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
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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.
The green credit performance evaluation focused on 3 factors, which are –
3.
4.
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.
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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.
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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
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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
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11. Eurofound.
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