REVIEW OF FINANCIAL MARKETS
GREEN FINANCE CHALLENGES IN DEVELOPING COUNTRIES
IN THE FIRST OF TWO ARTICLES FROM CHINA, DR JUZHONG ZHUANG SURVEYS THE ROLE OF GREEN FINANCE IN DEVELOPMENT
Dr Juzhong Zhuang is currently joint chief economist of the International Finance Forum and an adjunct professor at Fanhai International School of Finance, Fudan University. He worked as a research Fellow at the London School of Economics after graduating from Manchester University with a PhD in economics in 1992. He joined the Asian Development Bank (ADB) in 1997, in charge of technical support for ASEAN+3 monetary and financial cooperation. From 2010 to 2018, he served as ADB’s deputy chief economist and deputy director general of its Economic Research and Regional Cooperation department. He also led ADB delegations to many ASEAN+3, APEC, OECD, ESCAP, and G20 meetings. He has written extensively on Asian development, covering economic growth, income distribution, economics of climate change, and cost–benefit analysis. His latest publications include Inequality in Asia and the Pacific andManaging middle income transition: challenges facing China.
OECD countries. Market infrastructure for domestic capital markets such as trading platforms, clearing systems, credit ratings, regulatory frameworks, and insolvency resolution systems are often lacking or not well developed. Green finance has added requirements in financial market infrastructure, such as green accreditation. Developing countries also have a
According to United Nations Development Programme studies, total investment needs for achieving Sustainable Development Goals amount to US$3.9tn annually from 2015 to 2030, equivalent to 11% of developing countries’ projected combined GDP. However, green finance in developing
countries is still at a nascent stage. For example, according to data compiled by Climate Bonds Initiative, of the total green bond issuances globally (at US$297bn) in 2020, developing countries only accounted for 16%; if China is excluded, the developing world accounted for less than 5%. The International Finance Forum and
the International Institute for Green Finance of the Central University of Finance and Economics have collaborated on a project called the Global Green Finance Development Index, which provides rankings of the 55 largest economies worldwide in
developing green finance. It finds that the bottom ten are all developing countries. Developing countries face enormous
challenges in growing green finance. Green finance is mostly for financing long-term infrastructure, including energy, transport, water and sanitation, and agriculture. While bank loans and foreign capital are certainly important, green finance should mainly be raised through domestic capital markets, to avoid maturity and currency mismatches. But in developing countries, by and large, financial systems are still bank-dominated, and domestic capital markets are not well developed, not very deep and liquid, despite their continued progress. For instance, in the 2010s,
outstanding domestic debt securities only amounted to about 20% of GDP in Latin America and sub-Saharan Africa, and about 40% in developing Asia, compared with more than 50% for
CISI UK-China Finance Development Forum: Balancing Climate, Energy and Development – Part 2 Juzhong Zhuang speaks at the event, jointly hosted between the Central University of Finance and Economics International Institute of Green Finance and the CISI. Available on CISI TV at
cisi.org/ china-uk2.
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small institutional investor base. For instance, in 2017, for developing Asia as a whole, pension assets accounted for only 6% of the region’s combined GDP, and insurance assets only for 25%, while for OECD countries, the two figures were 83% and 50% respectively. The global community has a duty to
support the development of green finance in developing countries. Green finance supports green investment, especially for achieving global net zero emissions, which benefits every country in the world. There are many things the global community can do. Let me mention three. Developed nations could:
1. Fulfil, as soon as possible, their pledge of providing US$100bn annually to developing countries to finance climate actions.
2. Support capital market development in developing countries. In this respect, multilateral development banks, such as the World Bank, ADB, IADB, and AfDB, have been doing this for some years through their policy- based lending. This should be continued.
3. Promote cooperation between market participants in developed and developing countries, especially in knowledge sharing and capacity building, and in promotion of sound investment principles. In this regard, international cooperation initiatives such as the Equator Principles, the Task Force on Climate-Related Financial Disclosures, UNEP Finance Initiative, the Principles for Responsible Investment, and the Sustainable Stock Exchange Initiative have a major role to play.
THE REVIEW SEPTEMBER 2022
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