1 August 2022

China's Green Finance – Key Recent Developments

"Green finance" is quickly gaining momentum in China. The rise of green finance was at first driven by environmental goals when the concept of "ecological civilisation" was brought up...
China Finance and Banking
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“Green finance” is quickly gaining momentum in China. The rise of green finance was at first driven by environmental goals when the concept of “ecological civilisation” was brought up, and more recently by China's objectives to achieve the peak of carbon emissions by 2030 and carbon neutrality (or more precisely, net-zero of all six types of greenhouse gas emissions) by 2060, the so-called “Dual Carbon goals”.

According to research conducted by Tsinghua University, Goldman Sachs, China International Capital Corporation and Green Finance Committee of China Society for Finance and Banking, between RMB 100 trillion and 500 trillion green finance will be needed in the coming 30 to 40 years to achieve carbon neutrality by 2060.1 This will inevitably require a robust financial system to encourage, facilitate and direct finance into these areas.

We set out trends in the concepts, policies of green finance and a summary of the development of green financial products.

Introduction of Different Concepts and Recent Trends

Green finance is the most commonly used concept in China to describe financing into those environmental and climate friendly areas. Pursuant to the overarching policy in the area of green finance issued in 2016- the Guidelines for Establishing a Green Financial System (关于构建绿色金融体系的指导意见), green finance is financial services provided for economic activities to support environmental improvement, address climate change and promote conservation and efficient use of resource.

A number of other concepts have been used within and outside China to describe finance supporting the transition to a low carbon, sustainable or better future, including:

  • climate finance: finance in support of low carbon transition only, so its scope is narrower than green finance;
  • sustainable finance: finance in support of one or more of the 17 United Nations Sustainable Development Goals (SDGs), and is used and accepted more internationally;
  • ESG finance: similar to and sometimes used jointly with sustainable finance, it is more specifically in relation to the support of environmental, social, and governance goals; and
  • transition finance: a relatively new concept, which is finance that helps high-carbon companies to implement long-term changes to become greener or with low carbon.

It is worth noting that in the past two years, the notion of transition finance has been a topic of keen discussion in China. While green finance and climate finance require funds to be directed into those clean and low carbon areas, it becomes difficult for high emitting sectors to obtain financing from the green finance market. In order to achieve the Duel Carbon goals, lots of high emitting industries such as steel, cement, and aviation need to go through fundamental transformation but can hardly do so without enough finance. The importance of transition finance is now well recognised. Chinese financial sectors are actively exploring ways to develop both green finance and transition finance as well as to enhance the coordination between transition finance and green finance regimes.2

Recent Policy Update

We set out below some key developments in the recent two to three years in the green finance sectors in China.

Green taxonomy

In April 2021, an updated version of the Green Bond Endorsed Project Catalogue (2021) was issued to replace the previous version issued in 2015. The catalogue brought some important changes of China's taxonomy to sustainable finance – clean use of coal and several fossil fuel projects were removed from the 2021 catalogue. The 2021 catalogue also adopted the internationally accepted principle of “no adverse material impact” in green bond supported projects.

China participated in various international initiatives in efforts to align Chinese taxonomies with internationally recognised taxonomy frameworks and principles, including participating in the Network of Central Banks and Supervisors for Greening the Financial System (NGFS) and International Platform on Sustainable Finance (IPSF). In November 2021 and with an updated version in June 2022, the EU and China (the EU Commission and the People's Bank of China) published the Common Ground Taxonomy reports with an aim to provide more clarity and transparency about the commonalities and differences between taxonomies and potentially contribute to the analysis to lower the transboundary cost of sustainable investments. It was also reported that Bank of China's Frankfurt branch issued the first green bonds under the new China-EU Common Ground Taxonomy.3

Green finance industry standards

Improving green financial standards is listed as one of the five pillars supporting China's green finance system and also required under the 14th Five-Year-Plan of Finance Standardisation. China issued multiple green finance related industry standards during 2021 and 2022. Although not for mandatory application, these standards serve as guidelines and institutional capacity building for the green finance system.

  • In July 2021, People's Bank of China (PBOC) released the Financial Institutions Environmental Information Disclosure Guideline (JR/T 0227—2021). It provided guidelines on how financial institutions should disclose environmental information in a standardised and structured way.
  • In July 2021, PBOC released the Environmental Rights Financing Tools (JR/T 0228—2021), which set out general requirements and process of financing based on environmental rights. The environmental rights included the right to discharge pollutants, rights to emit emissions, right to use water, right to use energy, etc.
  • In April 2022, China Securities Regulatory Commission (CSRC) released the Carbon Financial Products (JR/T0244—2022). It defined various notions of carbon financial products and classified carbon financial products into three categories: carbon market financing tools, carbon market trading tools (derivatives), and carbon market support tools.

Climate finance

More recently, there are substantial focus and development in the area of climate finance and related carbon financing products.

In October 2020, five departments of China jointly issued the Guiding Opinions on Promoting the Investment and Financing in Response to Climate Change (关于促进应对气候变化投融资的指导意见). It provided that climate finance was part of green finance, and climate finance should benefit both climate mitigation and climate adaptation activities.

In December 2021, nine Chinese government departments jointly issued Climate Investment and Financing Pilot Working Program (气候投融资试点工作方案). In climate finance pilot cities (now involving more than 30 cities), financial institutions were encouraged to explore carbon related financial products and services, such as carbon funds, pledge of carbon asset, and carbon insurance. Pilot cities were also required to limit the development of high emitting industries and enhance carbon accounting and disclosure.

With Chinese national carbon market entering into full operation in July 2021, new forms of climate or carbon finance might be developed alongside the carbon market. For example, Beijing Green Exchange released in 2016 contract templates for carbon asset repurchase, carbon swaps and carbon options for use in the carbon market.

Environment, Social and Governance (ESG)

On 1 June 2022, China Banking and Insurance Regulatory Commission (CBIRC) issued the Banking and Insurance Sector Green Finance Guidelines. The guideline is the first document specifically to use the notion of ESG and to ask banks and insurance agencies to effectively incorporate the concept of ESG into their business. For example: the banks and insurance agencies are required to identify, monitor, prevent ESG risks in their business, enhance ESG disclosure and stakeholder participation, require its client contracts to include terms to elevate the ESG performance of their clients, conduct ESG due diligence as part of their investment decision making, etc.

Green Finance Products

Green loan and green bond are the most common types of green finance products in China.

Green loan

Bank loan is the most common way of finance in China and it is the same for green finance. Green loan represents 90% of the green finance funding. According to PBOC, by the end of 2021, China's green loan balance in RMB and foreign currencies reached RMB 15.9 trillion, representing a 33% increase compared to 2020, and was ranked first in the world in terms of green loan balance.4 Since 2018, banking financial institutions would be assessed internally by PBOC based on the amount, percentage, increase and other criteria of the green loans granted by such institution. Many banks have set decarbonisation targets for themselves and percentage targets for green loan.

In November 2021, PBOC rolled out a decarbonisation supportive tool where PBOC would provide banks with low-cost loans to cover part of the loans that the bank had granted to borrowers for decarbonisation projects.5 PBOC did not indicate an upper limit for such tool. In addition, PBOC rolled out another targeted re-lending program for the clean and efficient use of coal, capped at RMB 200 billion.6

Green bond

Green bond represents a relatively small part in the green finance market compared to green loan. According to PBOC, by the end of June 2021, green bond reached RMB 1.73 trillion domestically and abroad. Most of the green bonds were issued by state-owned companies.

In 2021, China has introduced several innovative sustainable debt labels such as sustainability-linked bond and carbon neutral bond.

Sustainability-linked bond is a new and special type of bond reflecting the idea of transition finance. According to the Sustainability-Linked Bond Principles published by the International Capital Market Association, sustainability-linked bond is generally a bond instrument where issuers commit explicitly to future improvements in sustainability outcomes within a predefined timeline. The sustainability outcomes are determined by Key Performance Indicators (KPI) and Sustainability Performance Targets (SPTs). Failure to achieve any SPT will likely to result in the change of financial and/or structural characteristics of the bond, and in most cases an increase of interest rate as penalty.

In March 2021, China's National Association of Financial Market Institutional Investors issued a circular on carbon neutral bond. Carbon neutral bond should satisfy requirements on project selection, use of proceeds, information disclosure. Based on public information, it was found that most of the carbon neutral bonds had lower interest rates than other bonds issued around the same time, although that was not a requirement of the circular.

Securities index and green insurance

According to the Guidelines for Establishing a Green Financial System, green securities index is part of the green finance system. Shanghai and Shenzhen Stock Exchanges have each issued green/ESG securities indexes. However, the development of green securities index is still at an early stage.

Mortgage and derivatives of carbon market

As one of the financing tools for the carbon market, in some carbon markets, companies can mortgage the carbon allowances they receive under the local carbon markets to banks in order to get financing from the bank. There are not yet national rules allowing such mortgaging of carbon allowances in the national carbon market, but some rules have been published in local carbon market pilots, for example, in Guangdong, Shanghai and Tianjin.

In the Beijing carbon market pilot, Beijing Green Exchange released contract templates to promote the green derivatives, including for carbon asset repurchase, carbon swaps and carbon options in 2016.

Practical Tips

Here are some of our recommendations:

  • Stay on top of the debate: Companies of all types should be aware of the ongoing climate change discussion. It is advisable to ensure that their business models are viable for the transition to a lower-carbon world and that they are equipped to take advantage of opportunities like green finance and carbon trading.
  • Capacity building: For companies who wish to apply for green finance, disclosure and reporting of carbon or sustainability information are essential in order to demonstrate compliance with the specific standards and requirements of the relevant financing option. Companies need to build capacity in these areas to match the increasing demand from financiers for this type of information. In addition, the capacity to disclose and report carbon or sustainability information needs to be robust and conform with the recognised standards in order to minimise any risk of “greenwashing”.
  • Long term strategy: As China and the world transit steadily to a lower carbon future, companies should treat climate change like any other major risk and formulate their own decarbonisation policies. Companies should continue to identify, measure, monitor and report financial risk arising from climate change, develop appropriate tools and metrics, and run risk scenarios.
  • Green supply chain: When determining whether a company is operating in a green and sustainable way, companies are now increasingly assessed on its entire supply chain to avoid a false green label being put on those who outsource pollution. The greenhouse gas emissions accounting protocols are also better developed to encourage companies to report their “scope 3” emissions, which are emissions that occur due to a company's activities, but from sources that they do not own or control, such as purchased goods, products and services, transportation and distribution (up- and downstream). Incorporating sustainability standards into the supply chain management is becoming more and more important.
  • Foreign investment: There is generally no restriction for foreign invested companies to explore China's green finance market and foreign investors are also allowed to participate in some of the local carbon market pilots.

Herbert Smith Freehills frequently holds webinars and publishes reports on climate, ESG and green finance related topics. Please contact the authors of this article to request a copy of our recent webinar recording entitled ESG in Asia part 1: ESG investing, sustainable finance and shareholder activism if you are interested.


1. Research on Green Finance Roadmap under Carbon Neutral Vision, Green Finance Committee of China Society for Finance and Banking, September 25, 2021, available at:

2. PBOC: Achieving a Smooth Coordination Between Green Finance and Transition Finance, available at:

3. Bank of China Plans to Issue its June 2022 Green Bonds in Offshore Markets, available at:

4. China's Green Loan Balance Reached Top One Worldwide, available at:

5. PBOC's Launch of the Decarbonisation Supportive Tool with Interest Rate at 1.75%, available at:

6. 200 Billion Re-Lending to Support Low Carbon and Efficient Use of Coal, available at:

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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