China has demonstrated its ambition to green its rapidly developing financial and capital markets, with actionable measures outlined in the report Establishing China’s Green Financial System, published by the People’s Bank of China (the central bank of China) and the UNEP Inquiry.
According to the report, China’s existing accounting system fails to effectively evaluate the environmental costs arising from infrastructure projects and industrial operations, leading to a serious underestimation of commercial and investment risks. With environmental regulation increasing, effective accounting of environmental costs will be needed to support business decision making. If China can integrate environmental costs into an effective policy framework, investors, companies and consumers are more likely to make the right choices.
As a member of China’s Green Finance Committee, Trucost is now partnering with the Industrial and Commercial Bank of China (ICBC) to develop a China specific natural capital risk model and tools to help financial institutions better understand natural capital risks and opportunities.
Supported by the China SPF Prosperity Fund from the UK’s Foreign & Commonwealth Office, the project will identify sectors and regions in China that are most exposed to natural capital risks. The project builds on the results from the Natural Capital at Risk: The Top 100 Externalities of Business research that Trucost conducted for the TEEB for Business Coalition in 2013. This can be seen as another important step to further regionalize the understanding of environmental externalities following Trucost’s research for GIZ to develop natural capital risk models for Brazil and India. By combining national and regional data, Trucost is able to provide a granular benchmark for China’s financial institutions to improve their natural capital risk exposures.
In the project kick-off meeting, ICBC, the pilot bank of this project, specifically expressed its interest in advancing its internal credit stress test methodology through this project, and is now considering incorporating natural capital risk in its risk management framework. ICBC becomes the first Chinese bank to step up its effort in quantifying environmental risks and opportunities in financial terms.
This project will form a vital part of the Green Finance Committee’s plan to build a robust financial infrastructure enabling investors across asset classes in China to systematically integrate natural capital risks into their conventional frameworks.
James Richens, +44 (0)20 7160 9804, email@example.com