I’m sitting in Beijing airport heading home. I’m struck by two stories in China Daily that, combined, raise a question that is central to China’s thinking as it designs its 13th Five-Year Plan (2016-2020).The first: Yesterday was “Singles’ Day” in China. It’s the annual internet shopping extravaganza, when singles (and others) treat themselves to 24 hours of bargains on Ali Baba and other sites. Ninety minutes after its midnight opening, $5 billion had been spent. The total spend is expected to be bigger than America’s Black Friday and Cyber Monday combined. Despite economic slowdown, China’s emerging consumer society is alive and well.The second: This week has seen the highest-ever recorded air pollution level in China, in the industrial Northeast city of Shenyang. Fine particle pollution (PM 2.5), was 50 times the maximum WHO acceptable level. China’s government has been recently taking tough measures on pollution, with levels falling in Beijing and other cities, but conditions in almost all cities remain dangerously unhealthy. Studies by the World Bank, WHO, and the Chinese Academy for Environmental Planning reveal that air pollution leads to between 350,000 and 500,000 premature deaths each year; while another study shows that PM2.5 caused 1.2 million premature deaths in China in 2010 alone.So here’s the question: is it possible to enjoy rising levels of prosperity, symbolized by today’s young online consumers, and also enjoy clean air, pure water, green spaces and uncongested, livable cities?I’ve been in Beijing for the Annual meeting of the China Council for International Cooperation on Environment and Development (CCICED), a group of international and Chinese advisors, chaired by Vice Premier Zhang Gaoli and Environment Minister Chen Jining. It’s a privilege to be a member of this Council, spending three days each year with senior Chinese officials discussing precisely the question posed above, sharing experiences, reviewing research papers and learning from each other.Financial Pivot?One of my jobs at this year’s meeting was to present the findings of a task force that I have been co-chairing over the past 12 months on the role of the financial sector in answering the above question in the affirmative. My co-chair is Professor Chen Yulu, who was until last month President of Renmin University of China, and is now Deputy Governor of the People’s Bank of China. Together with a group of outstanding international and Chinese task force members, we’ve explored policies and instruments available to redirect finance toward sustainable investments while supporting economic progress.China’s thinking in this area is already more advanced that in most countries. The starting point is a recognition that “green finance” is not merely a matter of creating pots of money that will be channeled toward pollution control, renewable energy, etc. Such funds will never be sufficient to shift investment to the extent required. It requires a much more fundamental review of what it would take for financial markets (and all their associated asset pools in banks, bond and equity markets, insurance and pension funds) to advance the major shifts in energy, city design, transport systems, industrial engineering and rural development that will be required for a sustainable future.Biases against sustainable finance exist on the demand and supply sides of financial markets (in virtually all countries, not just China). First, on the demand side, while there is a huge need for green investment, this is not adequately translated into effective demand through well-prepared bankable projects seeking finance. Such demand can only be created by well-enforced environmental policies and a broad fiscal and regulatory regime that rewards sustainable investment.On the supply side there are two problems. First, financial markets are not knowledgeable about environmental issues, and fail to incorporate environmental risk in their asset allocation decisions. China is planning to force progress in this area, as a few other countries have done, by making disclosure of environmental risks on the part of banks (which dominate China’s financial system) mandatory. They are also considering requiring liability insurance against potential environmental damage. Both would incentivize the building of capacity in banks to treat environmental risks the way they would financial risks.Second, financial markets, and especially banks, are highly conservative in their lending practices, giving preference to investments and technologies that are familiar. But now it is the innovative and unfamiliar that needs finance. Building bankers’ confidence to lend for new, greener technologies takes time, and can be encouraged by setting mandatory targets for green investments or through carefully designed subsidies, such as through differentiated discount rates at the Central Bank. Relatedly, our Task Force recommended setting up a large Green Development Fund under the leadership of the Peoples’ Bank of China. By investing equity in major green investments and providing risk management instruments (such as guarantees) and new instruments (such as green bonds), the Fund can be valuable in tapping new asset pools, all of which are encouraged by a changing regulatory and tax regime in China.From Laggard to LeaderThe recent UNEP Inquiry into the Design of a Sustainable Financial System referred to a “quiet revolution” in financial markets, as regulators are recognizing the importance of environmental issues in financial stability. As China rolls out a set of measures in an effort to redirect investment flows from polluting to benign activities, it is becoming a leader in this revolution. China’s recent announcement to provide more than $3 billion to support developing countries on climate issues is indicative of this leadership.As the incoming chair of the G20, China is planning to place this issue of “green finance” on next year’s agenda. A study group, under the leadership of the Peoples’ Bank and the Bank of England, has been established to think through a package of measures that leaders might agree to. International agreement on topics such as disclosure of environmental information, common standards for green bonds, and the incorporation of environmental concerns (including stranded assets) in stress tests could make next year’s G20 one of the greenest ever.The internet-shopping Singles should be grateful.