Guidelines for establishing the green financials system

China is at a crucial stage of economic structural adjustment and transformation for its development model. The demand for green finance to support green industries and sustainable development is constantly expanding. In order to fully implement the "Opinions of China's Central Party Committee and the State Council on Accelerating the Development of Ecological Civilization" (Zhongfa [2015] No.12) and the "Overall Plan for the Structural Reform for Ecological Civilization" (Zhongfa [2015] No.25), as well as promote the development concepts of innovation, harmony, greenness, openness and sharing, the following guidelines have been developed with the approval of the State Council. These guidelines strive to accomplish many essential goals – they will execute the tasks of the Government Work Report, promote the sustainable development of the economy, establish a sound green financial system, improve the function of the capital market in allocating resources and servicing the real economy, and support and promote the development of an ecological civilization.

1 The Importance of Establishing the Green Financial System

(1) Green finance refers to 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.

(2) The green financial system refers to 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.

(3) The main purpose of establishing the green financial system is to mobilize and incentivize more social (private) capital to invest in green industries, and to more effectively control investments in polluting projects. The green financial system is beneficial not only for the transition to a green economy and the development of an ecological civilization, but also for technological progress in environmental protection, new energy sources, energy savings and other fields. It will also help accelerate the development of new growth drivers and enhance the potential for economic growth.

(4) The establishment of the green financial system requires the internalization of environmental externalities by appropriate incentives and restraints with the support of policies, laws and regulations in the financial, fiscal and environmental areas. It also requires more innovations by financial institutions and financial markets in developing new financial instruments and services, to address the problems of maturity mismatch, asymmetric information and lack of analytical tools for green investment.

2 Vigorously Develop Green Lending

(5) Establish a policy framework to support green lending. Further improve the green credit policy system. Improve the green credit statistics system and strengthen the monitoring and evaluation of the implementation of green loans. Support green credit by central bank re-lending operations, specialized guarantee mechanisms and other measures. Allow projects supported by green loans to apply for fiscal subsidies on interest payments. Explore ways to incorporate green credit into the central bank's macro-prudential assessment framework. Use key indicators of green credit performance and green banking evaluation results as important references to develop incentives for green finance business and disincentives for curbing loans to industries of high pollution, high energy intensity and overcapacity.

(6) Promote self-regulatory organizations in in banking industry to gradually establish a green banking evaluation mechanism. Clarify the evaluation indicators, the organization process of evaluation work, and utilization of the evaluation results, and guide financial institutions to actively carry out green finance business and better manage environmental risks. Apply green banking evaluations to major banks first, and based on experiences gained, gradually expand the scope of evaluation to small- and medium-sized commercial banks.

(7) Promote securitization of green loans. Based on the experience from pilot programs of loan securitization, expand the range of participating financial institutions, standardize the selection process of underlying assets, explore efficient and low-cost approaches to collateral registration, improve the market liquidity of securitized assets, enhance information disclosure, with a view to promoting normalized development of green loan securitization.

(8) Explore ways to introduce lenders' environmental legal liability. Based on China's legal framework and domestic conditions as well as lessons from relevant international experiences, explore ways to clarify the due diligence requirements, conditions for immunities from legal prosecution, and environmental legal liabilities for lenders, and to propose relevant legislative suggestions.

(9) Support and guide banks and other financial institutions to establish a credit management system that conforms to the characteristics of green enterprises and projects. Optimize the credit approval process, boost support for green enterprises and projects while controlling risks, and resolutely cancel unreasonable charges to reduce the cost of green loans.

(10) Support banks and other financial institutions to treat environmental and social risks as important drivers in their stress tests for credit risks, and incorporate these test results into asset allocation and internal pricing. Encourage banks and other financial institutions to evaluate their risk exposures to loans and assets in areas of high environmental risks. Quantify the potential credit and market risks to financial institutions due to such exposure under different scenarios.

(11) Incorporate the enterprise environmental information including environmental violations into the financial credit information database. Establish a mechanism to share enterprise environmental information, which should provide a basis for loan and investment decisions of the financial institutions.

3 Enhance the Role of the Securities Market in Supporting Green Investment

(12) Improve the rules and regulations for green bonds and unify the green bond definitions. Research and improve the relevant regulations and self-discipline rules for issuance of green bonds. Clarify that funds raised by the issuance of green bonds must be fully (or mainly) used for green projects. Strengthen inter-departmental coordination and unify the definitions of green bonds. Clarity the requirements of information disclosure and other regulatory arrangements or green bond issuance. Support qualified institutions to issue green bonds and related products, and enhance the efficiency for approval or registration for green bond issuance.

(13) Take measures to reduce the financing cost of green bonds. Local governments can support green bond issuance through specialized guarantees and credit enhancement mechanisms. Study and formulate other measures to reduce the financing costs of green bonds.

(14) Explore ways to formulate standards for third party verification of green bonds and green credit rating. Standardize the quality requirements for third party verification of green bonds. Encourage institutional investors to make use of green verification reports in investment decision-making. Encourage rating agencies to evaluate, in their rating exercises, the green performance of the issuers, the "greenness" of the projects, as well as the impact of environmental costs on creditworthiness, and to disclose such information separately in credit rating reports.

(15) Actively support the qualified green enterprises to obtain financing via initial public offerings and secondary offerings. Actively assist qualified green enterprises in their efforts for IPOs, and help listed green enterprises to issue additional shares via secondary offerings according to legal procedures.

(16) Support the development of green bond indices, green equity indices and related products. Encourage financial institutions to develop green index based financial products, such as mutual fund products or private equity fund products, to meet the diverse needs of investors.

(17) Gradually establish and improve the mandatory environmental information disclosure system for listed enterprises and bond issuers. For listed companies that are on the black list of major polluters compiled by the Ministry of Environmental Protection, formulate and strictly implement the disclosure requirements for information on emission of major pollutants, construction and operation of environmental protection facilities, and major environmental incidents. Increase the penalties on listed enterprises and bond issuers that forge environmental information. Cultivate the ability of third party professional organizations to provide environmental information disclosure services for listed enterprises and bond issuers. Encourage third party professional organizations to participate in the collection, research and release of corporate environmental information and analytical reports.

(18) Guide institutional investors to invest in green assets. Encourage long-term funds such as pension funds and insurance funds to carry out green investment and encourage investors to release green investment responsibility reports. Enhance the analytical capacities of institutional investors on environmental risks and carbon intensity of their investments, and conduct stress tests of the impact of environmental and climate factors on institutional investors (especially insurance companies).

4 Launch Green Development Funds and Mobilize Social Capital through Public

and Private Partnerships (PPP) (19) Support the establishment of all kinds of green development funds and their market-based operations. The central fiscal authorities will set up a national-level green development fund by integrating existing special funds, such as energy saving and environment protection funds, and invest in green industries to demonstrate the government's strategic guidance and policy signals for green investment. Encourage local governments and social (private) capital to launch regional green development funds to support the development of local green industries. Encourage social (private) capital and foreign capital to set up all kinds of private green investment funds. Ensure that the investment and management of governmental green development funds are in accordance with the market approach, under the premise of executing national strategies and policies. (20) Local governments could support the projects invested by green development funds through measures such as relaxing market access restrictions, improving pricing of public services, granting franchises, implementing favorable fiscal and land policies, and improving benefit- and risk-sharing mechanisms. (21) Support the introduction of the PPP model in the green industry, encourage the bundling of energy saving and emission reduction projects, environment protection projects and other green projects with related higher-return projects, and establish a green service charge mechanism for projects with a "public goods" nature. Improve relevant rules and regulations on green PPP projects, and encourage local governments to release operational rules based on experience of past PPP projects. Encourage all kinds of green development funds to support green PPP projects.

5 Develop Green Insurance

(22) Establish a compulsory environmental pollution liability insurance system in areas of high environmental risks. Formulate and revise relevant laws and regulations of compulsory environmental pollution liability insurance according to procedure. The environmental protection agency, in collaboration with the insurance regulatory agency, should publish implementation rules. Include enterprises under the coverage of compulsory environmental pollution liability insurance in areas in which there are higher environmental risks and concentrated environmental pollution incidents. Encourage insurance institutions to play an active role in prevention of environmental risks, to carry out "environmental examination" for enterprises, to inform the environmental protection departments of the environmental risks discovered, and to support environmental risk supervision. Improve the environmental damage evaluation procedure and technical standards, guide insurance companies to expedite damage assessment and settlement of claims, compensate pollution victims on a timely basis, and control damages to the environment.

(23) Encourage and support insurance institutions to innovate green insurance products and services. Establish and improve the catastrophe insurance system related to climate changes. Encourage insurance institutions to develop insurance products for environmental protection technologies and equipment, liability insurance for product quality and safety for low-carbon and environmental friendly products, liability insurance for vessel pollution damage, forest insurance and insurance for

agriculture and husbandry disasters. Actively encourage insurance institutions to participate in the environmental pollution risk management of the breeding industry. Establish the coordination mechanism between agriculture insurance compensation and safe disposal of ill livestock.

(24) Encourage and support insurance institutions to participate in the development of the environmental risk control system. Encourage insurance institutions to perform the function of disaster prevention. Actively make use of Internet technologies and other advanced tools to establish monitoring and early warning mechanisms for applicants of pollution liability insurance policies. Conduct real-time risk monitoring and regular risk evaluation, alert hidden dangers in time, and efficiently process insurance claims. Encourage insurance institutions to make full use of their specialties on risk management, and provide education on environmental risk management to enterprises and the public.

6 Improve Environmental Rights Trading Market and Develop Related Financing Instruments

(25) Develop different kinds of carbon finance products. Promote the development of a unified national carbon trading market and carbon pricing center with global impact. Progressively develop carbon forwards, carbon swaps, carbon options, carbon leases, carbon bonds, carbon asset backed securities, carbon funds and other carbon finance products and derivatives. Explore and develop a trading system for carbon futures.

(26) Promote the establishment of markets for pollutant emission rights, energy use rights, water rights and other environmental rights. In key basins and key areas of air pollution, jointly promote inter-regional trading of pollutant emission rights and expand pilot projects on compensated use and trading of pollutant emission rights. Improve and innovate the systems for pollution emission rights trading. Establish and improve the certification process for pollutant emission rights and the market-based price formation system. Establish regional and national trading markets of pollutant emission rights. Establish and improve trading markets of energy use rights and water rights.

(27) Develop financing instruments based on carbon emission rights, pollutant emission rights, energy use rights, water rights and other environmental rights, with a view to expanding the green financing channels for enterprises. Based on the pilot experience of banks that provided financing with environmental rights as collaterals, develop methodologies for evaluating collateral values and their reference ranges. Improve the market-based pricing for environmental rights. Establish an efficient registration and disclosure system for collaterals. Explore methods for re-purchasing environmental rights and other approaches to the disposal of collaterals. Explore ways to include environmental rights and their future cash flows as qualified collaterals, and reduce compliance risk of transactions involving pledges by environmental rights as collaterals. Develop financial products such as repos, factoring, and custodian services for environmental rights.

7 Support Local Government Initiatives to Develop Green Finance

(28) Explore supportive measures, such as central bank re-lending, macro- prudential

assessment, and capital market instruments to promote green finance at the local level. Encourage and support local governments to crowd-in social (private) capital to invest in green industries, by measures such as setting up specialized green guarantee programs and establishing green development funds. Support local governments to make full use of the green bond market to finance medium- and long-term green projects with stable cash flows. Encourage local governments to include projects with significant environmental benefits into the green project database, and expand the financing channels for these projects by listing them on national financial asset trading centers. Encourage international financial institutions and foreign corporations to cooperate with local governments to make green investments.

8 Promote International Cooperation in Green Finance

(29) Expand the scope of international cooperation in green finance. Continue to promote the global consensus on developing green finance under the framework of the G20, promote the application of voluntary principles for green banking and green investment, as well as other best practices on green finance, and improve related capacity building. Promote regional cooperation on green finance and support green investment of relevant countries through implementing ‘the One Belt One Road' strategy and regional cooperation mechanisms such as Shanghai Cooperation Organization, China-ASEAN Cooperation, and South-South Cooperation, and the role of the Asian Infrastructure Investment Bank and BRICs New Development Bank in leveraging private green investment.

(30) Promote the progressive, two-way opening of the green securities market. Support domestic financial institutions and enterprises to issue green bonds overseas. Make full use of bilateral and multilateral cooperation mechanisms and guide foreign capital to invest in China's domestic green bonds, green equities and other green financial products. Encourage the establishment of joint venture green development funds. Support international financial organizations and multinational corporations to issue green bonds in the Chinese market and make green investments in China.

(31) Enhance the "greenness" of China's outward investment. Support and encourage domestic financial institutions, non-financial enterprises and multilateral development banks with China's active participation to strengthen environmental risk management, improve environmental information disclosure, adopt green financing instruments such as green bonds, develop green supply chain management, and explore the use of instruments such as environment pollution liability insurance to manage environmental risks, in implementing "One Belt One Road' and other overseas investment projects.

9 Prevent Financial Risks and Strengthen Implementation

(32) Improve the supervision mechanism to prevent risks related to green finance. Improve coordination among supervisory agencies on green finance businesses and products, make comprehensive use of macro-prudential and micro-prudential management tools, unify and improve relevant supervision rules and standards, enhance information disclosure, effectively control the default risks of green loans and green bonds, and fully develop equity finance, with a view to preventing excessive leverage by green projects, unhealthy financial arbitrage, "green washing"

and other problems, and preventing systematic financial risks.

(33) Government agencies should coordinate and join force in promoting the development of green finance. The People's Bank of China, the Ministry of Finance, National Development and Reform Commission, the Ministry of Environment Protection, China Banking Regulatory Commission, China Securities Regulatory Commission, China Insurance Regulatory Commission and other relative departments should pay close attention to the business development of, and the risks associated with, green finance, monitor and evaluate policy incentives and supervisory rules, and make appropriate policy adjustments in time. Strengthen the development of financial information infrastructure, and promote the sharing of information and statistics. Establish and improve the early warning systems, and intensify the supervision and evaluation of use of funds for green projects.

(34) Each region should, taking into account local circumstances and priorities, actively promote the development of green finance. Local governments should develop their plans for promoting green finance, clarify the division of labor, and incorporate the development of green finance into their annual performance targets. Strengthen the capacity building of green finance, and accelerate talent development and acquisition.

(35) Intensify public communications on green finance. Actively promote best practices of green finance and financial institutions and enterprises with outstanding green performance, and seek to build a greater public consensus of green finance development. Further increase environmental awareness, promote green consumption, and develop a better social atmosphere for ecological civilization and green finance.

The People's Bank of China

The Ministry of Finance

National Development and Reform Commission

The Ministry of Environment Protection

China Banking Regulatory Commission

China Securities Regulatory Commission

China Insurance Regulatory Commission

August 31, 2016