Can the Belt and Road Initiative become greener through green finance?

The original interview with Prof. Yao Wang in Chinese can be found here. Translation by Yiwei Qi.

What contribution will the Belt and Road Initiative (BRI) make to tackling climate change and realizing global green and sustainable development? What impacts and opportunities will green and low-carbon development path bring to the BRI initiative?

In an interview with the China Economic Herald, Prof. Yao Wang, the dean of International Institute of Green Finance (IIGF), elaborates how the BRI can further strengthen green responsibility, unify green standards, help green projects be implemented in BRI countries, realize energy conservation and emissions reduction together with economic development, and enhance the ability to deal with risk of climate change. With the rising global awareness of environmental and climate risks, investors preference for green financial products is accelerating – in the BRI and beyond.

The BRI helps address climate change

China Economic Herald: Many countries in the BRI are at risk of natural disasters, prone to floods, tsunamis, typhoons and other climate disasters. In your opinion, how should the BRI integrate climate change into its planning?

Prof. Yao Wang: At present, the climate change problem is increasingly serious. More and more countries have realized that this problem poses a serious threat to the survival and development of mankind. Ecological environment is fragile along big part of the BRI countries and regions, facing a shortage of water resources, forest resources, etc. People in many countries are more susceptible to the effects of droughts, floods and other extreme weather. Therefore, climate change factors must be integrated into the construction of the BRI, to ensure the sustainable development of the BRI countries and regions.

On the one hand, green and sustainable development is an international trend. Countries and regions along the BRI are no exception. Accelerating the development of new energy and promoting the clean and low-carbon transformation of energy is one of the important paths to realize the sustainable development of the BRI environment and economy. In terms of clean energy investment, statistics show that since the BRI initiative was put forward, Chinese enterprises have invested nearly 12.6 GW of renewable energy projects in countries and regions along the BRI.

On the other hand, to address climate change, we need to build sustainable infrastructure. Infrastructure is already the largest source of greenhouse gas emissions, accounting for about 70% of global emissions. However, much more infrastructure needs to be built in the future to meet social development requirements. This will have a profound impact on the future path of climate change. Most countries and regions along the BRI are backward in infrastructure and have a large gap in construction. Therefore, in the process of the BRI construction, in order to better deal with climate change, the construction of sustainable infrastructure must be emphasized.

China Economic Herald: What contribution do you think the construction of the BRI will make to the global response to climate change?

Prof. Yao Wang: Since the launch of the BRI initiative, the Chinese government has signed 173 cooperation documents with 137 countries and 29 international organizations by the end of January 2020. The BRI countries have expanded from Europe to Africa, Latin America and the south Pacific. Their sustainable development is of great significance to the world. If countries and regions along the BRI can achieve green development, it will have a positive impact on addressing global environmental and climate issues.

In the process of jointly building the BRI, ecological and environmental protection policies should be aligned, people-to-people exchanges should be strengthened to complement each other, green and environmental protection concepts should be integrated into the BRI project, so as to enhance the awareness and capacity of countries and regions the BRI to deal with climate change. At the same time, China has made good efforts domestically to pursue green and sustainable development. Various projects implemented along the BRI in China adopt the most advanced technologies, save resources and energy as much as possible, achieve the best effect of energy conservation and emission reduction, and achieve a good demonstration effect. Relevant experience, technologies and concepts can be promoted and further promoted in the BRI construction.

China Economic Herald: Green development will be an important topic for the future development of the world. How do you think the BRI construction should achieve green and low carbon infrastructure construction along the BRI?

Prof. Yao Wang: Infrastructure construction is an important link in realizing the sustainable development and development of the BRI. There is a big gap in the sustainable infrastructure construction along the BRI, and green finance can help:

• First, we should coordinate policies. The BRI countries lack stable and favorable policy environment, which increases the sovereign risk and financing cost of the project. Therefore, it is suggested that the relevant policy framework and operational guidelines should be issued to reduce the sovereign risk and financing cost of the project.
• The second is to achieve the unification of standards. By encouraging investors to join the “Green Investment Principle for the Belt and Road”, we will further support environmental protection and respond to climate change.
• Third, promote cooperation among financial development institutions. Sustainable infrastructure and other projects have large investment scale and long operation cycle. If we want to obtain long-term stable and affordable financial support, we must make full use of the funds of Asian infrastructure Investment Bank, National Development Bank and other financial development institutions, leverage public funds and mobilize private capital to help the project obtain long-term financial support.
• Fourth, we should encourage green investment in commercial financial institutions. Through green credit, green bonds, green funds and other innovative financial tools and mechanisms, we will guide private capital into the BRI project.
• Fifth, we should support the application of green technology and investment and financing. The technological level of sustainable infrastructure and other projects is uneven in different countries and regions. The countries and regions along the BRI generally have a relatively backward level of technology. Therefore, we should strengthen the support for technology research and development, platform construction and application demonstration, and enhance the technology absorption capacity of countries and regions along the line.

The construction of green financial system is crucial to the construction of the BRI

China Economic Herald: What are the important values and functions of building green finance system for the BRI?

Prof. Yao Wang: The countries and regions along the BRI should achieve low carbon, green and sustainable development while achieving economic development. A large number of green investments is required every year, and the governments alone cannot meet such huge demand for funds. This requires mobilizing the financial markets and the private sector to implement green investment through product and system innovation, and forming an investment and financing system to support green development.

The construction of green financial system will lead more public and social capital to green projects, and provide financial support for the construction of the BRI green project, so as to promote the sustainable development of the BRI and contribute to the global response to climate change.

On the one hand, under a mutually inclusive green financial system, the countries and regions along the BRI can attract more investors from the international capital market through the issuance of green bonds in the system and framework, raising funds for green projects. For example, Indonesia issued its first green Islamic bond in the international market in 2018, which played a good demonstration role in green project financing.

On the other hand, the construction of green financial system can help the countries and regions along the BRI develop low carbon economy through the new concept of green output and low carbon development, further leveraging domestic capital through product innovation, demonstration and guidance, so that more capital can be invested in green projects. It can not only reflect the principle of the BRI — equality, mutual benefit, win-win cooperation and common development. It can promote the sustainable economic and social development of China and the countries and regions along the BRI.

China Economic Herald: how can an effective green financial system in the BRI be implemented? What are the challenges and difficulties? How to deal with it?

Prof. Yao Wang: In the process of building the BRI, it is not easy to build a green financial system which is “universally applicable”. It faces many problems such as differences in policies and regulations, limited capacity, non-uniform standards, obstacles to cross-border connectivity, and so on. Therefore, it is more necessary to actively carry out international cooperation, establish an international platform, improve financial infrastructure construction, promote the convergence of green finance standards, and build a green financial system that can effectively provide help for green project investment and financing in countries and regions along the BRI, and promote the construction of green the BRI.

Due to the imbalance of regional economic strength and financial strength, the financial foundation of some countries along the BRI is relatively weak, the capital market is not perfect, the top-level design of finance is not yet perfect, and there is no foundation for building green finance. In the process of constructing the green financial system, there are still obstacles in the coordination of regulations and norms. In underdeveloped areas, there are deficiencies in financial technology, personnel quality, operation ability, etc. It is difficult to ensure the construction and continuous improvement of the green financial system.

Therefore, in the process of building a practical and effective green financial system, we must take the above problems into account, and from the current practice and long-term needs, we need to find the “common language” of green finance.

• First, we should actively carry out international cooperation and build an international platform to promote the construction of the green financial system in the countries and regions along the BRI.
•  Second, we should strengthen the construction of green financial infrastructure and system. The development of green finance is inseparable from the guidance and norms of policies. Evaluation standards should be issued to standardize the process and measures of the project at the environmental and social security level.
• Third, we should promote the standardization and unification of relevant standards for green finance. A convergence of green financial standards is the common language of green finance, but also to build a green financial system, to ensure that green finance plays an important role.
• Fourth, we should strengthen capacity-building and knowledge sharing. Under the common challenge of global sustainable development, all countries need to strengthen the effective exchange and sharing of green finance, and strengthen the coordination between different standard systems and rules.
• Fifth, we should accelerate innovation in green financial products and services. In the process of the construction and promotion of green finance, product and service innovation need to be made according to the local conditions to implement green finance, which will help to further broaden the financing channels, reduce the financing cost and thus contribute to green development.

The BRI will surely take the path of green and sustainable development

China Economic Herald: in the future, how should we look at the prospects of the green BRI development?

Prof. Yao Wang: As a sponsor of the BRI initiative, China actively advocates and promotes the construction of the green BRI. For example, China and the United Nations Environment Program (UNEP) have signed a memorandum of understanding on the construction of the green BRI and signed a cooperation agreement on environmental protection with more than 30 countries and regions along the route. During China’s presidency of the G20 in 2016, China introduced the topic of green finance into the agenda of the G20 for the first time, established a green finance research group, and issued the G20 green finance comprehensive report. China has actively implemented the “Green silk road messenger program” and has trained 2000 people from countries and regions along the BRI. China issued the “Guiding opinions on promoting the construction of the green BRI”.

Moreover, many countries have realized that green development is a top priority. Building the green BRI has been widely supported and recognized by the international community. Many financial institutions have realized that the development of green finance is not only their social responsibility, but also a new opportunity for the financial industry to prevent financial risks and realize transformation and development. According to the statistics of CBRC, the average default rate of green credit of major commercial banks in China is lower than that of all loans, and lower than that of “Brown” loans. In addition, with the further mainstreaming of ESG investment concept, it has been widely recognized by institutional investors, such as pension funds, mutual funds, endowment funds, etc., accelerating allocation of green assets in their holding portfolio. A lot of green assets will be generated during the construction of the green BRI. It is expected that more global funds will be allocated to related green projects and provide financial support for the construction of the green BRI.

At the same time, extensive capacity-building has provided good intellectual support for the construction of the green BRI. At present, many countries and international organizations, including China, are actively carrying out capacity-building, whether it is the establishment of “Green Investment Principle for the BRI “, or other green finance knowledge sharing and capacity building platforms for government departments, regulatory agencies, financial institutions and their employees of the BRI countries. These platforms have contributed to the construction and rapid development of green finance systems in countries along the BRI.

It can be said that the BRI will take a green and sustainable development road path.