Abstract: In this paper, the author argues that countries around the world are undergoing a green and low-carbon transition, and China has long valued green development and green finance. He elaborates on how finance can better support the green transition, which requires proper handling of three relations: the relation between establishing the new and discarding the old, between voluntary and mandatory action, between standards-setting and regulatory constraints.
Today, economies and societies around the world are undergoing a green and low-carbon transition. The international community has recognized the important role of finance in raising funds for green and low-carbon development and preventing financial risks related to climate change. The recently concluded G20 Bali Summit adopted the G20 Transition Finance Framework, a move that consolidated countries’ consensus on financial support for green and low-carbon transformation and reaffirmed the importance of using transition finance and other tools to address the serious challenges of climate change.
Since the 18th National Congress of CPC, China has attached great importance to green development, vigorously developed green finance, and strived to achieve carbon neutrality. According to the Report to the 20th National Congress of the CPC (hereinafter referred to as the Report), “Fiscal, taxation, financial, investment, and pricing policies and systems of standards will be improved to support green development. We will boost green and low-carbon industries and improve the system for market-based allocation of resources and environmental factors.” The Report has put forward new finance tasks and requirements to support green and low-carbon transition.
The People’s Bank of China (PBC) has always valued the research and practice of green finance and transition finance. Since 2016, under the leadership of the CPC Central Committee and the State Council, the PBC has worked with relevant departments to establish and improve the green finance system, play the functions of resource allocation, risk prevention and price discovery, and provide Chinese solutions for global climate governance and green finance development. As co-chair of the G20 Sustainable Finance Working Group, the PBC has taken the lead in developing the G20 Transition Finance Framework in close collaboration with relevant parties. Together with countries, international organizations, financial institutions, and other market players, the PBC has been dedicated to promoting the effective convergence between green finance and transition finance and applying the successful practices and experiences of green finance to transition finance.
My sharing today will focus on how finance can better support green and low-carbon development.
First, several relations must be properly handled during the process. The first is the relation between “discarding traditions” and “establishing new mechanisms”. It was stated in the Report, “(China will) work actively and prudently toward the goals of reaching peak carbon emissions and carbon neutrality. Based on China’s energy and resource endowment, we will advance initiatives to reach peak carbon emissions in a well-planned and phased way in line with the principle of building the new before discarding the old.” Last year, the Central Economic Work Conference also highlighted “(China should) pursue progress while ensuring stability. Policy adjustment and reform must consider timing, degree, and effectiveness. We must stick to the principle of establishing new mechanisms before discarding the old and make steady progress.” The central government has seriously studied the experience at home and abroad and emphasized the principle of building the new before discarding the old. This is in line with the requirement of “pursuing progress while ensuring stability.”
In recent years, "flash carbon reduction" has been widely heard globally, and some financial institutions have forbidden financing for all coal-related activities in a one-size-fits-all approach. The outbreak of the Russia-Ukraine conflict has profoundly changed the international energy landscape. Europe encountered an energy crisis. Some anti-coal countries had to restart coal power plants or support coal power projects.
China's resource endowment and its economic development stage make it rely more on fossil energy, so the low-carbon transition can be more challenging. In promoting energy transition, some regions failed to deal with the relationship between ensuring stability and making progress. The old was discarded before the new was established. Actually, the goal of carbon neutrality cannot be achieved overnight, so we should insist on seeking progress in a stable manner, establishing the new before discarding the old, coordinating the current and long-term goals, and properly handling the relationship between energy transition, economic development, and livelihood protection. Financial institutions need to improve their capabilities for identifying green and low-carbon economic activities, actively address financial risks related to climate change, and avoid mechanical de-carbonization and campaign-style carbon reduction to ensure steady and sustainable green and low-carbon development.
The second is the relationship between voluntary and mandatory actions. Moving from voluntary to mandatory actions is a general trend. In recent years, some financial institutions have taken an early step to voluntarily propose and compile initiatives such as the Principles for Responsible Banking, the Belt and Road Green Investment Principles, and the Equator Principles. These principles have provided valuable references for more financial institutions to develop green financial businesses, and some of them have been recognized by policy-making departments. For example, some of the experiences of the UK-China Climate and Environmental Information Disclosure Pilot have been incorporated into China's financial industry standards.
With the rising importance of sustainable development worldwide, international capital flows into the sector have accelerated. In the process, some companies and financial institutions have raised funds in the name of green projects while conducting selective disclosure, and false or even fraudulent propaganda. For example, an asset management subsidiary of Deutsche Bank, DWS Group, was previously accused of "greenwashing". "Greenwashing" not only leads to unstable business operations, but also reduces the "green content" of economic growth and impairs a society’ confidence in the low-carbon transition. In order to promote the healthy development of sustainable finance, more countries are establishing mandatory standards through legislation and normative documents and promoting the transformation of green finance standards from mainly voluntary compliance to both voluntary and mandatory compliance.
To this end, both self-discipline and regulation are needed. Financial institutions and enterprises should strengthen self-discipline and improve their awareness and capabilities of carbon accounting and environmental information disclosure. In particular, large financial institutions should lead the way and help their invested enterprises do a good job in this regard. Regulators should gradually require mandatory, comprehensive, and quantitative environmental information disclosure, come up with professional quality certification and verification & evaluation standards for carbon accounting by third-party institutions, and effectively improve data quality and credibility.
The third is the relationship between standard-setting and regulatory constraints. These are the "two hands" that help achieve high-quality development of green finance. Standard-setting is an important hand in guiding practices, while regulatory constraints aim to draw a "negative list" and a "red line" of practice.
Global green finance standards have evolved rapidly over the past six years, and the international community has worked to promote the compatibility of major global green finance standards. In July 2021, the G20 finance ministers and central bank governors meeting called for establishing the International Sustainability Standards Board (ISSB) to promote the development of global sustainability disclosure standards. In July this year, the PBC and the relevant departments of the European Commission jointly compiled and updated the Common Ground Taxonomy for sustainable finance. The convergence of standards between the two major green finance markets in China and Europe marked an important step forward. The higher standards will help the market identify and accept green assets in an easier way and improve the efficiency of risk pricing.
In contrast, strengthening regulatory constraints requires more effort. Green finance is not only required by green and low-carbon development and climate response, but also a constraint to ensure economic transformation. At present, the basic framework and business model of green finance have become clear, and the coverage of incentive initiatives has been significantly expanded. If the regulatory constraints remain inadequate in the long run, it is not only detrimental to the effectiveness of incentive mechanisms, but also may trigger moral hazard.
China's financial institutions record a relatively high proportion of credit assets in high-carbon industries. As a result climate change and low-carbon transition will have a significant impact on the wealth pattern and asset management sector. A too-quick exit from high-carbon assets such as fossil energy will increase the transition risk; however, a too-slow exit will not only hamper the goal of achieving carbon neutrality, but also increase financial risks. In this regard, financial institutions should be guided to continuously improve their capabilities to develop green finance and support the orderly low-carbon transition of the economy by strengthening financial supervision and conducting climate risk stress tests in accordance with the requirement and roadmap for realizing carbon neutrality.
Second, China will take into consideration of its own conditions and implement the G20 Transition Finance Framework to increase the intensity and quality of financial support for the low-carbon transition.
As the largest developing country and an important contributor to the G20 Transition Finance Framework, China’s practice in transition finance receives considerable attention from the international community. To achieve the goals of carbon peaking and carbon neutrality, we need to develop green finance and accelerate the development of low-carbon industries and projects; meanwhile, we also need to strengthen transition finance and push forward the low-carbon transition of carbon-intensive industries and economic activities. Based on China’s national conditions, we should learn from G20 Transition Finance Framework by summarizing effective practices and beneficial modes and applying them to the field of finance so as to connect green finance and transition finance, which is an important step to strengthen the effectiveness and quality of finance in support of low-carbon development.
1. Stepping up the design of transition finance standards. In 2021, The PBC began to research transition finance. As of now, it has laid out the basic principles and conducted research on four areas, including steel, coal-fired power, construction and building materials, and agriculture, which will be publicly released when conditions are ripe to provide a reference for meeting the reasonable financing needs of low-carbon transition in carbon-intensive industries.
2. Improving requirements on climate-related information disclosure. In recent years, China’s financial institutions have explored environmental information disclosure through a gradualist approach, and their capacity to compile and disclose climate information has been significantly improved. Going forward, we should urge economic entities to set up a roadmap for carbon reduction and link economic interests with energy saving and carbon reduction; Based on the implementation of existing departmental regulations and financial industry standards, we should focus on exploring and developing carbon accounting methods for financial institutions in line with China's national conditions, and gradually expand the scope of carbon accounting and related information disclosure.
3. Enriching and enhancing the instruments of transition finance. Given the difficulties of low-carbon transition for carbon-intensive industries, economic entities concerned face multiple risks. Hence, based on the attempts to develop financial tools like transition bonds, sustainability-linked bonds, and sustainability-linked loans, we should further create risk mitigation tools such as equity-based financing tools, securitization products, insurance, and guarantees. We should supply more transition finance products and services to support businesses with clear low-carbon transition strategies and sound internal governance to obtain diverse forms of financing.
4. Strengthening incentive and restraint mechanisms of transition finance. In 2021, the PBC, for the first time, introduced tools to support carbon reduction and special refinancing loans to support clean and efficient use of coal, encouraging social capital to invest more in green and low carbon transition. Looking ahead, we should explore and launch fiscal and financial tools and expand policy coverage to fully mobilize social capital to invest in projects with significant benefits of emission reduction. In addition, we should conduct research to improve the comprehensive evaluation system of the green finance index and expand the scope of evaluation and application scenarios of evaluation results.
5. Promoting just transition. As climate change and green transition tend to disproportionally affect carbon-intensive industries like agriculture, certain regions, and low-income groups, we should attach great importance to just transition. In recent years, the PBC has gained experience in utilizing refinancing and rediscounting tools to support the development of agriculture, rural areas, farmers, micro enterprises, and industries hit hard by the Covid-19 pandemic. In the future, macroeconomic policies should focus on employment goals, improve employment statistics, and encourage financial institutions to increase financial support for regions, industries and groups who face greater transition pressure in order to guard against financial risks and maintain economic and social stability.
Lastly, I wish the Bund Summit a great success. Thank you.
This is a speech made by the author at the opening ceremony of the 4th Bund Summit on 10 Dec, 2022. It is translated by CF40 and has not been reviewed by the author. The views expressed herewith are the author’s own and do not represent those of CF40 or other organizations.
