MMJS1213 Green Economy Green Credit Assignment 2 Lecturer: Dr. Umi Aisah Asli Submitted by: Hazirah Hanim binti Zaharuddin (MMJ201048) Date of Submission: 2 November 2021 MMJS 1213 – GREEN ECONOMY 2021/ 2022 – SEMESTER 1 Green Credit Hazirah H. Zaharuddin, MMJ201048 This assignment was based on the journal The Impact of Green Credit on Economic Growth-The Mediating Effect of Environment on Labour Supply by Cai Chene, Yingli Zhang, Yun Bai and Wenrui Li. 1. What is Green Credit? Green credit is a derivative financial tool and a macro-control way of coordinating the financial system and environmental protection. It was introduced by China State Environmental Protection Bureau, the People's Bank of China, and the China Banking Regulatory Commission to bring ecological environment factors into the accounting process and the decision-making of financial institutions and to help enterprises reduce their energy consumption [1]. Green credit is a series of policies, institutional arrangements, and practices to promote energy saving and emission reduction through credit. It reflects that state guide banks and other financial institutions to voluntarily undertake and fulfil more social and environmental responsibilities through appropriate regulatory policies and regulatory measures. Thompson and Cowton hold that green credit policies mean that, in the process of offering credit, banks take environmental information about projects and the operating companies into their audit mechanism and make final loan decisions through this mechanism [2]. Generally, green credit can be considered as a type of financial service provided by banks to encourage borrowers to commit to green investment and achieve sustainable development [3]. 2. Research on the performance of such an environment-oriented financing policy has been divided into two main categories, which are – i. Impact on The Economy – Implementing an environment-oriented financing policy has been found to promote economic growth. In theoretical qualitative research, the more developed a financial system, the higher the total factor productivity will be; thus, the economy will eventually develop faster. Many studies have found that green finance can guide the flow of capital and provide financing channels into green industry to promote sustainable economic development. In addition, green credit acts as an economic stimulus by enforcing the environment-oriented financing policy to control the development of the area to only allow green economic growth. In the journal, it was concluded that there are three channels to promote economic growth through green finance: the formation and development of innovative technologies, the promotion of environmentally friendly enterprises and the formulation of effective trading strategies. In a case study in China by Dong Wen [5], he proposed that China should vigorously strengthen green credit policies and promote technological innovation and efficiency to promote green economic growth. Meanwhile, in empirical and quantitative research, it was found that the scale and resource allocation efficiency of green finance hinder economic development. Although a study by Qiu Haiyang [6] stated green finance has a negative effect on economic development, he proposed improving the green financial system and innovating green financial products. ii. Impact on The Environment – From the theoretical qualitative research on environmental improvement, a "pollution sanctuary hypothesis" was established which presume that environmental regulation will make polluting enterprises gradually move from areas with stronger regulations to areas with weaker regulations, thus improving the environment of the former. This hypothesis was made referring to a study by Cole [7] that highlights if the government is keen to tackle the environmental concern of their country, they could implement a policy encouraging firms to locate outside the city albeit these policies would reduce city-level concentrations but would not reduce national emissions. The journal also discussed on the benefit of green finance policy that would enable green enterprises to obtain more capital through financing allocation and expand their production which would then increase availability of green products and services to the consumers. Moreover, it was proven that green credit has a significant effect on energy-saving, environmental quality consumption and environmental technology Page 1 of 3 MMJS 1213 – GREEN ECONOMY 2021/ 2022 – SEMESTER 1 diffusion. When a bank institution vigorously issues green credit, this reflects on the institutions’ responsibility towards the environment. 3. 4. The green credit performance evaluation focused on 3 factors, which are – i. Total Factor Productivity (TFP) – Total factor productivity (TFP) refers to the productivity of all inputs taken together. It is a measure of the output of an industry or economy relative to the size of all of its primary factor inputs. As such, its level is determined by how efficiently and intensely the inputs are utilized in production [8]. By introducing energy consumption and pollution into TFP, the impact of green credit performance on both resources and environment are considered thus establishing the term green total factor productivity (GTFP) [9]. The concept of sustainable development aims to transform from high input independence to low input independence, increases output, and reduces pollution, to achieve an increase in TFP which is essentially improving GTFP. In a study by Porter [10] found that when the environment is combined with TFP, the external environmental regulations would force enterprises to improve their own technological innovation to improve TFP and promote output growth. The core of GTFP is green technology innovation. This sector shall need funds from financial sectors which the implementation of green credit will help increases the incentives for enterprises to carry out green technology research and development. ii. Industrial Restructuring – Industrial restructuring represents an attempt at managing and anticipating change, simultaneously tackling issues of economic, social and environmental significance [11]. Green credit affects the industrial structure through the capital and channels of enterprises and has a significant impact on the adjustment and upgrading of the industrial structure. The journal touched on the example of how the green credit performance is stronger in the western region than in the eastern and central regions of China. In the whole country, especially in the central and eastern regions, the industrial structure, industrial technology level and financial service system are all ahead of those in the western regions of China. The implementation of green credit and external environmental regulation in eastern and central region results in the polluting enterprises to move to the western region. This effect in the improvement of the labour supply and GDP of the western region. Thus, this proves that the investment amount of green credit plays an active role in promoting regional economic development, and the more advanced the industrial structure is, the stronger the promotional effect will be [4]. iii. Financial Markets – Financial markets in the context of green credit performance refers to the green bond and loans market in the financial sector. Green finance encourages banks and investors to allocate capital to green sectors. The capital allocated will shape ecosystems and the production and consumption patterns. This will allow direct financial flows to promote sustainable development. From the journal, it was mentioned that there were many methods used to measure green credit by collecting data from financial institutions’ loans but unfortunately the data of major banks or financial institutions are not sufficient for this paper. The research was then proceeded to use the ration of interest expenditure of six high-energy industries to green credit issuance for measurement. Is hypothesis H2a valid? Why? H2a: The issuance of green credit will not affect labour productivity through air environmental quality and then affect the level of domestic output. From the paper, the H2a hypothesis is valid due to the effect of green credit issuance on labour productivity is still not obvious in the heterogeneity analysis. Because the chain-mediated model (X ® M1 ® M2 ® Y) with labour productivity is invalid, it was assumed that the improvement of air quality may have no effect on labour productivity. The reason why improvements in environmental quality have little effect on labour productivity may be that traditional labour industries, such as those that require much physical exertion, are gradually being replaced by automation. Most positions requiring manpower are those with low labour consumption, and environmental improvement has no significant impact on positions with a higher automation degree. Page 2 of 3 MMJS 1213 – GREEN ECONOMY 2021/ 2022 – SEMESTER 1 References 1. He, L., Zhang, L., Zhong, Z., Wang, D., & Wang, F. (2018). Green credit, renewable energy investment and green economy development: Empirical analysis based on 150 listed companies of China. Journal of Cleaner Production. doi:10.1016/j.jclepro.2018.10.119. 2. Thompson, P., Cowton, C.J., 2004. Bringing the environment into bank lending: implications for environmental reporting. Br. Account. Rev. 36 (2), 197e218. 3. Simin A., Bo L., Song D., Chen X. (2021) Green credit financing versus trade credit financing in a supply chain with carbon emission limits. European Journal of Operational Research. Vol. 292, Issue 1. https://doi.org/10.1016/j.ejor.2020.10.025. 4. Chen C, Zhang Y, Bai Y, Li W (2021) The impact of green credit on economic growth-The mediating effect of environment on labour supply. PLoS ONE 16(9): e0257612. https://doi.org/10.1371/journal.pone.0257612 5. Wen D. (2019). The Mechanism of Green Credit to the Growth of Green Economy in China. China Society for Management Science Environmental Management Professional Committee 2019 Annual Meeting. 6. Haiyang Q. Research on the Economic Growth Effect of Green Finance. Economic Research Reference. 2017;(38):53-9. https://doi.org/10.16110/j.cnki.issn2095-3151.2017.38.007. 7. Cole, M. A., & Elliott, R. J. R. (2003). Determining the trade–environment composition effect: the role of capital, labour and environmental regulations. Journal of Environmental Economics and Management, 46(3), 363–383. doi:10.1016/s0095-0696(03)00021-4 8. Li T and Liao G (2020) The Heterogeneous Impact of Financial Development on Green Total Factor Productivity. Front. Energy Res. 8:29. doi: 10.3389/fenrg.2020.00029 9. Liu, S., Hou, P., Gao, Y., & Tan, Y. (2020). Innovation and green total factor productivity in China: a linear and nonlinear investigation. Environmental Science and Pollution Research. doi:10.1007/s11356020-11436-1 10. Zhou, Y., Xu, Y., Liu, C., Fang, Z., Fu, X., and He, M. (2019). The Threshold Effect of China’s Financial Development on Green Total Factor Productivity. Sustainability 2019, 11, 3776. https://doi.org/10.3390/su11143776 11. Eurofound. (2007, Dec 16). Industrial Restructuring. https://www.eurofound.europa.eu/areas/industrialchange/restructure Page 3 of 3