4. Discussion of policies in green finance

4.1 The role of policies in green finance

The development of environmental protection industry needs a lot of up-front investment capital and has a long payback period of investment, so the environmental protection industry must have its own unique financing path. The relevant polices of green finance can ease the financing bottleneck that government faces to some degree combined with reform and innovative financial tools. The policies include two aspects: first, the reform and innovation of existing financial tools, an exploration of the type of fiscal policy and the feasible way to raise money for green finance development; second, the reform of existing fiscal revenue management and distribution policy, namely the efficiency and direction in the use of fiscal funds.

4.2 The impact of green bonds on environmental protection

Financial instruments are crucial means for applying green finance in real life. The global green bonds experienced an explosive growth. Green bonds combine both "bonds" and "green" features. First and foremost, green bonds own basic function and characteristics of ordinary bonds. For issuers, capital cost of issuing bond is low and interest is pre-tax charge; bond investment risk is relatively low and investors’ demand for yield is low thus reducing the cost of capital. Also, the bonds can raise a larger scale of funds whose terms are relatively long, so bonds are very suitable for those investment projects of large-scale infrastructure construction which demands huge capital and returns investment for a longer period. In addition, the financing subjects are persified, including government, financial institutions and enterprises, etc. For investors, compared with bank deposits, bonds tend to provide higher profitability, liquidity and stability meeting the persification of investors. At the same time, the bonds markets make investors easier to enter and exit, adjust the investment portfolio, thus having higher flexibility in liquidity management.

Compared to the regular bonds, green bonds put forward requirements to "green". The raised funds must be spent on renewable energy and sustainable green projects. Green bonds can hedge investment risk brought by environment and climate change. Some green bonds raise money to the project with national or local government subsidies and the government in the future may also launch preferential policies related to green bonds, such as lower investment threshold, more favourable tax, etc. In addition, green bonds have stricter disclosure requirements than regular bonds, so that investors can invest with a low risk, both meeting the social sense of responsibility and can obtaining benefits.

In June 2007, the European Investment Bank (EIB) issued the first global Climate Awareness Bond for financing its renewable energy and energy efficiency improvement projects. Since then, the international green bonds market has experienced the initial development stage (2007~2012), and in 2013, the green bond market entered the stage of rapid development. Among the key characters that the green bonds market performs are scale increase and the issuer varieties. Distribution scope is expanding from Europe to all over the world especially developing countries.

4.3 How the policies ease the contradictions between the green finance and environmental protection

The policies to support the development of green finance need to deal with the contradiction between ecological environment protection and green finance. The initial contradiction is the liquidity of funds that green finance raises for environmental protection. Liquidity refers to the ability of an asset to liquidate at a reasonable market price. There are two measure standards of liquidity: one is the cost of the assets to liquidate, the lower the cost of assets to liquidate, the stronger the liquidity of the assets; the second is the speed rate of assets to liquidate, the faster assets to liquidate, the better liquidity of assets. In general, when traded at active platform or market with plenty of the buyers and the sellers, the assets’ ability to liquidate is stronger. However, ecological protection is a long-term process. Whether it is directly invested for eco-friendly projects, or invested by equity in related industries, it needs relatively long investment cycle. In particular, some projects of large infrastructure construction often do not have money in the early stages of the investment, the recycling condition, therefore, also limits the relevant projects’ ability of absorbing funds.