Remarks by PBC Deputy Governor Xuan Changneng at the Bund Summit
I am glad to attend the Bund Summit and deliver my remarks on the global green transition. The world today is undergoing green and low-carbon economic and social transition, and the international community has been fully aware of the vital role of finance in raising funds for green and low-carbon development and preventing financial risks related to climate change. The G20 Framework for Transition Finance, which was endorsed at the recently concluded G20 Bali Summit, further fosters consensus among countries on financial support for green and low-carbon transition and reaffirms the significance of addressing the severe challenge of climate change through transition finance and other tools.
China has attached great importance to green development and made vigorous efforts to develop green finance, thereby achieving remarkable progress toward peak carbon emissions and carbon neutrality. The report to the 20th CPC National Congress stipulated that “fiscal, taxation, financial, investment, and pricing policies and standards should be improved to support green development, and we should boost green and low-carbon industries and improve the system for market-based allocation of resources and environmental factors.” This has put forward new tasks and requirements for mobilizing the financial sector to support green and low-carbon transition.
The study and practice of green finance and transition finance have also been high on the agenda of the People’s Bank of China (PBC). 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, giving full play to its functions in resource allocation, risk prevention, and price discovery while providing key Chinese solutions for global climate governance and green finance development. As a co-chair of the G20 Sustainable Finance Working Group, the PBC worked closely with relevant parties and led the creation of the G20 Framework for Transition Finance. We will work with relevant countries and international organizations, financial institutions and other market players to ensure the smooth transition from green finance to transition finance and replicate successful practices and experience. Today, I would like to share with you my thoughts on how finance can better support green and low-carbon economic development.
First of all, we should strike a balance between different aspects to promote financial support for green and low-carbon development.
Firstly, we will properly handle the relationship between “discarding the old” and “building the new.” The report to the 20th CPC National Congress stipulated that “we should actively and steadily progress toward carbon emissions peak and carbon neutrality; based on China’s energy and resource endowment, we should advance initiatives to reach peak carbon emissions step by step and in a well-planned way in line with the principle of building the new before discarding the old.” Last year, the Central Economic Work Conference also highlighted that “we must pursue progress while maintaining stability, manage the timing, intensity and efficiency of policy adjustments and reform, and build the new before discarding the old to ensure their steady advancement.” Drawing on domestic and international experiences, the CPC Central Committee emphasized the principle of building the new before discarding the old, which is integral to the general principle of pursuing progress while ensuring stability in economic work. In recent years, there have been advocates of “blitz carbon reduction” worldwide, where some financial institutions simply ruled out all financing for activities related to coal-fired power companies. Following the outbreak of the Russia-Ukraine conflict, the international energy pattern has witnessed profound adjustment, with an energy crisis taking place in Europe. Some European countries that used to be strong advocates for the phase out of coal had to announce the restart of their coal-fired power plants or take measures to support coal-fired power projects.
Restricted by limited resources and the current stage of economic development, China is highly dependent on fossil energy, and the task of low-carbon transition is more severe and challenging. In the process of energy transition, some regions have discarded existing energy sources before adopting new ones, thus failing to strike a balance between seeking progress and ensuring stability. The goals of reaching peak carbon emissions and achieving carbon neutrality cannot be attained overnight. We need to uphold the principle of seeking progress while ensuring stability and building the new before discarding the old, balance short-term gains and long-term tasks, and properly balance between energy transition, economic development, and ensuring people’s livelihood. Financial institutions should continuously improve their ability to identify green and low-carbon economic activities, proactively respond to financial risks relating to climate change, and avoid “coal-free” and “campaign-style” carbon emission reductions that are simple and mechanical, thus contributing to steady and long-term green and low-carbon development.
Secondly, we will deal with the relationship between voluntariness and mandate. It is a general trend that financial support for green and low-carbon development shifts from voluntary to mandatory actions. In recent years, as countries gradually improved their green finance policies and systems, some financial institutions have taken the lead in making explorations and voluntarily put forward and complied with initiatives such as the Principles for Responsible Banking, Green Investment Principles for the Belt and Road and Equator Principles, providing valuable reference for more financial institutions to develop their green finance businesses, and some practices have been accepted by policy makers. For instance, experience in the pilot programme of climate and environmental information disclosure of financial institutions in China and the UK has been partially incorporated into standards for China’s financial industry. With the increasing significance of global sustainable development issues, international capital has been flowing into the field of sustainable development at a faster speed. Also in this course, some enterprises and financial institutions have raised funds for the projects that did not meet relevant standards in the name of green projects through selective disclosure, false or even fraudulent publicity. For example, DWS Group, an asset management subsidiary of Deutsche Bank, was accused of “greenwashing.” “Greenwashing” or “green sheen” will not only lead to unstable business operations, but also damage the “green content” of economic growth and social confidence in low-carbon transition. To promote the sound development of sustainable finance, more and more countries have established mandatory standards for green finance through legislation and issuing normative documents, promoting green finance standards to shift from mainly voluntary to both voluntary and mandatory.
To this end, we need not only self-discipline of financial institutions and enterprises, but also the supervision from regulatory authorities. Financial institutions and enterprises should be self-disciplined through strengthening the awareness and capability of carbon accounting and environmental information disclosure. In particular, large financial institutions should take the lead. In addition to conducting their own carbon accounting and environmental information disclosure, they should also urge the enterprises they invest in to make gradual improvements. The regulatory authorities should promote the gradual achievement of mandatory, comprehensive and quantitative environmental information disclosure, explore the establishment of professional qualification verification, and evaluation standards for third-party carbon verification institutions, and effectively improve the data quality and credibility.
Thirdly, we will address the relationship between standard setting and regulatory constraints. These are two important parts in achieving high-quality development of green finance. Standard setting is an important way to guide the green transition in advance, and regulatory constraints are aimed at defining the “negative lists” and “red lines” of behavior, both of which are indispensable. Over the past six years, global green finance standards have evolved rapidly, and the international community has been making efforts to promote compatibility of major green finance standards globally. In July 2021, the G20 Finance Ministers and Central Bank Governors Meeting endorsed the establishment of the International Sustainability Standards Board (ISSB) to promote the disclosure standards for global sustainable development. In this July, the Common Ground Taxonomy (CGT) and its updated version were finished as part of the work co-led by PBC and EU Commission, marking a crucial step towards convergence of standards in the two major green financial markets of China and Europe. Higher standards will help to improve market recognition and acceptance of green assets and improve the efficiency of risk pricing.
Comparatively speaking, strengthening regulatory constraints requires more efforts. Green finance is not only a plus for supporting green and low-carbon development and addressing climate change, but it may also serve as a constraint against non-transition and slow transition. So far, the basic framework and business models of green finance have been clear, and the coverage of policy incentives has been significantly expanded. Chronic insufficiency in regulatory constraints hinders the effectiveness of the incentive and constraint mechanism, and may even cause moral hazard. A high percentage of Chinese financial institutions’ assets are credit assets related to carbon-intensive industries. As a result, climate change and low-carbon transition will greatly affect wealth distribution and the asset management industry. The rapid withdrawal of some financial institutions from carbon-intensive assets such as fossil energy will increase transition risks. However, excessively slow withdrawal from carbon-intensive assets will not only hinder the goal of peaking carbon emissions and achieving carbon neutrality, but will also increase financial risks. To support an orderly transition towards low-carbon economy, we should guide financial institutions to enhance their capacity of green finance in accordance with the timetable and roadmap for peaking carbon emissions and achieving carbon neutrality through strengthened financial regulation and stress tests on climate risks.
Second, we should actively implement the G20 Framework for Transition Finance in light of China’s conditions, and increase the intensity, quality, and effectiveness of financial support for the transition to a low-carbon economy.
China is the largest developing country and an important contributor to the G20 Framework for Transition Finance, so the international community has paid close attention to its practices in transition finance. To peak carbon emissions and achieve carbon neutrality, we need to vigorously develop green finance and quicken our pace in developing green and low-carbon industries and projects. Moreover, it is necessary to strengthen transition finance and promote low-carbon transition of carbon-intensive industries and economic activities in an orderly manner. Based on China’s condition and drawing on the G20 Framework for Transition Finance, we will develop transition finance on the effective practices and models learned from green finance. The effective coordination between green finance and transition finance serves as a vital link for enabling better financial support to the high-quality and effective green and low-carbon development.
Firstly, we should develop standards for transition finance at full tilt. The PBC started the research on transition finance in 2021. So far, we have preliminarily defined the basic principles of transition finance, and carried out research on standards in four fields, namely steel, coal-fired power, building materials and agriculture. We will disclose them when condition permits, so as to provide a basis for meeting reasonable financing needs of carbon-intensive industries in low-carbon transition.
Secondly, we should strengthen the requirements for climate-related information disclosure. In recent years, Chinese financial institutions have explored environmental information disclosure in a tiered and phased manner, starting from large-scaled projects and simple cases and gradually covering small projects and complex cases. The abilities of climate-related information compilation and disclosure have been improved significantly. In the future, economic entities should be urged to develop a roadmap for carbon emission reduction, and to link economic benefits to behaviors of energy conservation and carbon emission reduction. Based on the implementation of existing departmental regulations and financial industry standards, emphasis should be put on exploring and developing carbon accounting methodologies for financial institutions in line with domestic conditions, so as to gradually expand the scope of carbon accounting and information disclosure.
Thirdly, we should further enrich and improve the instruments of transition finance. Transition to low-carbon development is a hard task for carbon-intensive industries, as the process involves various risks for relevant economic entities. Based on the exploration of existing instruments for transition finance such as transition bonds, sustainability-linked bonds and loans, we should further innovate equity financing instruments, securitized products, as well as insurance and guarantees and other risk mitigation tools. We should increase the supply of related products and services, and help enterprises with clear low-carbon transition strategies and sound internal governance to gain access to diverse forms of financing.
Fourthly, we should strengthen the incentive and restraint mechanism for transition finance. In 2021, the PBC launched the carbon emission reduction facility (CERF) and the special central bank lending for clean and efficient coal use to encourage more private investment in green and low-carbon sectors, which achieved positive results. In the future, we should actively explore and introduce fiscal and financial facilities, continuously expand policy coverage, and fully mobilize social capital to invest in projects with marked benefits in carbon emission reduction. We should study and improve the comprehensive evaluation indicator system for green finance, and expand the scope of evaluation as well as the application scenarios of its results in an orderly manner.
Fifthly, we should promote fair and just transition. Climate change and the transition to green and low-carbon economy normally have a huge impact on carbon-intensive industries, agriculture, as well as certain regions and low-income groups, which are vulnerable to climate changes. Therefore, we should pay high attention to the issue of fair and just transition. In recent years, the PBC has made full use of central bank lending and central bank discounts for rural development and MSBs to provide continued support for agriculture, rural areas, and farmers, as well as for MSBs, and we have enhanced support for industries heavily hit by the COVID-19. Much experience has been gained in the process. In the future, macroeconomic policies should be more focused on the employment target, and we should strengthen and improve employment statistics and provide more support, and we should guide financial institutions to enhance their support for regions, industries and people bearing greater pressure in the transition, so as to effectively forestall financial risks and maintain economic and social stability.