Author: CUI Ying
Original article (in Chinese): HERE
The highlights from the Guiding Opinions on Promoting the Investment and Financing in Response to Climate Change.
Responding to climate change is one of the most pilling tasks that society is facing right now. In September 2020, President Xi Jinping announced that China would peak its emissions before 2030 and reach carbon neutrality by 2060. On October 26, 2020, five ministries, including the Ministry of Ecology and Environment (MEE), the National Reform and Development Commission (NDRC), the People’s Bank of China (PBoC), China Banking and Insurance Regulatory Commission (CBIRC), and China Securities Regulatory Commission (CSRC) jointly issued the Guiding Opinions on Promoting the Investment and Financing in Response to Climate Change. For the first time, climate investment and financing have been put on the national-level policy agenda.
Promoting climate investment and financing will require a specific policy system, relevant standards, social capital, local practice, international cooperation, organization, and implementation. The following article summarizes and analyzes each of those aspects.
Climate investment and financing is an important aspect of green finance, and they should be developed in coordination.
For the first time, the guiding opinions clarified the definition of climate investment and financing and the scope of support for climate investment and financing which should focus on both climate mitigation and adaptation.
The guidelines also recognized that climate investment and financing is an important aspect of green finance and proposed strengthening the policy coordination between them. Since the release of The Guiding Opinions on Building a Green Financial System in August 2016, China has made significant progress in green finance standards, incentive policies, environmental information disclosure, ESG product innovation, and innovative green financial products such as green credit, green bonds, green insurance, and green funds. Green finance already has a well-established position and support the practitioners of green finance-related industries to enter the field of climate investment and financing.
Climate investment and financing will become a new trend for green finance and is expected to attract more funds to carbon capture, utilization and storage, and carbon sinks. Therefore, developing standards consistent with green finance standards and facilitating integration with the international standards are of vital importance.
Building the standard system for climate investment and financing
To ensure that funds are invested in climate change mitigation and adaptation, it is imperative to establish relevant standards, including climate project standards, climate information disclosure standards, and climate performance assessment standards.
The climate project standards and the list of key supported climate projects (based on the effectiveness of addressing climate change) are especially needed to enhance the financing channels for climate projects and they serve as guides for financial institutions to develop financial products and services. The Guiding Opinions proposed linking climate-related project standards with the Green Industry Guidance Catalogue (2019 Edition) to enable financial institutions to develop climate financial products and services based on the Guidance Catalogue.
Due to their excellent resilience to climate risks, climate financial products can fill the climate risk prevention gap in the traditional portfolio. Even though most of the money from already existing green financial products such as green credit and green financial bonds are invested in climate change mitigation or adaptation projects, they cannot be adequately labeled as climate financial products without relevant standards.
To establish climate performance standards, credit rating agencies must incorporate environmental, social, and governance (ESG) factors into their rating system and encourage climate performance monitoring of financial institutions, enterprises, and regional governments. The improvement of climate information disclosure standards would support establishing a climate information disclosure system for publicly listed companies. Unified standards would also provide a reliable information basis and help the capital markets avoid climate risks.
Climate investment and financing policy system should help leverage private capital
The Guiding Opinions called for faster establishment of a climate investment and finance policy system, improving financial regulatory policies and integrating climate change factors into the industrial sector policies. The Guiding Opinions also focus on leveraging private capital in climate investment and financing on a larger scale. For example, the document encourages local governments to establish regional climate investment and financing promotion centers and to build green branches with climate investment and financing characteristics. To improve the financial support for groups with financing difficulties such as small and micro-enterprises and farmers, collaborative models of financial support such as government-backed financing guarantees, tax-based financing, and “bank loans plus risk compensation fund” were also proposed. The low-carbon development and climate adaptation of those groups are crucial for the successful implementation of climate investment and financing.
National project database to support local climate investment and financing pilot projects
Based on the previous successful experience of the Pilot Zone for Green Finance Reform and Innovation (Green Finance Pilot Zones), pilot programs are considered an effective tool for promoting the establishment and growth of green investment and financing. Establishing climate investment and financing pilots will serve as essential blueprints and reference models. The experience accumulated on green finance pilots can be applied to the climate investment and financing pilots because of many similarities between them. Additionally, the Guiding Opinions proposed establishing a national climate investment and financing database that would support statistical monitoring, information disclosure mechanism and link the supply and demand sides.
Innovations in carbon financial products and promoting internal carbon pricing mechanism
Previously, the carbon market was defined as a policy instrument to control greenhouse gas emissions. The Guiding Opinions was the first top-level document explicitly supporting the exploration of carbon financial derivatives trading. Although carbon derivatives, such as carbon futures, originate from carbon spots, their trading volume is usually much larger than carbon spots. It is worth mentioning, that in China, carbon spot and futures markets are supervised by different regulators. The spot market, for example, is supervised by the Ministry of Ecology and Environment, and the China Securities Regulatory Commission supervises the futures market.
According to the requirements of Administrative Regulations on Futures Trading, the pilot carbon markets do not have the authority to trade carbon futures. Hence, most of them only carry out carbon spot trading, except rare pilot markets conducting forward carbon trading (Shanghai and Hubei).
Besides, Guiding Opinions also proposed to increase the participation of a broader range of traders such as investment institutions and individuals. Combined with the introduction of carbon derivatives, it could increase the scale and improve the liquidity of the carbon market and promote price discovery nationwide.
The Guiding Opinions support the establishment of a market-based carbon financial investment fund that uses carbon emission reductions as a project assessment criteria. It would improve the attractiveness of emission reduction projects by providing financial support, reducing the difficulty of initial financing, and securing stable cash flows.
Establishing an internal carbon pricing mechanism would also guide capital toward low-carbon projects. The guidance encourages enterprises and institutions to incorporate carbon price factors into their investment activities. It could be especially beneficial for projects with a long return on investment. Incorporating the expected carbon price growth into the project total costs will help enterprises better assess the project’s investment feasibility.
International cooperation on climate investment and financing.
China will continue to optimize its image in the international arena using climate investment and financing opportunities. Financial institutions are encouraged to support the low-carbon development of the “Belt and Road” and “South-South Cooperation.” The use of unified Chinese standards to regulate overseas investment activities of enterprises and financial institutions is expected to form a more unified risk management system that will effectively prevent climate risks. Secondly, the international application of Chinese standards will help China participate in the formulation of international standards and gradually increase the acceptance and popularity of Chinese standards in the international arena.
China also hopes to accelerate the process of RMB internationalization. The document specifically put forward relevant guidelines, including supplying RMB green financial products and transactions in the offshore market, supporting the establishment of RMB green overseas investment and loan funds, encouraging overseas institutions to issue green financial bonds in China, or using RMB as a cross-border settlement currency for climate-related activities.
In conclusion, the guidance sets out a development direction for China’s climate investment and financing. Financial institutions, enterprises, and local governments should fully integrate the” Guiding Opinions,” promote their comprehensive implementation and explore the best practices of climate investment and financing.