Sustainable financing and investing continues to interest China
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Sustainable financing and investing continues to interest China

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HSBC - Shanghai Financial District In Fog

China's dynamic market sees scope for innovation when it comes to sustainable finance, however old habits persist when it comes to coal.

Thinking about sustainability is moving rapidly into the mainstream of capital markets practice in China, according to a Euromoney survey of 180 issuers and investors.

Now in its second year, the Sustainable Finance and Investing Survey 2020 underscores how official support and the appetite of issuers and investors are driving China’s increasingly dynamic sustainable finance market.

The research, conducted on behalf of HSBC, shows how the market is gaining new areas of focus in China, including health, supply chains and carbon capture. But the market still faces challenges, such as returns and disclosure, and participants — especially issuers — are eager for more government support.

Continuing green shoots

Green and sustainable finance are moving rapidly into the mainstream of financial markets thinking in China. That trend emerges strongly from our annual survey of practitioners, which this year includes a special focus on China.

The 90 capital markets issuers and 90 investors in China who took part in this research reveal a striking openness, both to investing in the green and sustainable economy and to issuing green and sustainable debt. But they also highlight some significant remaining obstacles, above all the perceived returns.

Following the coronavirus pandemic, issuers and investors identify the health of the Chinese population as a priority in the drive towards sustainability.

Over 70% of those who report obstacles see returns on green and sustainable investments as insufficient. Many call for tax or other financial incentives to stimulate investment, with 50% of issuers and 44% of investors seeking these kinds of support.

The survey also reveals new areas of focus. Following the coronavirus pandemic, issuers and investors identify the health of the Chinese population as a priority in the drive towards sustainability. Thirty-nine percent of respondents picked this as one of the top four issues that China and Chinese market participants should increase their emphasis on. Only the most prominent environmental issues such as reducing greenhouse gas emissions and air pollution ranked more highly.

The emerging issue of supply chain sustainability is also attracting attention. With Chinese production a crucial element in many global supply chains, very substantial majorities of both issuers (92%) and investors (87%) are looking to companies to develop sustainable supply chains. However, formal requirements are uncommon at this early stage of focus on the issue.

Last orders for coal?

Although China is reducing its use of coal, it still accounts for over half its energy. Moreover, the country has invested substantially in new coal-fired power plants. Recovering some of the carbon dioxide emitted could help China control overall greenhouse gas emissions. Respondents identify carbon capture as the largest and most attractive investment opportunity in China’s green and sustainable economy over the next five years — a sign that they see a need to reduce emissions, but expect coal and other fossil fuels to remain important energy sources.

Recycling and ‘circular economy’ initiatives rank as their next most popular green and sustainable investment opportunity. It is interesting to note that alternative energy sources attract slightly less support. Solar power is the most popular of these, followed by tidal, wave and wind power and hydrogen. China’s green bond market also stands out. Investors rank it first among seven measures of Chinese green and sustainable finance’s effectiveness. This puts it ahead of official measures and guidance, as well as the efforts of banks, companies and investors to become more sustainable.

The green bond market’s success feeds into another finding: that respondents see real scope for the finance sector to generate significant innovations in sustainability. In investors’ view, energy, finance and manufacturing hold the most promise of generating sustainability innovations in the next five years, outstripping even information technology. In contrast, fewer respondents see sustainable investment potential in agriculture, forestry or energy-efficient housing. Given the challenges of feeding and housing China’s huge population, this is a notable and perhaps challenging conclusion.

Key findings from the China report

  • Green and sustainable finance are increasingly widely considered and followed in China - 72% of investors are open to investing
  • Yet there remain significant obstacles to investing in the green and sustainable economy
  • Tax or other financial incentives and government investment would give the market’s development impetus - 47% of issuers/investors are seeking these
  • Following the coronavirus pandemic, health is attracting attention as a driver of sustainability - Respondents identify it among four key issues for China
  • Issuers and investors are also starting to focus more on supply chains and whether they can be made more sustainable
  • Investors are excited by the prospect of carbon capture and storage technology and recycling or circular economy initiatives
  • The green bond market is making clear progress - 71% of issuers/investors consider it very well or well developed
  • Respondents see great scope for innovations in the finance sector, in pursuit of sustainability
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