Analyzing Green Finance Incentives: An Empirical Study of the Chinese Banking Sector

Abstract

Climate change is a major contemporary issue. In response, financial institutions offer green financing to fund low-carbon investments to those organizations who want to help mitigate this issue. Nevertheless, a lack of green credit remains the case. Therefore, to learn how to close this financing gap, this empirical study explores China’s green finance through the lens of the Chinese banks who are the providers of such loans. Green finance has been growing rapidly in China since the Chinese government issued the Green Credit Policy. Previous studies have posited that banks have incentives in the form of credit risk management, new business opportunities, corporate reputation, and compliance risk to offer green loans. The objective of this thesis is to ascertain whether green loans provide better risk management and more business opportunities in practice. As a part of the research, this thesis explores China’s banking system and the development of, and current research into, China’s Green Credit Policy. This study identifies a distinct characteristic of the Chinese banking system (i.e., heavy government involvement) and posits how the government may influence the development of green finance in China. A dataset with a panel design was collected to perform the quantitative tests. The dataset contains financial and green finance data from 24 banks in China between 2009 and 2015. Panel regression techniques, such as Two-stage Least Square Regression Analysis (2sls) and Random-effect Panel Regression (RE), were used to examine whether the banks’ green finance practices lead to better financial performance. The results reveal that green loans grow at a faster rate than do other types of loans, and that allocating more green loans to the total loan portfolio reduces a bank’s NPL ratio. The findings imply that green financing is a less risky investment with increasing demand. Through empirical evidence, this thesis contributes to the existing green finance literature and fills the literature gap on the Green Credit Policy in China through its study of the policy’s implementation from the banks’ perspective.