, and a lack of incentive mechanisms and products for greening MSEs and farmers.

Therefore, we need to figure out why inclusive finance is not green enough, how to make it greener, and how to make green finance more accessible to MSEs, agriculture, farmers, rural areas, and consumers.

I believe that we should focus on the following four priorities:

First, expanding the coverage of green finance taxonomies to MSEs, and agriculture and consumption activities.

To date, green finance taxonomies are mainly program-based. According to the Catalogue, there are 211 green programs under 30 sectors, most of which are undertaken by LMEs; generally, MSEs are not qualified to undertake the programs in the Catalogue. Therefore, we need to work on green standards for MSEs even if they do not have green programs yet so that their working capital loans can be defined as green credit. Green standards for specific agricultural products should also be in place, such as agro-produce, fertilizer, pesticide, and agricultural machinery. These standards should be feasible and not too complicated, otherwise, verification costs would be too high. In addition, the green standards in the consumer sector need to be defined too. There are many technical standards for green products like green appliances, green vehicles, green buildings, etc. How to translate these technical standards into feasible green standards that are easy for financial institutions to apply at low costs should be a priority for the next step. With these standards, financial institutions can better identify green MSEs, green agricultural activities, and green consumption, and thus provide green financial products and support policies in these areas.

Second, establishing an ESG information disclosure system for MSEs, agriculture, and consumption.

As mentioned earlier, disclosure is the second pillar of green finance. The owner of the green program funded by green financing should disclose relevant information (including environmental benefits, such as the reduction of CO2, SO2, and NOx, emissions, and sewage discharge) so that market, financial institutions, and the public can identify them as green. Large enterprises and large-scale green programs already have a mature disclosure system, including the indicators, calculation methodology, and implementation approach; MSEs, farmers, and consumers also need a feasible system for them. Fintech instruments must be applied to the ESG disclosure so as to reduce costs and improve efficiency throughout the industrial chain, including data collection on product traceability, the calculation of ESG indicators, green labeling of production and consumption, and reporting to regulators and disclosing to the public. Some first green finance pilot zones have made some explorations to empower ESG data collection and disclosure with fintech. Huzhou, a city in Zhejiang province, in particular, has recently developed an ESG green evaluation system for MSEs.

Third, developing green financial products applicable to MSEs, agriculture, and consumption.

Currently, green financial products mainly support green infrastructure and other green programs of LMEs. However, MSEs have their unique features, for example, most of them do not have needs for project loans but working capital, so green labeling MSEs are critical to identifying their working capital loans as green credit. The same is true for green agriculture and green consumption. For example, we can provide green financial products to farmers who purchase green agricultural inputs and produce qualified organic produce and forest tenure right mortgage loan, and forestry carbon sink pledge loan to farmers engaged in forestry. We can provide green consumer loans, such as green mortgage products and new-energy vehicles (NEVs) loans for consumers. Some localities have already launched carbon credit for enterprises and consumers, which can serve as a reference for credit granting and interest rate discount. Other financial instruments for green small and medium-sized enterprises such as collective bonds can also be considered.

Finally, policy incentives can make inclusive finance greener and green finance more inclusive. One approach is to integrate the incentive mechanisms of inclusive finance and green finance and apply them to economic activities. Thus, green economic activities eligible for inclusive finance can obtain double benefits, which will, in turn, bring bigger incentives to these activities. Specific measures need to be further explored. But we already have some green finance instruments at our disposal such as guarantee, interest discount, re-lending, and supporting tools for carbon neutrality, as well as similar instruments for financial inclusion, such as re-lending, guarantee, interest discount, and tolerance for non-performing loans (NPLs). How to make better use of the common instruments and identify who to use should be priorities for the major tasks of financial regulators and institutions in the next phase.