Executive Summary: China Finance 40 Forum (CF40) has recently held the 2nd Bund Summit in conjunction with member institutions of the organising committee, and topics such as climate change and green development were discussed with participants. Meanwhile, China’s active response to climate change is widely praised by the international community. The promotion of green development is of great significance to China. However, low-carbon transition also means risks, challenges and reforms, and it is no easy task to achieve a net-zero emissions economy.
To drive the green development of the economy and society requires the active participation of financial sectors. In the future, the first step is to expedite the development of green-finance products and encourage green investment; the second step is to encourage the development of environmental, social and corporate governance (ESG); the third step is to strengthen the financial-risk control and prevention related to climate change; the fourth step is to promote the assimilation of China’s green-finance standards to major global standards; the fifth step is to connect green finance with the building of Shanghai as an international financial centre and the internationalisation of renminbi; the sixth step is to advance a green Belt and Road Initiative (BRI) through green finance; and the seventh step is to further collaboration in global carbon pricing.
I. China actively responds to climate change and its carbon-neutrality promise is widely praised.
Climate change is a global challenge that threats the socioeconomic stability of every country. It triggers extreme weather events and natural disasters and may bring economic activities to a halt, causing businesses, people and the balance sheets of financial institutions to suffer losses that, in the long run, damage the well-being of the people.
In September 2020, Chinese President Xi Jinping solemnly announced at the General Debate of the 75th Session of the General Assembly of the United Nations: “China will scale up its intended Nationally Determined Contributions (under the Paris climate agreement) by adopting more vigorous policies and measures. We aim to have CO2 emissions peak before 2030 and achieve carbon neutrality before 2060.”
China’s active response to climate change is widely praised by the international community. Many foreign experts, including Jeffrey Sachs, a renowned American economist; Tim Adams, former Under Secretary for International Affairs at the United States Department of the Treasury; Lord Adair Turner, former Chairman of the Financial Services Authority; and Edmond Alphandéry, former French Finance Minister, all remarked that China’s carbon-neutrality promise was highly significant and showed that it is ahead of the rest of the world in its response to climate change. China’s responsible attitude was truly invigorating and exciting.
II. Achieving a net-zero emissions economy is highly significant but no easy task
Promoting green development is of great significance to China. First is the consequential enhancement of its international influence. Currently, tackling climate change and driving sustainable development are some of the key topics of global economic and financial systems, and many countries regard green development as a basic national policy. That is why a worldwide green collaboration will help China to develop a more extensive “friends’ circle”. Second is the achievement of economic recovery and transformation through more sustainable and socially and environmentally friendly means, while giving consideration to both short- and long-term goals. To encourage green development and build an economy of net-zero emissions mean China must extensively adjust the conventional investment means and structures and gradually shake off the models of real estate and conventional infrastructure investment, so as to facilitate healthier and more sustainable development of China’s economy.
To China, low-carbon transition is a great responsibility that cannot be achieved overnight. Achieving a low-emissions economy means fundamental changes in every aspect, including economic-development model, energy-consumption means and even travelling and food production. If China’s economy wants to achieve the goal of net-zero emissions over the next four decades, it must complete the transition from being highly dependent on fossil fuel to net-zero emissions, which is no small challenge to the overall economy and society. Furthermore, during the transition to a low-emissions economy, the increasingly stricter environmental-protection, energy-conservation and emission-reduction policies may lead to the revaluation of high-carbon assets in the financial field, which can lead to negative feedback inside the financial systems, and between the financial industry and the real economy, increasing financial risks.
Experts at the Summit were fully confident of China’s leading role in achieving a net-zero emissions economy and global green development. Some foreign experts believed China could achieve carbon neutrality by 2050. Lord Turner remarked that he believed China had the technological prowess and adequate policy-enforcement potential to achieve carbon neutrality by the middle of this century. In the future, the technological costs of renewable energy would become lower, and China only needed to use 1% of its annual GDP to make incremental green investment, which would be a totally plausible and foreseeable means.
III. Driving green development through green finance
To drive the greener and more sustainable development of the economy and society requires the active participation of financial sectors. The expedited development of green finance is necessary to support the national goal of emission reductions and the strategies of green development.
First is to expedite the development of green products such as green credit, bonds, insurance and funds; to encourage green investment; and to step up support for the environmental-protection industry and the development of green infrastructure by the financial industry. Currently, China’s green financing primarily comprises green credit and bonds. It is necessary to innovate the means of green financing to promote the development of green insurance, funds and equity financing. In terms of encouraging green investment and supporting the development of green infrastructure, experts advise that public investment by governments play a guiding role in areas such as renewable energy, electric vehicles and clean intercity transport.
Second is to encourage the further development of ESG in China and to define the ESG-disclosure standards. Providing financing to ESG companies also indirectly supports the development of a green economy. Some believe that the key to driving the development of ESG in China is the establishment of a comprehensive and regulated information-disclosure mechanism that defines the ESG-disclosure standards. China has to date built a preliminary voluntary ESG-disclosure system. In the future, it may draw from mature foreign experience and conduct a pilot programme that makes the disclosure of listed companies semi-compulsory. It is necessary to advocate the principle of “disclose or explain” to perfect the scope and accuracy of ESG data in China and increase the desire of institutional investors to engage in ESG investment, so as to boost the recognition of ESG across the country.
Third is to step up the prevention of financial risks related to climate change. Climate change may turn into financial risks through physical and transitional risks, and corresponding prevention and response are highly critical. This requires central banks, regulators and financial institutions to take action, increase the reserves of professional talent, reinforce regulatory and business innovation and properly perform information disclosure and risk management.
Fourth is to advance the standards for green finance in China, so that they can be in line with major international standards. China’s green finance accounts for a large percentage of the international market and is highly influential. It is necessary for China to conditionally join hands with related regions, countries and international organisations to assimilate to major standards for green finance through different stages and steps, which requires, first of all, improving China’s system and complementary measures for the standards of green finance. Secondly, it is essential to promote the assimilation of the Chinese and European standards for green finance. Once this is done, they can be promoted in the U.S. With the help of the market force, it can expedite the interconnection between the Chinese and American green-finance markets.
Fifth is to connect green finance and sustainable investment and development with the building of Shanghai as a financial centre and the internationalisation of renminbi. On the one hand, China’s green development possesses tremendous potential. As more green products denominated in renminbi are launched, global investors will increase investment in green fields, which will bring China a large amount of funds and promote the building of a renminbi-denominated asset-allocation centre in Shanghai. On the other hand, with many green products being denominated in renminbi, it will evidently help the internationalisation of renminbi. Take euro for example, euro zone’s green-finance products are leading the world and significantly support the international status of euro as the products are denominated in euro. Furthermore, experts suggest China research the feasibility of letting some regions such as Shanghai achieve the carbon-neutrality goal ahead of schedule, which can play an exemplary and guiding role.
Sixth is to promote a green BRI through green finance. Firstly, China’s financial institutions may finance green projects to satisfy the demand of BRI countries for green investment; secondly, institutions from countries along the BRI and international financial institutions may issue green bonds in China to directly fund green projects; thirdly, China’s experience in building a green-finance system and developing a green-finance market may serve as examples for countries and regions along the BRI. Experts at the Summit believed that further development of the BRI needed to be based on digitisation, 5G networks, smart transport, zero emissions and the interconnection of electric power and global energy. The BRI should become a green initiative geared to future needs.
Seventh is to build an emissions trading market based on prices and to encourage global collaboration in carbon pricing. Two incentive mechanisms are available for the achievement of emission reductions and carbon neutrality, and the simplest one is to tax carbon emissions, but this will lead to a heavy political price. Another mechanism is to create a carbon market, and carbon-emitting companies may emit carbon dioxide upon obtaining an emissions licence. Many economists believe that a carbon-emissions trading market has greater development potential, and a carbon market guided by prices instead of emission volume will be more effective. If carbon prices continue to rise predictably, funds will naturally be invested in decarbonisation technology, and carbon-emitting companies will strive to reduce emissions or achieve zero-carbon production. Europe and China may consider further collaboration opportunities in carbon pricing while inviting the U.S. and other countries to explore the building of a global market for carbon-emissions trading, so as to jointly establish a carbon-pricing mechanism that is fair, transparent and reasonable and encourage the global economy to decarbonise.
