China Green Finance Task Force Report: Theoretical Framework
Despite the considerable headway made in the promotion of green credit by the government of China, efforts for building a green finance system remain fragmented and conceptual.
This paper develops a theoretical framework for green finance. A ‘green finance system’ refers to a series of policies, institutional arrangements and related infrastructure building that, through loans, private equity, issuance of bonds and stocks, insurance and other financial services, steer private funds toward green industry.
The paper focuses on the core problem driving unsustainable investment – that prices for products in the market do not reflect environmental costs of production. Internalizing these externalities can be undertaken in three ways, in each case including measures focused on the financial system and the real economy:
- Increase the return on investment of green projects
- Reduce the return on investment of polluting projects
- Increase awareness and responsiveness to these signals amongst investors, companies and consumers.