With air, water and soil pollution coming to the brink of crisis in China, there’s much interest in shifting to a more sustainable economy. But that’s hard to do when financial sector design doesn’t support it. Despite some progress, the financial system hasn’t yet created the right incentives to move capital from polluting industries to clean sectors on a large scale. Costs to the environment are not accounted for. For example, the absence of a carbon price and lack of lender’s liability for borrower’s environmental damages means that fossil fuel consumption and related business risks do not easily flow into corporations’ and financial institutions’ risk assessments.But that may be changing. Today, the Green Finance Task Force of the China Council for International Cooperation on Environment and Development (CCICED), a commission established by the Chinese government and of which WRI’s President Andrew Steer is a co-chair, has released its new report, Green Finance Reform and Green Transformation. It lays out clear recommendations for how the national government can put the right institutions in place to help shift investments from polluting to sustainable industries. If the government adopts this set of recommendations, it could help push China forward in its shift to a low-carbon economy.China Active in the Game ChangeInterest in greening China’s financial sector is growing. Since 2007, China has been trying to channel bank loans away from resource- and emissions-intensive industries to green sectors through its Green Credit Guidelines. More recently, a task force led by the People’s Bank of China participated in the UNEP Inquiry into the Design of a Sustainable Financial System. Following the release of the report, the Bank established a Green Finance Committee to organize activities such as developing a green bonds standard, facilitating environmental stress tests for the banking sector, publishing papers on international green finance practices, and organizing discussions on greening China’s overseas investment.And earlier this year, the Chinese government established the CCICED Green Finance Task Force to push the financial sector even further forward. The Task Force’s recommendations for the Government of China include priority policy changes such as:Create enabling legal conditions to encourage behavioral change. These legal measures include changing commercial banking laws to make lenders liable for environmental damages caused by borrowers; mandate environmental information disclosure for listed companies and high-polluting entities; and make environmental insurance compulsory for sectors with high probability of damaging the environment. Use fiscal and tax incentives to leverage public finance. This entails establishing an interest rate subsidy for green credits, creating a loan guarantee mechanism supported by public funds for green projects, and using tax incentives to generate revenue from green bonds. Set up institutional infrastructure to facilitate green investment. These infrastructure additions include a credit rating system that incorporates environmental factors, a network to move investors towards green investments, a national database on companies’ environmental records, and more. Provide financial tools and instruments to scale up green investment. The most important ones in this category are setting up a National Green Development Fund, scaling up green credits from the banking sector, and issuing green bonds. Green Chinese overseas investment and China’s emerging investment banks. In addition to encouraging environmental and social risk management with Chinese corporations investing beyond China’s borders, this entails greening the Asian Infrastructure Investment Bank, the New Development Bank, the Silk Road Fund, and the Belt and Road Initiative.A Prime Time to Go GreenThese recommendations come at a critical moment when China is at the center of several changes. China has been selling the Belt and Road Initiative to neighboring countries, and is poised to fast-grow its overseas investment along the routes. China is central to the creation of a number of multilateral institutions and new funds, including the Asian Infrastructure Investment Bank, the New Development Bank and the Silk Road Fund. And in 2016, China will host the G20 Summit. By adopting a greener financial regime, China can influence the outcome of these institutions and is better positioned to spread best practices internationally.At this historic juncture, China has an unprecedented opportunity to promote green finance globally. The question now is: Will the country capitalize on the opportunity before it?