Distinguished guests, ladies and gentlemen. It is my pleasure to participate in this session on “Green Finance and Recovery” as part of the 2021 China Financial Street Forum. Thanks to the People’s Bank of China (PBOC) for inviting me.
In the wake of the COVID-19 pandemic, governments around the world have realized that we cannot continue with “business as usual”. But there is also a recognition that we can use the post-pandemic recovery as an opportunity to pursue a green and inclusive transformation of our economies.
China is particularly well placed to benefit from this opportunity. First, China would directly benefit from a cleaner environment and from actions to mitigate the risk of catastrophic climate change and biodiversity loss. The human health and livelihood costs associated with high levels of pollution are well known. Moreover, China is large enough that its actions can materially affect the global climate. According to some calculations, the implementation of China’s net zero emissions commitment by 2060 on its own could reduce global warming by 0.2-0.3 degrees Celsius.
China would also benefit from acting early and decisively to reduce the transition risks of abrupt later policy changes domestically and in other countries. The recent announcement that China will stop building new coal-fired power plants abroad recognizes this risk. It is very welcome because it underscores China’s commitment to a global green transformation.
Perhaps most importantly, China is set to benefit significantly from the wave of innovation and investment in green technologies and the creation of jobs associated with the transformation to a net zero economy. Already today, China’s green industries employ more people than China’s coal industry.
Let me now turn to the topic of green finance. China’s net-zero transformation will require enormous amounts of investment. Some estimates indicate that over the period 2014 - 2030, between RMB 2.3-7.2 trillion (or US$320 billion to US$1 trillion) per year would be needed to address climate and environmental challenges. The public sector is expected to provide only about 10% of this amount, so scaling up available financing from the private sector will be crucial. China has ample domestic savings, and so once again looks well placed to lead and benefit from the green transition.
Allow me to briefly describe some actions that could help fill the green financing gap.
First, while several government agencies have developed lists of economic activities qualifying as “green”, the existence of multiple taxonomies has created some confusion in the market, despite recent efforts by PBOC and NDRC to harmonize them. Also, there are still some deviations from international good practices. Ironing out these deviations would give investors more comfort that their money is going into assets that are genuinely green.
Second, China needs to further enhance transparency and disclosure of GHG emissions and other environmental indicators in order to boost the demand for green finance. Increased transparency
is critical to identify opportunities and risks. The disclosure of emissions data can affect consumer demand, creating incentives for companies to expand green investments. It also helps companies identify low hanging fruit and minimize the costs of abatement.
At the global level, the Task Force on Climate-related Financial Disclosures (TFCD) and the Task Force for Nature-related Financial Disclosures (TNFD) aim to produce internationally accepted good practices for disclosure. These initiatives present an opportunity for China to play a leadership role in setting standards while at the same time accelerating disclosure at home.
Third, greening the financial system requires incorporating climate and environmental risks into financial decision making. Climate change and biodiversity loss have real economic impacts that directly affect bank portfolios. Increased frequency of disasters will also lead to higher claims on insurance companies. In addition to these risks, financial institutions are also exposed to significant transition risks, related to shifts in policy that reduce the competitiveness or viability of certain activities.
Since the 2016 “Guidelines for Establishing China’s Green Financial System”, the PBOC has actively participated in the global conversation on how to integrate climate risks into financial supervision frameworks. Implementing these ideas will require developing appropriate climate risk assessment tools and methodologies for Chinese financial institutions as well as incentives to fully incorporate such assessments into their daily operations. Financial regulators have also floated using prudential tools to encourage banks to shift towards funding green activities, for instance through reduced capital charges or reserve requirements. Caution may be needed here to ensure prudential measures don’t assume functions better placed with fiscal authorities.
Fourth, while China’s green finance market has expanded rapidly in recent years, the range of available instruments is still narrow, consisting mainly of green loans and green bonds. There is a need to introduce a wider range of products to help finance the transition to a low carbon economy, including green mortgages, green building funds, green car loans, securitization of green assets, or sustainability-linked loans and bonds. The demand for green assets from retail and institutional investors is likely to increase over time. In the meantime, the authorities could require state-owned institutions, such as the social security fund or state insurance companies, to hold a certain proportion of green assets to stimulate market development.
Another area of financial product innovation is the development of a market for long-term risk capital for early or growth-stage green enterprises to support the development and deployment of innovative green technologies and solutions. This will be key to realize the potential productivity gains from the low carbon transformation. Earlier this year together with the Ministry of Finance and the Clean Development Mechanism we agreed to set up a green equity fund focused on growth stage green SMEs to help address this funding gap. But additional measures may be needed to encourage investors to develop technologies that have yet to prove their commercial viability such as first loss and other risk sharing mechanisms. The introduction of carbon taxes, carbon offsets, or the expansion of China’s Emissions Trading Scheme would significantly accelerate the required reallocation of capital without the need for full ex ante knowledge of which technologies to support.
I recognize that these actions taken together represent a big agenda and may appear daunting. Successful implementation will therefore require careful prioritization and sequencing, combined with continuous monitoring so that different policies and instruments could be added or adjusted as appropriate. The World Bank will continue to work closely with China as it continues on this ambitious path.
Thank you very much for your attention.