Professor Lan Hong is from the She ethnic group. Lan has a Ph.D. in Economics and is the Deputy Director of the Ecological Finance Research Center, Professor and Doctoral Supervisor at the Department of Environmental Economics and Management of the School of Environment, Renmin University of China, and a visiting researcher at New York University. She has served as a senior technical advisor to the United Nations Environment Programme Finance Initiative (UNEP FI) and a technical advisor to the Equator Principles (EP) Promotion Project at the World Bank headquarters in Washington, DC, from 2017 to 2020. Lan also worked as the Deputy Director of the Green Finance Management Committee in Guizhou to promote the local practice of green finance.
Specializing in green finance, she has published more than 100 papers in key journals such as the China Economic Quarterly and The Economist and has presided over and participated in more than 60 projects and initiatives at international, national, provincial, and ministerial levels. She was the editor-in-chief for the 14th Five-Year Plan Carbon Finance Series textbooks and authored Green Finance System for Creating Ecological Civilization, Environmental Risk Management of Commercial Banks, Carbon Finance and Business Innovation, and New Theory of Environmental Finance: System and Mechanism. In addition, she has taken part in the specific investment and financing design work of many green projects as a financing design expert.
In August 2022, nine government departments, including the Ministry of Ecology and Environment and the National Development and Reform Commission jointly issued “The Notice on Piloting Climate Investment and Financing,” approving 23 local pilots. What’s the status of these pilots? What are the key areas requiring our attention? What policies have been implemented by local governments to support and promote the related work? In the future, what other policies do you think should be introduced at the national and local levels to continue to drive the development of climate investment and financing?
The 23 pilots have been fully rolled out and started implementation. There are three key aspects to highlight:
- The creation of a climate financing project pool and the establishment of carbon accounting and information disclosure as the infrastructure of carbon financing work,
- The breakthrough and key working areas of climate investment and financing based on each region’s resource endowment and features and
- Climate financing innovative tools and models that we can leverage.
I think the Tongzhou District of Beijing, as one of the 23 pilots focused on building a global voluntary ETS, has set a great model for the investment and financing of green buildings and transportation.
Depending on their resource endowments, local governments of those pilot regions have already put in the effort in creating a climate investment and financing project pool, exploring differentiated models with local characteristics, and establishing carbon accounting and other infrastructure, while introducing several preferential policies. For instance, the Tongzhou District of Beijing has pursued related policies to set up a global voluntary ETS, aiming to achieve a real breakthrough in investing and funding green buildings, green transportation, sponge cities, and climate-resilient cities. Miyun District of Beijing is another selected climate financing pilot. The district is where Miyun Reservoir is located and has dense forests and a large number of waterways and wetlands, offering great carbon sequestration capabilities. Therefore, the Miyun pilot is pursuing a model prioritizingthe conservation of the ecosystem’s resources.
In addition, to deal with the risk associated with climate investment and financing projects, establishing a risk-sharing fund with fiscal capital participation is critical. Financial institutions are not experienced with climate adaptation and mitigation projects and are thus still learning to control and avoid such risks. A government participated risk-sharing fund can share such risks with financial institutions, to a certain extent combining the private sector climate investment and financing with the government fiscal capital, which provides assurance to financial institutions that the government will work with them.
Therefore, setting up a risk-sharing fund with fiscal capital participation can boost the confidence of financial institutions on projects in the climate and financing pools and stimulate investment.
You have worked with the World Bank, spent years studying and piloting how to incorporate finance into ecosystem protection, and served as a green finance expert for several provinces and cities in China. Can you share with us examples of ecological product value realization and how green finance promotes regional low-carbon, high-quality development when you worked as the Deputy Director of the Green Finance Management Committee, Gui’an New Area?
To promote local green finance pilots, the People’s Bank of China has introduced policies to incentivize banks to conduct green finance business. For instance, green credit and green bonds have been included in the central bank’s assessment of commercial banks; financial tools such as refinancing and medium-term lending facilities were introduced to support banks issuing green credit. These supporting policies on green finance, in practice, provide preferential conditions to green projects by reducing financing costs.
For example, during my tenure as the deputy director of the Green Finance Management Committee in Gui’an New Area, the lending rates for general projects in Guizhou were at least six percent, if not more, but the rates for all our green projects were within five percent. Most green projects are derived from public goods of environmental protection, so these are usually large projects designed to build sewage treatment plants or wetland parks or to manage drainage basins, requiring hundreds of millions or even billions in capital investment. Therefore, interest rate reduction for green projects brought about by PBOC’s green finance policies has substantially lowered project costs. As a result, the net earnings of these have improved. Lower interest rates were offered because of the ecological value of these green projects. Therefore, the central bank’s green finance preferential policies, to a certain degree, realized the ecological value realization.
Green finance encompasses green policies and financing structure design. Local green finance pilots have created different fundraising models and financing structures for different projects to minimize financing costs and increase revenue, which is another path to helping realize green projects’ ecological value.
While driving the actual green projects forward, we generally adopt both the green finance policy tools and financing structure design to promote their ecological value realization. For example, in the protection project of Hongfeng Lake, the water source of Guizhou, a loan of 740 million yuan (107 million USD) was needed to plant 60,000 hectares (40 square kilometers) of water-conserving forests to improve water quality and secure water volume. However, this was a risky investment without any collateral assets. We carefully designed the financing structure to minimize the risks and increase the return while utilizing PBOC’s refinancing tool to lower the financing cost. Without the green finance supporting policies and the financing structure design, it would be difficult or even impossible for the project to raise funding, particularly given the shortage of government funding.
Another example is the Single Tree Carbon Sink Poverty Alleviation Project of Guizhou, which devised a new forestry carbon sink methodology and established a local carbon trade exchange. This project succeeded in realizing the ecological value of small-scale carbon sink forests in a market-based manner and helped alleviate poverty. According to China Certified Emission Reduction (CCER)’s current forestry carbon sink methodology, it is challenging for forests smaller than 10,000 mu (6.67 square kilometers) to generate any income. However, the majority of low-income farmers in the mountainous areas of Guizhou do not have the ability to manage carbon sink forests larger than 10,000 mu (6.67 square kilometers), but only to plant dozens or hundreds of trees. Our innovative approach supports single-tree carbon sink trading for poor farmers who can plant only one tree and still monetize its ecological value. Moreover, each tree is e-labeled and linked directly to the bank card of the planted farmer so that the money people paid for carbon sinks can be transferred to the farmer’s account, providing direct benefits.
You have been working on the development of biodiversity risk management standards for financial institutions, is there any arrangement for pilot work? What is the progress? What is the expected goal?
As biodiversity loss worsens, financial institutions face ever-increasing biodiversity-related risks. There are two types of biodiversity-related risks: physical risk and transition risk. Currently, financial institutions, in general, face more transition risks. The Green Peacock Case of Yunnan province was a typical example.
We have now compiled The Biodiversity Risk Management Standard for Banks and successfully released it at a side event of the United Nations Biodiversity Conference (COP 15) in Montreal, Canada, in December 2022. On March 17, 2023, the Standard was officially adopted in Quzhou, Zhejiang Province, and is currently at the pilot implementation stage. Local branches of China Construction Bank, Industrial and Commercial Bank of China, Industrial Bank, and other banks in Quzhou have incorporated biodiversity risk management into their due diligence, mid-loan, and post-loan management processes in accordance with the Standards and conducted a pre-loan review based on the key items and management methods provided by the Standard.
The city was chosen for the pilot of the Standard because it is where Qianjiangyuan National Park is located. Biodiversity risks tend to be geographically specific, especially when it comes to the habitats of endangered species, such as the black muntjac in the park. Industries and projects adjacent to the park face higher biodiversity risks, so the Quzhou pilot could serve as a typical case that has more significance. The principle of biodiversity risk management is to turn risks into opportunities and to create an industrial chain and product clusters in favor of biodiversity via proper risk management—a goal to which the resources and surrounding environment of the park are also conducive.
How do you practice a green and sustainable lifestyle in your daily life?
I adopt a low- or zero-carbon approach in my daily life and work. For instance, I buy carbon-neutral tickets from Xiamen Airlines, use more environmentally friendly travel methods such as walking or taking public transportation, and purchase energy-efficient or low-carbon labeled products.
I believe a simple lifestyle and reducing consumption are key to carbon neutrality. Thus, I choose to pursue a minimalist lifestyle, consuming as little natural and ecological resources as possible: only purchasing locally produced vegetables, fruits, and food to reduce energy consumption incurred in transportation; reusing eco-friendly shopping bags; opting for simple clothing and food ingredients; calculating additional emissions generated by the conferences I organize or attend and offsetting by purchasing carbon sink.