New report: China is now at the forefront of responding to environmental challenges at home and abroad. China’s target to reach net zero emissions by 2060 and its hosting of the 15th Convention on Biological Diversity this year will set out a post-2020 Global Biodiversity Framework.
At the same time, the country has emerged as a leading green financial centre. In 2016, during its G20 Presidency, China pledged to become a global leader in green bonds. Since then, it has developed a sophisticated market and regulatory architecture, and become the second largest market in the world, with US$120 billion of green bonds issued. These developments are especially significant right now. Many economies – and the ‘natural capital’ that supports their productivity and resilience – are under severe strain. Half of low-income countries are either at high risk of or already in debt distress, creating the need for immediate fiscal space and resources to drive inclusive economic growth. The G20 is advancing discussions on a range of solutions to address both the sovereign debt and nature crises, and China’s role as a creditor puts it in a position to engage in discussions on how best to support debtors.
There is a two-fold opportunity to integrate economic risks and opportunities posed by nature and climate into debt markets, while at the same time driving economic recovery and meeting international commitments. First, the pricing of sovereign debt should reflect the tangible economic impacts of how ‘natural capital’ is managed as a driver of economic productivity and development, such as through sustainable agriculture and tourist revenues, and in providing long-term resilience in the face of climate change. Second, linking nature and climate outcomes to sovereign debt issuance and payment terms can help debtor countries weather the current debt crisis, and at the same time support their efforts in meeting international climate and nature commitments.
In a new report released today, NatureFinance (formerly known as Finance for Biodiversity (F4B)) sets out the opportunity for China to engage in developments linking debt and biodiversity. The emergence of a new generation of debt instruments would allow China to advance the risk profile of nature in sovereign debt markets, secure nature outcomes that benefit debtor countries, and advance the goals of international commitments, while unlocking resources for meeting broader fiscal demands.
The paper argues for an equally rapid and ambitious approach for China to develop Nature Performance Bonds (NPBs). These bonds offer a key opportunity for China to integrate the pricing of nature-related risks and performance into financial markets. This would build and expand its existing market capabilities, and catalyse the issuance and trading of these financial instruments in domestic and international markets. The report sets out three practical steps that China could take, which include: advancing research on prospects for nature-specific debt instruments and nature-supporting market arrangements; participating in international initiatives to advance the integration of nature in debt markets; and developing a programme of innovative domestic pilots to underpin an international leadership role in issuance and trading.
This report has been developed as a contribution to the Special Policy Study on Green Finance of the China Council on International Cooperationon Environment and Development (CCICED).
