The Use of Public Environmental Data in Green Finance

The Use of Public Environmental Data in Green Finance

Dr. Guo Peiyuan

On 16^th and 17^th January 2017, the G20 Green Finance Study Group held its first work meeting of 2017 in Frankfurt, Germany. The meeting was co-hosted by the People's Bank of China (PBoC) and the Bank of England. The main focuses of the Green Finance Study Group in this year are analysis on environmental risk in finance and availability of data regarding environmental improvement. The author was invited to attend the meeting and gave a speech on the use of publicly available environmental data in green finance. This article is published based on the author’s speech.

What is the Public Environmental Data?

Environmental information or environmental data (the two terms are generally the same, hereinafter collectively referred to as environmental data) are important infrastructure for green finance. Due to the lack of environmental data, the market cannot identify the level of greenness and environmental risk of the assets. Thus the market mechanism of green finance cannot be formed. This fact has been clearly pointed out in the Guidance for Establishing the Green Financial System collectively issued by the seven ministries, as well as in the 2016 G20 Green Finance Synthesis Report.

Based on the different disclosure entity, environmental data can be roughly categorized as environmental data disclosed by enterprises and environmental data disclosed by non-business entities. The former includes sustainability reports issued by the listed companies according to the requirements of stock exchanges, or the pollutant discharge information that the key pollution discharging entities disclose to the public according to the requirements of the environmental protection administrations. The later includes the environmental data released by international organizations, governments, research institutes and civil organizations. Those data could be about certain companies, such as information on violation; or could be non-related to certain companies, such as data on one country or region’s water resource and climate change.

Environmental data disclosed by entities other than enterprises could be known as public environmental data. Disclosed by public institutions, these data have more public attributes (especially data on the national natural resources and climate), and some can be accessed through public channels. The public environmental data normally have several attributes. The first is their large quantity and scale, because they are not limited by the boundaries of certain corporations. The second is their varieties of forms, from violations records of companies to quantitative goals of environmental policy of the government are all included. The third is their diversities of sources. Public environmental data can be obtained from various channels from many different entities. The fourth is their low marginal cost. Some data (such as climate data) are collected for intended usage. Therefore, their cost has already been covered. Collecting those data has no additional cost. The more the data is used, the less the marginal cost is.

Public environmental data can play an important role in green finance, since it acts as an important supplement to the environmental data disclosed by enterprises. For instance, if financial institutions want to implement environmental stress test, they need to build one or more virtual future scenarios. Public environmental data such as quantitative goals of environmental policy, ecological carrying capacity are needed in the building process. In the past, we paid more attention to the environmental data disclosed by enterprises, while neglected the public environmental data. Therefore, a lot of public environmental data remained "sleeping treasure." The G20 Green Finance Study Group is at the right time to put forward this issue, and termed public environmental data as Publicly Available Environmental Data (PAED).

Using PAED: The Experience of China

There has been limited research on the use of PAED in green finance. Therefore, the next section tries to sum up its patterns through the review of China’s practical experience in the past two decades.

In the 1990s, China gradually established various environmental management systems. The environmental authorities at the time was the State Environmental Protection Bureau (later reorganized and renamed as the State Administration of Environmental Protection, and the Ministry of Environmental Protection). According to relevant laws and regulations, many companies were required to submit a variety of environmental data to the administration. The administration also initiated the collection of some data. These data were scattered in different governmental sectors. For example, environmental monitoring administrations had data on pollution discharge of enterprises, environmental impact assessment administration had environmental data on projects, and ecological protection administrations had data on natural resources. At that time, there was no Regulation on the Disclosure of Government Information in China yet (issued in 2007). The government’s awareness to actively disclose data was not strong. Therefore, a lot of data were not publicly available, especially the data on pollutant discharge and environmental violations of enterprises. The China Statistical Yearbook on Environment and other souses of information usually only publish some general data. Therefore, the PAED is missing during this period of time.

The condition of the PAED in China is improved with the increased disclosure of government information, which is speeded up by the rapid development of Internet and mobile communication technologies. The obvious improvement is that there are more environmental data available for society, or within a certain scope. A remarkable milestone related to green finance is the Notice on Issues Concerning Sharing Information on Environmental Protection of Enterprises issued by PBoC and State Administration of Environmental Protection in 2006. As required by the notice, the State Administration of Environmental Protection should provide the PBoC with the information on enterprises’ violation of environmental law, gathered in the Administration’s special mission to regulate illegal pollution discharging enterprises and to protect people’s health. Upon maturity, law enforcement information from environmental protection administrations would be gradually incorporated into the credit reference system of enterprises. One year later, State Administration of Environmental Protection, PBoC and China Banking Regulatory Commission collectively issued the Notice on the Implementation of Policies, Laws and Regulations on Environmental Protection to Prevent Credit Risk. It is required that environmental protection sector and financial sector at all levels should work closely with each other, and should establish schemes of information communication. Through those policies, China initiated a scheme for sharing the PAED. Commercial banks and other financial institutions can refer to these information and to restrict or to stop loans to polluting enterprises.

It is worth mentioning that the Institute of Public & Environmental Affairs (IPE) was also established during this time period (2006). The earliest work of IPE was to bring together the PAED on environmental violations of enterprises, and set up the China's Water Pollution Map website. Most data came from environmental protection administrations at all levels or media reports. Therefore, without government information disclosure (whether active or passive disclosure), IPE would face lots of constrains to set up the Water Pollution Map.

The sharing of environmental data by environmental protection administrations has strongly promoted the development of green finance, especially green credit of commercial banks. However, there are many challenges in the utilization of those data. One of the challenges is that the majority of the data are about violation by enterprises in the form of blacklist, but these data are lack of content description. Most of the shared information are negative. Although excluding bad enterprises are made possible, the lack of positive information makes it impossible to identify good businesses. Financial institutions sometimes lack the expertise to read, understand, and utilize environmental data. In order to solve these problems, some provincial and municipal environmental protection administrations in recent years have begun to explore new practices, in order to present PAED in simple, clear and structured ways. Environmental Protection Department of Jiangsu has explored in-depth about environmental data. They designed a set of environmental credit evaluation scheme, using five colors (green, blue, yellow, red and black) for labeling. Financial institutions can take different actions accordingly: To encourage loans to enterprises labeled green and blue. To include enterprises labeled yellow for observation. To withdraw loans for enterprises labeled red and black. Some other provinces are using simpler labels of green, yellow and red. IPE has explored in the structural presentation of PAED. The first case was about green supply chain. By building CITI (Corporate Information Transparency Index), companies’ environmental performance could be improved as part of their branding efforts. In 2015, IPE launched the pollution ranking of listed companies in China. By analyzing data from online monitoring upon companies’ pollutant discharge, the listed companies are ranked based on their level of excess pollutant emissions. With this list, the capital market is able to impose pressure on companies with bad environmental performance.

Obviously, from the sharing of raw data to structured presentation, the cost to use PAED is declining for financial institutions, and the willingness for financial institutions to use PAED is increasing. In green finance, PAED’s application has been greatly enhanced. However, to maximize the value of PAED, the use of data should be related to the pricing scheme for the companies. In this regard, Jiangsu Province once again takes the pion*eering initiative in China. They connect the five-color environmental credit rating with companies’ water and electricity prices. At present, enterprises labeled as red or black need to pay an extra 0.6 yuan/ton or 1 yuan/ton in addition to market prices. Thus, the operating costs of the companies are substantially influenced. Financial institutions therefore will be more concerned with PAED and will integrate them into their risk analysis and pricing.

The Application of PAED: Summary of the Four Stages

The above-mentioned practical experience describes China's exploration to use the PAED in green finance in the past two decades. In summary, from the perspective of green finance, the use of PAED can be divided into four stages (as shown in the table below). The first stage is that data’s missing. The government has some PAED, but lacks the willingness for disclosure or sharing. As a result, most of those data are “sleeping”. The second stage is that data are being shared. At this stage, government sectors, NGOs, and etc. share some or all of their PAED with other entities or the general public. The majority of those data are raw data with certain value. Financial institutions occasionally use them, but the data is not convenient to analyze. The third stage is that data are being presented with proper structure. Convenience and easiness of data utilization is the main issue at this stage. PAED should be presented to financial institutions in a more structured and more user-friendly manner. Methods of rating and listing can be used. The fourth stage is the risk pricing, when PAED are integrated deeper into the pricing system for enterprises, and when PAED’s value is maximized.

The four continuous stages formed the roadmap for the use of PAED. The government should gradually promote the sharing of PAED, followed by their structured presentation, and finally their integration into pricing. Currently, China could further expand data sharing, promote structured presentation, and start exploring risk pricing.

Table 1: Four Stages of Using the PAED in China

Policy Recommendations

For the national or regional government policy makers, using PAED to full extent can effectively promote the development of the green finance, and ultimately promote the transformation towards a green society and economy.

Specific policy recommendations are as follows: Firstly, pay attention to PAED especially the "sleeping" PAED while promoting the disclosure of environmental data. Secondly, based on the four-stage roadmap, analysis on the country/region current stage should also be carried out in order to accordingly determine the complexity and depth of policy tools (as shown in the table below). Thirdly, when designing and implementing policy tools, principles including user-friendly, simple, substantial, quantitative, transparent and etc. must be taken into consideration. Fourthly, development of third-party data service providers (including professional NGOs) should be encouraged. In many cases, the government is better at providing raw data, but third-party data service providers abide by rules of the market are better at the secondary development of data, so as to improve data availability and circulation efficiency. Fifthly, successful cases should be provided to various stakeholders in the market, in order to guide the financial institutions in using the PAED actively.

Table 2: Policy Tools Available for Each Stage

The author is Dr. Guo Peiyuan, General manager of SynTao, Chairman of SynTao Green Finance.
Source: China Financial News
Translation: SynTao Green Finance