The global environmental crisis has worsened since the signing of the 2015 Paris Agreement. Greenhouse gas emissions have been growing while rainforests in the Amazon and Indonesia are shrinking, not least because of man-made fires. As for efforts to fuel eco-friendly development, most countries are stuck in the second gear for far too long and are not moving at the pace they should be.

By contrast, China's efforts to build a green economy have been exemplary. It is estimated that China's carbon emission will peak by 2021, nine years ahead of schedule. The green transition is extremely complex, but it is worth asking why most countries have strayed from the collective road map for a sustainable future. In particular, the global financial sector should play a leading role in scaling up green initiatives by shifting capital allocation and involving all stakeholders. And it can use China's experience in this regard.

Although the concept of green finance was not pioneered by China, the country has been one of the largest and most rapidly developing green finance markets for several years now. Green finance has always come across as an attractive deal for investors in China. After all, the nonperforming rate of green loans is significantly lower than that of ordinary ones.

Between 2015 and last year, 21 major financial institutions in China issued more than $114.09 billion in green loans, while China's green bond issuance accounts for nearly 15 percent of the world's total.

China is emerging as a global testing ground for innovations in green finance. In 2017, China started five national green finance pilots to encourage innovation in green finance products.

The five pilots are at different economic levels and spread across different regions. This way all kinds of innovative ideas in green finance will get tested and the best practices can be duplicated in suitable areas.

Given the short history of China's green finance practices, its ability to bring about a green transition in private capital is no mean achievement. Several lessons can be drawn from this.

First, a comprehensive policy framework involving different ministries as stakeholders has made the top-level design compatible with incentives. After the central government announced the guidelines to establish a green financial system, the People's Bank of China, the Ministry of Finance and other government departments began setting standards for green bonds, loans and banks; earmarking pilot regions for green finance; issuing regulations on green funds and public-private-partnerships; and establishing compulsory information exposure mechanisms for a national carbon market.

Second, China's wisdom of relying on local governments for development drives its green transition. Ecological civilization serves as the blueprint for local governments. So, each of China's 31 provinces penned policies to spur green bond issuance and green credit at the local level. Even though these policies took various forms, from introducing monetary subsidies for the issuers, reducing barriers for green entities to borrowing money and encouraging green financial product innovation, the regional approach helped the local governments gather much experience and brought in greater flexibly than the private sector-led initiatives in Europe.

Furthermore, macro-prudential policies combined with micro-financial innovations triggered a boom in demand for green financial assets.

Therefore, qualified green bonds and loans can now serve as collaterals for the central bank's refinancing operations, while the mandatory pollution liability insurance has raised awareness about environmental risks.

And third, the Green Finance Committee of China Society of Finance and Banking has brought in great policy entrepreneurship among different stakeholders. Currently, two-thirds of China's financial assets are managed by the committee members. They are also the key actors facilitating new policies, promoting the concept of green finance in the industry and green financial product innovation.

China is greening its financial system through domestic endeavors. However, China has also learned from global experiences, and is sharing its knowledge with the international community. It is during the G20 Summit in Hangzhou, Zhejiang province, in 2016 that green finance entered the global agenda thanks to the support from a China-led working group.

Through G20, China has been working closely with both developed and developing economies to fuel the global finance sector's green transition.

Besides, under the Belt and Road Initiative framework, China helped establish green investment principles for Belt and Road projects in August, so as to mitigate the negative impact of investment projects on the environment and ecology.

BRICS nations have been cooperating in green economy, with the New Development Bank serving as an active platform for green financial cooperation.

In 2017, the New Development Bank and Brazil's National Bank for Economic and Social Development inked the first green agreement under which $300 million was given as a 12-year loan to fund renewable energy projects in Brazil. A$300 million loan from the NDB to South Africa is for reducing carbon emissions and enhancing energy efficiency. Currently, Brazil and China are the only three BRICS countries that have released official green credit standards.

There is overall consensus that a global green transition is inevitable and urgent, but the private sector's initiatives are not enough to drive such a transformation. The demand for green investment is in trillions of dollars, so is the demand for green financial products. Nonetheless, the global financial system is not ready to match the two sides, leaving a huge gap between what is needed and what is supplied.

China's endeavors to green its financial system has not only led it toward low-carbon development, but also helped build green infrastructure and a carbon trading market. But the ambitious global green transition cannot rely on some countries' financial systems. An international problem needs an international solution. Despite some weaknesses, China's surge from a straggler to a leader in green finance could offer the world wisdom and inspiration.

Cao Shengxi is a research fellow at China Finance 40 Forum and a PhD candidate at Tsinghua University. Li Rong is a research assistant at the China-Latin America Development Research Initiative led by Alessandro Teixeira at Tsinghua University.

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

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