A new set of guidelines on green industry are a key building block in China's green financial system and help clarify the global green finance mission.

On Feb 14, the Chinese National Development and Reform Commission along with relevant ministries and agencies published the Green Industry Catalog of 2019.

The catalog is of national importance because it establishes the rules for what kind of industries can be defined as green and thus be grouped within the growing field of environmentally conscious business sectors in China. This will help grant companies proper status and spur ecological growth in the long run.

The catalog encompasses six sectors, touching on 30 industries and 211 sub-industries. It is the first of its kind specifically focusing on green industries, and provides important guidance for developing green finance as well, since finance is closely related to industry.

While the new catalog includes a large number of sub-industries which are not in the existing Green Bond Catalog, it also excludes a few, most noticeably in the area of industrial energy conservation, energy management centers, urban and rural infrastructure construction with energy efficiency, passenger railways and waterway transportation.

When it comes to the definition of green, the new catalog also varies with the Green Bond Catalog in a number of cases. For instance, hydropower can be considered green only if it is a key large-scale hydropower project specified in the country's 13th Five-Year Renewable Energy Plan (2016-20).

One of the most important parts of the green finance is green bonds. The NDRC's catalog of green industries could help align two different bond types that currently exist in the country's green bond market - the corporate bond and the financial bond.

The green corporate bond, primarily used by State-owned enterprises, is issued according to documents by the NDRC and the Green Finance Committee.

The green financial bond, a primary tool for financial institutions, is issued according to documents by the China Society for Finance and Banking and the People's Bank of China.

It is largely believed that the two documents for issuing green bonds will also be modified accordingly, and a revised and uniform national green bond standard is expected in the near future.

The new catalog has the potential to be a building block in the standardization of green financial rules according to industry characteristics.

It can help coordination between different departments in identifying and rating, and ensure that information disclosure rules are in place for various green finance products.

With the new catalog, standards and guidelines for green financial products can be updated and standardized. We have long wished to see a coherent set of standards for not just green bonds, but also green credit, green stocks, green insurance and green funds. But such a suggested transition should be as smooth as possible.

To ensure this, professional analysis of new and old policies is needed with guidance available for stakeholders, so they can clearly understand what projects are going to be redefined.

Transitional management is also required for the proper handling of green finance funds and green projects, so they might adjust funds with new policies while avoiding financial loss in previously finalized projects.

An important last step in ensuring a smooth ride lies in the monitored update of databases that host relevant data for actors in the green financial fields, from bonds and stocks to funds and credit - an overall update with clear time division is critical to ensure fair assessment of a financial product from a historical point of view.

The new catalog is not only of domestic benefit, it could also help align regional standards.

Asian countries are incrementally adding green finance policies to their national legislations.

The Association of Southeast Asian Nations members, Japan, India and other countries and regions have all established their own standards for green finance. But countries in Asia are in different development stages, with different industrial structures, energy structures and different economic growth focuses, thus there exist differences in green definitions and classifications.

In order to reduce the transaction costs for cross-border circulation and attract more green investment, it is necessary to unify all these standards for green finance.

This could be achieved by studying the overlapping clauses between different countries' green standards and establishing a common framework with reviewable conversion mechanisms.

The new catalog is an important step down this path. With Chinese financial markets further opening up to the world, the access to various markets, such as green bonds, will be widened.

A translatable definition of what is green will be welcomed by responsible investors looking for investments in the green financial market.

The newly issued green industry catalog will also be an important building block in forming such a world.

The author is director general of the International Institute of Green Finance at the Central University of Finance and Economics. 

The author contributed this article to China Watch exclusively. The views expressed do not necessarily reflect those of China Watch.

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