If China hopes to make good on the promise that its carbon emissions will peak by 2030 and it will achieve net zero or carbon neutrality by 2060, then it’s going to need to attract private capital to finance green investments – and quickly. Its ambitions require an estimated $1 trillion annual spend and only 10% to 15% of this will be met by the Chinese government.
The nation finds itself in an entirely different position to Europe, where the growth in green finance has been driven by investor demand and the government response – in the form of regulation and a taxonomy – has followed.
Similarly, in the US green finance has been driven by the buy side, although there, regulatory follow-up is only now emerging.
Attracting private investment seeking green outcomes is not going to be easy for China no matter how much government intervention there is.
According to recent research from Standard Chartered, when it comes to sustainable investments, the world’s largest asset managers remain focused on North America and Europe.
Almost two thirds of investors are putting money to work in the two regions – despite over half of all investors surveyed admitting outperformance in China.
Controversies
Why the reticence?
Risk, disclosure and harmonization. In green bonds, for example, China is the second largest market for issuance, yet its domestic green bond standards don’t support international investor participation.
According to S&P, in the first half of 2020 China’s issuance of green bonds was almost $8 billion, yet only $4.37 billion were globally aligned bonds.
Even announcements earlier this year by China’s top regulators stating that fossil fuels would be removed from its green bond taxonomy won’t appease foreign investors in the near term.
This is because some of the proceeds will still be allowed for projects such as carbon capture and storage that China desperately needs given its reliance on coal.
This remains controversial for dedicated green investments on a global stage.
The challenge of marrying China’s financing needs with foreign investment criteria is not lost on the Chinese government
The challenge of marrying China’s financing needs with foreign investment criteria is not lost on the Chinese government; nor is the need to unify the standards and guidelines among the large number of exchanges, government departments and regulators.
Guidance
In October, five Chinese government ministries and regulators jointly issued the ‘Climate Finance Guidance’, a vast set of guidelines that encompass just about everything – including measures for green finance for both climate adaptation and mitigation that many other governments have yet to broach.
With regards to standard setting, regulation and disclosures, the guidance sets clear timelines of 2022 and 2025 for improvements.
There’s no hint at mandating the Task Force on Climate-related Financial Disclosures (TCFD) despite, or maybe because of, recent research from global environmental non-profit CDP that shows Chinese financial institutions are still in the early stages of TCFD alignment.
Such a move would arguably help attract investment both foreign and domestic. Sixty per cent of domestic investors and issuers told HSBC in a survey in October that, like foreign investors, they did not feel disclosures went far enough.
That is backed up by data from Ping An Economic Research Centre. In June this year its research showed that in 2019 85% of China Securities Index 300 companies published an environmental, social and governance report, yet only 12% of these were audited reports.
Support
But does China really need foreign investment given the vast wealth inside the country? Possibly not.
However, given the vast sums needed and the fact that foreign investors are more willing to accept lower returns, then it would serve China well to woo them.
According to HSBC’s survey, 72% of domestic investors said they were willing to invest in a green economy, but, in stark contrast to foreign investors, a similar number said they felt returns were insufficient.
It is unsurprising that the Chinese government is throwing everything at the problem
It is unsurprising, therefore, that the Chinese government is throwing everything at the problem.
Clearly a bid to attract domestic investors, the Climate Finance Guidance highlights plans to provide public-sector support to de-risk environmental markets and technology through government bank guarantees, government bank insurance, bank loans plus risk guarantee compensation and tax credit finance, as well as general mechanisms for loss sharing, risk compensation and public-private partnerships.
Not only will this appeal to domestic investors but it’s good news for pipeline development for China’s burgeoning green private equity fund industry.
In the mix of the country’s broader policies around creating green investments is the creation of green finance zones: five pilot clusters plus emerging zones across China focused on developing green finance – primarily through fintech.
Behavioural changes
And if investors can’t be convinced, then regulation will force a greening of the financial sector.
In December, for example, a Chinese government-commissioned report proposed stricter guidelines for financial-sector funding of brown projects for the Belt and Road Initiative.
The report proposed that environmentally risky projects should be subject to stricter regulations and that the use of a traffic light system could be used – where wind and solar power projects are rated ‘green’ and coal and gas-fired power projects are ‘red’.
It would essentially put a ban on coal for China’s overseas investments and lead to behaviour change at Chinese financial institutions.
While China may be thought to be lagging Europe and North America in global green finance, one has to wonder how long that will continue if the huge efforts being taken by the Chinese government are successful.
The need to attract green investment to meet its net zero goals could well result in China becoming the global centre of green finance by the end of this decade.
