How China Will Lead Through Sustainable Investing

Greening China's Finance Provides Future Strength for Investors

smog china

Sustainable investment strategies may have been a niche endeavor in the past in countries such as the US but that is rapidly changing.

Sustainability factors are becoming the difference between global economic strength and weakness. 

Environmental conditions and access to resources are a starting point for economic strength, as can be seen in countries such as the US where we remain strong on agriculture, whereas in countries such as China, levels of pollution are in the way of their own economic future. For example, China only ranks 109 out of 180 on the EPI Index with poor scores on health resulting from pollution potentially in the way of their future economic growth. This score didn't move at all from the previous year's rankings, so while the country is increasingly focused on their pollution challenges, progress has been slow.

China's continued economic rise going forward is likely to be directly dependent on the greening of their economy, and that is best achieved through finance and investment strategy, and the Chinese government gets that, having become the largest global investor in Green Bonds.

Investors interested in China as a long term investment can probably gauge their future success on how well the country does cleaning up its air, land and water in many ways, which will allow them to have a healthy and perhaps a leading global economy. 

A new series of reports shows how China is working on Greening their Financial infrastructure accordingly - perhaps this will create a Greening Finance global race. That would be a good thing and something to keep a keen eye on for all of us.

While a work in progress, the UNEP Inquiry for a Sustainable Financial System is working on exactly this subject in conjunction with the Research Bureau of the People's Bank of China on an 18 month long Synthesis Report now released and called Greening China's Financial System and which can be found at the previous link.

There are ten recommendations, which include:

1. Create a Green Banking System - with a case study of the UK Green Investment Bank as one example to consider. An example US effort of this type would be the NY Green Bank, which efforts can be seen here in this quote from their website. 

"Future growth expectations for New York’s clean energy marketplace are considerable, as these investments continue to provide attractive risk/return profiles. Reflecting initial private sector leverage and taking into account the recycling of NY Green Bank’s capital, early projections suggest that our $1 billion capitalization could produce as much as $8 billion of additional private sector investment in clean energy projects over the next ten years. Unlike grant or incentive payments, which typically involve ratepayer funds being used as one-time subsidies or grants, NY Green Bank funds are invested at market rates, ensuring that we cover our own costs and preserve our capital base for continued deployment. By growing the market and developing a track record of project and loan performance, we aim to further mobilize clean energy activity in New York State without the need for further ratepayer funding as evolving market opportunities prove increasingly attractive to private sector entities."

2. Develop Green Funds - this is something seen largely in mutual funds in the US, Europe, Canada and Australia. Public/Private Partnerships are suggested as a way forward, especially if the investments are to be sizable enough to make a serious difference.

3. Green the Development Banks - organizations such as the World Bank,IMF and the ADB (Asian Development Bank) have been in some ways leading the way attempting to green finance, for example issuing some of the first so-called Green Bonds. The new AIIB which the US oddly resisted at first is a key driver here as well. If Trillions of Dollars of new Infrastructure are forthcoming as is expected, how green that investment is will be a key driver. The US needs to get on board with this effort.

4. Discounted Green Loans - incentives are needed to ensure the right activity is encouraged in lending until market forces can take care of this on it own. 

5. Green Bonds - the Climate Bonds Initiative is the place to watch on this subject with their new 2016 report showing record growth and hope for $100 Billion of new issuance in 2016 makes this a hot investment area. US retail investors need an option here, there are currently none at all. This needs to change and is a big opportunity to watch for. Green Bonds are often oversubscribed numerous times so there is liquidity and safety. 

6. Green IPOs - such as we see here in the US around YieldCos,there can be a steady stream of income from solar projects and many other methods exist to play the public markets in a green fashion, but caution is advised to make sure you are invested in solid financial plays. This then gives Private Equity and Venture Capital further reasons to participate and create a positive dynamic accordingly.

7. Emissions Trading - cap-and-trade mechanisms have largely not succeeded in Europe but they are alive in China and California for that matter. As the Financial Crisis of 2008 recedes, trading may return as an acceptable way to mitigate carbon emissions. China may lead before the US on this.

8. Green Ratings - credit agencies are being encouraged to evaluate financial investments and companies on a green basis - a work in progress, but green credit is an area to watch, especially if poorly rated investments fail financially, much as the coal sector has collapsed. For example, the stock price of Peabody Energy is down 14 times over the last few years alone. King Coal may be truly dead and is at minimum under great pressure.

9. Stock Index - while sustainability indexes languish in general they remain a potential mechanism for change with the rise of passive, lower fee investing.

10. Develop an Environmental Cost Analysis - this gets into the area of putting a price on nature. This can help lead to a price on carbon, as is being seen in the US Clean Power Plan legislation whereby a Social Cost on Carbon can lead to financial decisions cleaning up the energy generation impacts in the US and again puts pressure on coal. 

Much work remains to be done in China on enforcement but they have been cracking down on corruption, and while more remains to be done, these recommendations above start to set the country on a better course through investing. 

This may be the difference between future economic success and failure for investors and the country itself whose rising middle class is more vocally insisting on having the lifestyles we take largely for granted.

Ensuring their is a business case gives a strong China a best chance to succeed, and perhaps there is learning there for all of us.