China, an active proponent and pivotal player in the global fight against climate change, ascertained its firm strategic resolve and commitment to achieving the dual carbon goals in 2020. Intensified efforts in green finance and the fostering of green industries and projects are instrumental in attaining the dual carbon goals. The Central Financial Work Conference underscored the importance to make significant strides in five key areas, namely sci-tech finance, green finance, inclusive finance, pension finance and digital finance. Acting upon the directives of the Central Financial Work Conference and fostering a seamless integration between green and transition finance, while summarizing and refining successful green finance practices and models and applying them to the realm of transition finance, constitutes a vital component in enhancing the effectiveness and efficiency of financial support in promoting green, low-carbon initiatives and facilitating a high-quality economic development trajectory.
Ⅰ. Green and transition finance complement each other to jointly serve the dual carbon goals
Since the 18th CPC National Congress, significant progresses have been made in the construction of China's green financial system. A multi-layered and diversified green finance market, primarily featuring green loans and green bonds, has now taken shape, providing robust momentum for supporting the green and low-carbon development of the real economy. By the end of the third quarter of 2023, China topped global rankings with a green loan balance of RMB 28.58 trillion, a 36.8% YoY surge, and the domestic green bond market claimed the world's second spot with a balance of RMB 1.98 trillion.
Given the constraints of energy structures and economic development stages, alongside the vigorous development of green industries, a systematic and orderly low-carbon transition in high-emission and hard-to-abate sectors plays a direct role in achieving the dual carbon goals. In practice, the urgency to explore and advance transition finance is continually emphasized. Transition finance targets sectors and projects with substantial emission reduction potential, offering crucial financial support for high-emission and hard-to-abate fields in their low-carbon transition. In this way, it facilitates an increased share of green industries and projects in economic activities while ensuring a "Safe carbon reduction".
PBOC consistently underscores several key aspects in coordinating the advancement of green and transition finance: 1. Systematic thinking. It advocates for a phased and staged approach to green and low-carbon transitions, grounded in comprehensive supply chain transitions or overall business entity transitions. 2. Steady progression. It emphasizes balancing short-term needs with long-term strategies, managing the interplay between energy transition, economic development, and social welfare. Financial institutions are encouraged to enhance recognition ability of green and low-carbon activities, proactively manage climate-related financial risks, and shun "Campaign-style” carbon reduction measures, thereby ensuring a stable course for green and low-carbon development. 3. Grounded in national circumstances and actual technologies. Following the principle of “Priority for urgent needs”, it prioritizes financial standard setting for key sectors like coal-fired power, steel, construction materials, agriculture, and focuses support on areas with advanced technology and notable carbon reduction impacts. 4. Domestic green and low-carbon development bolsters international collaboration and coordination on sustainable finance, and vice versa. PBOC serves successively as co-chair of the G20 Green Finance Study Group and Sustainable Finance Working Group, vigorously promotes related international researches and works on green and transition finance, contributing Chinese perspectives and solutions. Notably, the G20 Transition Finance Framework, among other key reports drafted by the working group, has been officially released after being approved by the G20 Leaders' Summit.
Ⅱ. PBOC will draw upon valuable lessons from green finance and comprehensively incorporate climate change-related factors into the design of transition finance policies and instruments
Looking ahead, PBOC, guided by President Xi Jinping's thought on ecological civilization, will diligently implement the spirit of the Central Financial Work Conference, and reinforce top-level design for financial support of green and low-carbon development. It will adhere to market principles in promoting the growth and seamless integration of green finance with transition finance, and comprehensively enhance the financial system's capacity to manage and mitigate climate-related risks.
First, PBOC will refine the standard system to strengthen the foundation for the development of green and transition finance. Drawing on the experience of formulating green finance standards, it will gradually introduce transition finance standards applicable across various financial products. Entities undergoing transition will be encouraged to devise scientific, reasonable, and practicable transition plans to ensure comprehensive carbon reduction and emission mitigation. Leveraging the opportunity of establishing transition finance standards, current green finance standards will be adjusted and updated to elevate the green level and broaden the scope and systematic nature of transitions. A financial statistical system capable of assessing carbon reduction outcomes will be incrementally built, upon which incentive and restraint mechanisms for green and transition finance will be further improved. Active advocacy for global transition finance issues will be pursued to elevate the comparability and consistency of international sustainable finance standards.
Second, PBOC will reinforce carbon accounting and environmental disclosure requirements. Efforts will be intensified to improve the enterprise carbon accounting system, referencing international best practices to develop methodologies for financial institutions' carbon accounting, and promoting the formulation of national standards. Under controlled costs, the consistency and comparability of carbon accounting data for financial institutions will be enhanced, accompanied by the establishment of interdepartmental information sharing mechanisms. The scope of entities subject to environmental disclosure will be widened, with emphasis on enhancing the comparability of environmental information and reinforcing disclosure obligations regarding carbon emissions and reductions, and other climate-related aspects. Mandatory environmental disclosure for financial institutions will be phased in. Additionally, the Bank will take an active role in formulating and piloting global sustainable disclosure standards.
Third, PBOC will refine incentive and restraint mechanisms to ensure policy continuity. It will strengthen the monetary policy support for green and low-carbon development, continue to leverage tools supporting carbon reduction and dedicated relending for clean and efficient coal utilization, and support the green and low-carbon transition of economy. Enhancements will be made to the effectiveness and pertinence of the green finance evaluation, improving the indicator system, and exploring the gradual inclusion of green and transition finance performance, climate-related financial risks, green institutional development, green and transition finance services, and climate environmental benefits into the evaluation framework. More mature products and services will be incorporated into the evaluation scope, the application scenarios of evaluation results will be expanded, and the supportive policies for green and transition finance will be linked with evaluation results. Regular climate risk stress testings will be conducted, with ongoing improvements to testing methodologies and scenario enrichments. More financial institutions and regions will participate in these testings to explore ways to incorporate climate change risks into the regulatory framework, alongside in-depth macro-scenario stress testings for climate risks.
Fourth, PBOC will enrich the variety of financial products and service systems. The development of transition finance products and markets will be vigorously promoted. Targeted financial products will be researched and developed based on transitioning entities, phases, and funding purposes. Support for sustainable development-linked bonds will be reinforced, employing diverse instruments such as credits, bonds, equity investments, trusts, to financially support transition activities. PBOC will encourage the growth of private equity (PE), venture capital (VC), acquisition funds, debt-to-equity swaps, mezzanine financing, and other risk-tolerant financial products, while popularizing green investment concepts. This will expand participant entities in green and transition finance markets, guide green investors to engage with and support transitional economic activities, and expedite the development of a national carbon emissions trading market. The trading mechanisms and rules of the carbon market will be refined to clarify registration, transaction, settlement, and other systems. Financial products linked to carbon emissions will be actively researched, while the scope of carbon market participant entities based on investor suitability will be expanded, with reasonable control of the total issuance of carbon allowances, scientific allocation of initial quotas, enhancement of market liquidity, and optimization of pricing mechanisms.
Fifth, PBOC will fully mobilize the initiative and ingenuity of local levels to drive the comprehensive development of green and transition finance through regional pilot projects. Since 2017, ten green finance reform and innovation pilot zones have achieved positive results, and generated a wealth of replicable experiences across the country. In 2022, the first batch of pilot zones successfully concluded. More qualified regions willing to embark on diverse green finance innovation experiments based on their regional characteristics, are encouraged to support the upgrading of original pilot zones with unique features and solid foundations, and foster transition finance, thereby consistently contributing grassroots efforts to the overall progress of green and transition finance.
Source: PBOC
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