In this latest article in our series on COP26, we examine the impact of climate change and net zero policies on the finance and banking industries, and how companies like HSBC and the London Stock Exchange are funding and enabling green financial solutions
China’s energy consumption mix currently relies heavily on coal, but China has demonstrated its determination to shift to more renewable sources of energy – investing $83.4 billion in renewables in 2019, almost as much as the US, Japan, Germany, France and the UK combined.
At the same time, China’s Central Bank (PBoC) is driving more climate-friendly regulations. The Green Bond Endorsed Project Catalogue was updated in April 2021 to better align with global standards, and now the so-called clean coal and secondary oil and gas extraction projects will no longer qualify for fundraising via green bonds. We are also seeing efforts co-chaired by China and the EU under the auspices of the EU International Platform on Sustainable Finance to work towards a “Common Ground” Taxonomy to help investors to be able to determine which projects and activities are sustainable.
The PBoC is also considering how to provide low-cost funds for carbon emission reduction, as well as promoting and building green finance pilot zones. Lastly, a national unified carbon emissions trading market was established in July 2021 to contribute to the effective control and gradual reduction of carbon emissions in China and to the achievement of green and low-carbon development. All these steps provide opportunities for international cooperation which China is actively promoting, including co-chairing a G20 Sustainable Finance Research Group alongside the US.
Opportunities and challenges in the China market
China’s carbon neutralisation pledge and the delivery of its net zero commitments have pushed green finance much higher up the agenda. The development of China’s green finance capacity still needs to progress alongside the setting of its green finance standards, bringing them more in line with international standards where appropriate, and many have encouraged more disclosure of carbon footprints for invested projects as well as possible incentives to spur innovation in green finance products. In addition to the above efforts to develop climate-related opportunities, China’s prudential regulators, along with other members of the Network for Greening the Financial System (NGFS) will continue to work on the effective management of climate-related risks. This will include the development of stress tests for the stability of the financial sector against environmental and climate-related credit risk.
Given the huge scale of investment required, public funding alone will never be able to achieve carbon neutrality, and China’s policy-makers will need therefore to encourage the rapid mobilisation of private sources of capital. As action on climate change becomes an increasing priority for China’s policy-makers over the next decade and the Chinese market continues to open, so the opportunities for overseas investment and financial institutions in China’s green finance markets will grow.
Those banks and institutions that fail to transition to net zero will increasingly risk finding stranded assets on their balance sheets and in their investment portfolios. They may also face legal “liability” risks for undermining efforts to transition, or for failing to declare accurately their ‘green’ exposures.
The UK-China Green Finance Taskforce is a long-standing partnership between the City of London Corporation and China’s Green Finance Committee of the China Society for Finance and Banking. It will continue to serve as an important platform to drive green finance growth in the UK and China, as well as globally. — Alderman Willian Russell, 692nd Lord Mayor of the City of London
Creating opportunities for cross-border collaboration
Improving the visibility of and access to capital for green and sustainable commercial activities will be key to achieving the lofty goals set by the UK and China in the future.
The UK-China Green Finance Taskforce, co-established by the City of London Corporation and China Green Finance Committee, as part of the outcome from the 2017 UK-China Economic and Financial Dialogue, spearheaded UK-China collaboration in green finance over the past 5 years and continues to serve as a key platform for leading industry and policy experts to develop market-led solutions to help scale up green finance in both countries as well as globally.
At the Second Belt and Road Forum for International Cooperation held in Beijing in 2019, the Taskforce announced the formation of the Secretariat for the Green Investment Principles for the Belt and Road (GIP), and the first list of signatories, including HSBC. The goal of the GIP is to encourage and assist signatories to better integrate environmental considerations into the decision-making and implementation processes of their investments in the region. Today, the number of GIP signatories stands at 40, with overall assets amounting to over $48 trillion worldwide.
In terms of specific financial support, the London Stock Exchange’s Green Economy Mark identifies listed companies and funds contributing to the global green economy by addressing key environmental objectives such as climate mitigation and adaptation, waste and pollution reduction and transitioning to a circular economy. More than 100 companies and funds with a combined market cap of $140 billion have received the Mark since its launch in 2019. In 2020, Yangtze Power became the first Chinese issuer to receive the London Stock Exchange’s Green Economy Mark, certifying that the company generates more than 50% of its revenues from green products or services, according to FTSE Russell’s Green Revenues Data Model.
Enabling the next generation of green leaders
Achieving net zero goals will require new skills and ideas. Sharing international examples of best practice will help both leaders and employees understand their carbon emissions and environmental impact, identify climate-related risks, and successfully disclose environmental information.
Companies with strong environmental, social and governance (ESG) standards are well positioned to prepare their corporate culture for net zero. A common perception about China is that its companies retain a rudimentary understanding of ESG, with low levels of transparency and disclosure. While this may have been true in the past, today we’re seeing a growing appreciation of the value that attention to ESG factors can bring in China. Investment company ABRDN is working with Chinese companies that are aligning themselves with the UN’s sustainable development goals, such as Contemporary Amperex Technology Co., a global frontrunner in the manufacture of rechargeable lithium-ion batteries powering the shift to the electrification of road transport.
Lujiazui Financial City Green Financial Development Center (GFDC), one of the five projects in China supported by UK Partnering for Accelerated Climate Transitions, held an ESG Information Disclosure Policy and Practice Seminar in September 2021. The seminar invited relevant regulators, financial institutions, industry representatives and third-party professional service parties to discuss ESG information disclosure policy and practice, especially in environment information disclosure and carbon emissions target management. More than 50 representatives responsible for ESG matters from domestic and foreign financial institutions and enterprises actively participated. GFDC and the Carbon Trust shared their carbon reduction targets and implementation paths, which received a warm response, promoting several potential UK-China business collaborations.