Green Finance in China with Mathias Lund Larsen
“The starting point is that it’s extremely difficult to sit outside China and work on China. I think the only way to bridge the gap is to physically be in China.”
Mathias Lund Larsen is the Director of International Cooperation at the International Institute of Green Finance – a Beijing based Chinese think tank. He simultaneously holds roles as consultant to UN-Habitat, UNESCAP, and GIZ. His research focuses on green finance in China and in a global context, as well as links between the two. He has spent more than a decade working on the intersection between China, sustainability, and economics, and speaks fluent Chinese. More specifically, his key areas of research include green bonds, multilateral development banks, sustainable infrastructure financing, and greening the Belt and Road Initiative.
What initially sparked your interest in China?
I was in China the first time 13 years ago just after high School and have had a China sort of side focus. After going back to school at Peking University, I realized I wanted to work in sustainability and felt I had a competitive advantage as a non-Chinese in China. What I do in IIGF now is to help international organizations that want to work on sustainable finance in China, either with my institution or with the government, as well as help China work with the rest of the world. There are many people working on sustainability and finance, but what I thought I could do uniquely is to help bridge China and the rest of the world.
What are current aspirations IIGF has for international collaboration?
With the exception of recent complications of China’s relationship with the rest of the world due to COVID-19, the trend is that green finance is becoming more and more of a hot topic in China and internationally while China is gradually opening up in different areas, including in its financial systems. This lays the groundwork for doing green finance with a focus on international collaboration.
There have been numerous initiatives over the last few years in harmonizing green finance standards, such as allowing more foreign investors to invest in China and setting up investment platforms in Hong Kong, Shanghai, and London. China has a very strong interest in attracting more international investment, so there’s no question that the incentives are all there, and we’re seeing more actions in facilitating this investment.
For example, green bonds have been developing internationally for a number of years, and China only started a couple of years ago. China now has a very big green bond market, but there’s very little interaction between green bonds in China and green bonds elsewhere. If you look at green bonds in the international market, it will be a company in one country issuing green bonds in another country, while the investors come from ten other countries. Whereas in China, it’s China doing all three with barely any international links. We are now seeing more Chinese issuing green bonds outside of China so that they can reach international investors through different channels.
What are major efforts that China is making to incentivize investors?
The concept of green finance didn’t exist in China five years ago. It’s a relatively new concept. In Western countries, we mostly talk about climate issues rather than the larger umbrella of green issues, whereas in China one talks about the environment as a whole, with climate included.
Because China actively governs the financial system, they use financial system governance towards environmental purposes--that’s what green finance is, essentially.
There are various ways to create these incentives you mention. First, they’re trying to make the green projects more profitable. They can do that with interest rate subsidies, etc. Second, they can also make the polluting projects less profitable with pollution fines, mandatory liability insurance, etc. Third, they can reduce transaction costs by having project platforms--they can set up committees that do research, committees that coordinate green finance policies, and so on--building capacity and improving understanding of the issues at hand. They essentially work across the board with all the financial instruments, all the stakeholders, and all the regulations. In short, they’re very actively making green projects more profitable.
What is the main challenge for further international collaboration with China within green finance?
A key obstacle is still green definitions. In China things like clean coal are often included in green standards. If you’re an international investor who buys a green bond, you will not expect that the product has to do with coal or other fossil fuels. Fortunately, there has recently been some progress on harmonizing the green bond standards: a revision of the project catalogue a few months ago took out projects involving clean coal. We hope that for the bond market clean coal will be out soon.
There are still standards that are not the same as the rest of the world--the green standards, and the way environmental and climate issues are disclosed.
What are ways to make green standards more transparent?
Some of the key initiatives in the past regarding harmonizing green standards have been between the Chinese Green Finance Committee and the European Investment Bank. They jointly issued white papers comparing the green bonds standards in Europe and in China, and we should see more of these efforts in the future. As I previously mentioned, China now has a draft of the new green bond catalog, the EU has just launched one, and ASEAN has a green bond standard as well. When you do collaboration between actors that put forward standards and directly compare them--since it’s unrealistic to have one standard for all--if all parties can agree with a way to compare their standards, investors will at least have transparency to make sure that they don’t end up with projects that they did not expect.
In terms of the US, although there isn’t one official standard, they have the climate bond initiatives standard. Together with the standards put forward by China, EU, and ASEAN, one can list, compare, do research on how they differ and where they overlap, with the purpose of creating transparency and clarity for investors.
China uses a top-down approach, where one official definition for green bond is put forward, while in the US as well as in the EU until recently, a bottom-up approach is employed: anyone can call a bond a green bond, and it’s up to the investors to decide if it meets the standards for green bond. To harmonize the standards, one has to work between the regulators in China who make the standards top-down and the investors in most western capital markets who use the bottom-up approach.
How has the trade war affected international collaboration in green finance with China?
The trade war is mostly focused on trade in actual physical goods, so it has less of an impact on financial institutions. The trend is still that there are more Chinese investing outside of China, and more foreign investments coming into China. Big asset managers have just been allowed to have majority-owned asset management companies in China. They know that the financial system in China is growing and they want to be a part of it. There is no lack of interest from financial institutions, asset managers, and investors since everyone wants to be involved in the growing market, so the trade war is less of an issue because it doesn’t apply to much other than physical assets.
What would be your recommendations for Western students that want to help bridge between the US and China and collaborate internationally?
The starting point is that it’s extremely difficult to sit outside China and work on China. China is just very different and very isolated from a Western perspective. The language is difficult, cultures are different, the internet is censored back and forth, and it’s hard to see and read the same things. There is just a lack of cultural communication between the two, which results in a lack of understanding between cultures. I think the only way to bridge the gap is to physically be in China.
One should go to China and spend some time there--go for a summer, a semester, or do a full degree. Spend the time in China, study in China, and work in Chinese organizations. I think that’s the only way for a Westerner to be efficient in being a bridge between the two areas.
Interviewer: Jane Yang
