22 January 2018

China’s New Green Imperative

Key themes emerged from HSBC’s China Connections event in Shanghai in October, when businesses from around the world gathered to explore growth opportunities in China.

Like many countries that have undergone rapid development, China's evolution into the world's second-largest economy has come at a significant environmental cost. From a largely coal-based electrical system that has caused high levels of air pollution, to questionable industrial practices that have contaminated large swaths of agricultural land, the authorities face no shortage of pressing problems to tackle.

The good news is that the same speed and focus that have marked China's emergence as an economic superpower are being applied to efforts to clean up the country and place it firmly on a more sustainable path.

This was evident in the prominence given to the environment at the 19th National Congress of the Communist Party of China. In discussions with senior leaders, President Xi Jinping noted that the country should eliminate practices that pursued growth ahead of environmental quality, and unveiled a list of priorities that included intensifying anti-pollution measures and promoting the more efficient use of natural resources.1

Signs of a more conscious environmental approach are also contained in China's major developmental blueprints. Targets outlined in China's 13th Five-Year Plan, for example, include reducing water and coal consumption, and slashing carbon dioxide emissions per unit of GDP by 40—45 percent from 2005 levels by 2020.2 The country's 13th Renewable Energy Development Plan, adopted in late 2016, calls for 20 percent of primary energy consumption to be derived from non-fossil fuel sources by 2030.3

The new sense of urgency created by these ambitious national goals has been trickling down to local administrations, many of which are now evaluated on KPIs tied directly to environmental performance, according to Yang Xiao Zhong, Chief Branding Officer at leading solar panel manufacturer Trina Solar.

Peggy Liu, Chairperson of Shanghai-based nonprofit Joint U.S.—China Collaboration for Clean Energy (JUCCCE) and a professor at the China Academy of Governance, which trains Chinese officials, has noticed a broad consensus on the need to drive environmental improvements in China at the municipal level. 

Local mayors "are not questioning whether climate change exists, or how they're going to make [environmental improvements] economically feasible," she says. "They only want to know who to call, who can get to their city and start implementing solutions as fast as possible."

Benefits—and risks—for businesses

This increasing appetite for sustainable solutions and practices translates into significant opportunities for businesses that may be able to contribute to China's environmental goals. Yet companies operating in the country must also be aware of the possible implications of China's increased environmental focus for their local strategies and operations.

Barely a decade ago, there was virtually no environmental enforcement in China, says We-Shin Chan, Director, Climate Change Strategy at HSBC Research. But with an increasingly connected and vocal public demanding action to tackle the severe pollution that has often affected Beijing and other cities, the government has steadily tightened environmental controls, most notably with an updated Environmental Protection Law in 2015. 

Companies that fail to take this shift seriously, or that don't factor it into their decisions or planning, will face serious risks, according to businesses on the ground. Christopher Hay, CEO of contract manufacturer Hayco, which has several facilities in China, cited a 2017 ban on waste paper imports—which took many firms by surprise and caused paper prices to skyrocket—as an example. "When China does something seriously, you can expect overnight change," he says.

Businesses—particularly foreign companies, which tend to be held to higher standards—therefore need to be proactive and place themselves ahead of the curve in enhancing the environmental quality of their operations. This may require investment to retrofit facilities in order to improve waste treatment systems, or to install LED lighting. But these investments pay off. Hayco, for example, has received tax rebates for successfully reducing carbon emissions from its Chinese factories. 

No longer optional

As China's environmental standards develop more in line with—and perhaps even surpass—global norms, companies simply will be left with no choice but to make sustainability a priority. 

Beyond the possible reputational costs of poor environmental practices, pollution-intensive industries are likely to struggle to access funding from banks and investors in the future. There is now wide recognition that consumers are increasingly interested in making ethical buying decisions, and are actively seeking greater accountability from the products and services they invest in. The opportunities presented by the rapidly developing markets for sustainable assets continues to grow. As more investors factor sustainability criteria into their decisions and mandates, total sustainable assets globally reached nearly $23 trillion in 2016, a 25 percent increase from 2014, according to the Global Sustainable Investment Alliance.4

In particular, green bonds, which finance projects that can be tied to environmental outcomes, have met with strong investor demand, and are an increasingly attractive source of funding for sustainable infrastructure and development. In November 2017, HSBC announced $100 billion of finance for low-carbon technology and sustainable development by 2025, as part of its global commitment to tackling climate change, China is playing a leading role in the rapid growth of this asset class, accounting for almost 40 percent of the $81 billion in green bonds issued globally last year.5

Perhaps most encouraging, sustainability has gained enough of a foothold locally that China is now beginning to export sustainable concepts and practices to other countries. In 2015, President Xi Jinping unveiled a $3 billion-plus fund to help developing countries deal with the impacts of climate change, along with plans for hundreds of low-carbon and climate mitigation training and demonstration projects.6

The Chinese government has also launched an international center to advance research on sustainable development, notes Yang of Trina Solar. Initiatives like these seem to illustrate that China, as Liu of JUCCCE says, is "rapidly moving from the chief polluter of the world to the chief provider of innovative, sustainable solutions for the world."  


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China’s journey from factory to forerunner









This article was published in Bloomberg on 5 December, 2017.

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