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Soil Remediation in China: How a huge pollution problem is putting the green finance movement to the test

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By Nathalie Bernasconi-Osterwalder, Mark Halle, April 12, 2017

Sustainable development is an investment problem. Without shifting the bulk of investment funds from unsustainable activities to sustainable ones, it will be impossible to move the planet onto sustainable foundations, and there is no chance that we will attain the Sustainable Development Goals.

This is not a new insight. The need to align investment and finance with the needs of sustainable development was recognized at the Earth Summit in Rio in 1992, and there has been an explosion of interest in how to “green” investment ever since. This surge has had an impact, with the strong growth of financial market actors signing up to green standards, disclosing their carbon footprint, or joining global initiatives such as the Global Compact for corporations and the Equator Principles for banks. No respectable company of any size today can afford not to implement measures to improve its environmental, social and governance (ESG) performance.

The greening of the financial system is underway

More recently, there has been a surge of creativity in financial and capital markets—with the rapid growth of green bonds, green insurance products, impact investment vehicles, and even green banks and credit funds. Central banks are examining environment and climate as potential prudential risks—namely risks to the stability of the economy itself. Pension funds are divesting coal assets, and legal developments in some countries extend liability for environmental harm to lenders. The development of green digital financial technology is opening new horizons for financial transfers that entirely avoid traditional banking institutions. The greening of the financial system is genuinely underway.

In the end, though, the test of green finance is whether it addresses and resolves real environmental problems. It is not sufficient to create new green boutique opportunities for investors with a conscience. Nor is it sufficient to ensure that new investments meet green criteria, important as that may be.

The real test lies in the ability of green finance to move to scale in addressing the legacy of environmental damage that plagues the planet.

One such experiment is underway in China where IISD, with Chinese and international partners, is testing the potential of the entire spectrum of green finance approaches to deal with China’s legacy of toxic soils and the urgent need to restore them to health and productivity.

Decades of rapid industrialization and the sacrifice of environmental standards at the altar of growth have left China with vast areas of contaminated soil—urban sites, farmland, and industrial areas and their surroundings. China’s leadership recognizes the problem as urgent, and a new law on soil remediation is being developed.

Cost of cleaning China's contaminated soil: USD 1.3 trillion 

The problem is that, while the techniques for soil cleanup are known, they are expensive—especially at the scale of the problem in China. Estimates of the cost of addressing the challenge run to USD 1.3 trillion. While in the past the public budget might have allocated the funds, this is no longer possible. The government itself estimates that it might be able to cover some 15 per cent of the overall cost. The rest will have to come from private sources.

The challenge is two-fold. The first is how to make soil remediation a worthwhile investment for holders of private capital. This is not immediately obvious. What, after all, is the revenue model for someone who invests in cleaning up a plot of land? The answer, of course, depends on the situation. Contaminated urban sites with high intrinsic value will attract investment more easily than farmland, where raising capital will be more challenging.

The second challenge is to ensure that the limited investments from the public purse are used optimally—namely that they are deployed in such a manner as to leverage the maximum private investment. This can take the form of incentive schemes, measures that reduce the perceived investment risk for private capital, measures that lower the cost of capital, blended capital, and both insurance and guarantee schemes. And in the case of some mining or industrial heritage sites, there may be no alternative to government funding.

Prospects for replication and scaling are almost infinite

To meet all these challenges, the full range of innovative financing vehicles and “new finance” approaches will need to be assessed and tested—something that has never before been undertaken at this scale. The soil remediation initiative will examine the potential for green bonds—a debt-finance mechanism that has become highly popular in China—crowd funding, peer-to-peer investment vehicles, local community mobilization, fintech-enabled investment, and more. It will revive mechanisms such as debt-for-nature swaps that, at one time, were prominent.

Resolving real environmental problems in the here and now through innovative green finance and dealing with the decades-old legacy of environmental degradation and pollution will take the green investment movement to another level.

If this initiative succeeds, the prospects for replication and scaling are almost infinite.