ESG Investing in China｜Carbon Neutrality and Financial Industry Innovation

Introduction: On April 29, 2021, the 9th ESG Investment Frontier Forum "Financial Industry Innovation under '30·60' Carbon Neutrality" was held in Shenzhen. Industry experts from HSBC Financial Research Institute of Peking University, China Southern Fund, Sino-Carbon Innovation and Beijing Institute of Finance and Sustainability participated in this forum to discuss how the financial industry promotes low-carbon transformation, and how technology is advancing innovative applications in the process of low-carbon transformation with our financial system.

1.     Carbon Neutrality and Innovation in the Chinese Financial Industry

In China, the "30·60" target will have a significant impact on enterprises and financial institutions. It will become an inevitable trend for enterprises to embrace the macro carbon neutrality goal and more talented people to join ESG-related entrepreneurship. Financial institutions will enhance green financial evaluation standards and formulate corresponding investment procedures to transform the concepts of carbon peaking and carbon neutrality into reality. To promote industrial transformation and upgrading, financial institutions can participate in various areas, such as:

-       Equity Financing: VCPE institutions can increase capital allocation for green industries

-       Financing Guarantee: local governments and banks can help ESG enterprises obtain more financing guarantees

-       Resource Empowerment: financial institutions can increase cooperation with green technology companies and thus empower them, such as building green innovation platforms for industrial transformation.

Moreover, the carbon market is a critical mechanism for reducing carbon emission in the future. Thus, the implementation of a national carbon trading market will gradually improve the fragmented carbon trading system, clarify relevant transaction rules, and increase enterprises’ participation.

2.     The New Trend for the Financial Industry in the Context of Carbon Neutrality

In the carbon-neutral era, carbon-neutral technology and industrial competition will inevitably become the main areas of competition. These competitions will involve new forms of national competition and energy security issues under the new energy system. This is an important development opportunity for my country.

From a researcher's perspective, the "30·60" target provides a clear, directional, and aggregate target for carbon neutrality. This target will guide all industries and production links in the same direction. Compared with the goal of reaching the peak of carbon, carbon neutrality is still a vision. In the 40 years of realizing the vision of carbon neutrality, technological breakthroughs, industrial restructuring, model restructuring, and even conceptual restructuring will occur. Therefore, in order to achieve the goal of carbon peak and carbon neutrality, we need to allocate resources scientifically and rhythmically.

First of all, finance is based on the physical industry, and the future physical industry will operate in an orderly manner based on carbon neutrality. From a financial perspective, how to build a good market to enable all parties to achieve adequate pricing and resource flows, and to efficiently promote carbon neutrality, is what must be done in the next 40 years.

Secondly, long-term investment, value investment, and responsible investment are the core principles of institutional investment of public funds. When we measure the investment value of a company, we will truly consider whether the company and its industry have development potential and opportunities in the long run.

Finally, from the perspective of investors, we need focus on the evolution of the world. When investors have responsibility for capital, the entire carbon-neutral financial system will have a operational foundation.

In addition, China's financial authorities have gradually established a complete standardized system for green finance. China has established an experimental zone for green finance in the application of green finance standards, including the formulation of standards, and the application of standards. Moreover, China and the European Union are currently formulating a classification scheme for green financial economic activity. The scheme will be the world's first green financial standard recognized by sovereign states and sovereign regions.

3.     New Outlets for Carbon Neutrality: Opportunities and Challenges

To achieve carbon neutrality, the first difficulty is goal setting. In addition to the "30·60" long-term goals and phased goals, we need short-term goals and actions as we face the global climate change.

The second difficulty is technological progress. A global reduction of about 40% of carbon emissions by 2030 can be achieved by using existing technologies and products, as long as their penetration rate and market coverage are increased. However, for China to achieve carbon neutrality after its carbon peak, we need a big technological breakthrough, such as new energy technology, energy storage technology, CCUS technology, etc. The speed of breakthroughs, scale, and industrial application of these technologies also determine the final progress od carbon neutrality.

The third difficulty is reshaping of ideas. In particular, do we have to reach the carbon peak to achieve neutrality? Many top domestic experts are also reluctant to conclude on this point. If it is a steep carbon slope after its peaking, it will put pressure on the future carbon neutral target.

At the same time, the proposed carbon neutrality target brings unprecedented opportunities to enterprises and financial institutions. Faced with a clear "30·60" target and a highly uncertain carbon emission reduction path, financial assets have a great opportunity to manage risks and obtain excess returns. At present, we still lack the top-level design and a comprehensive data system. If low-carbon investment has a clearer data system and relatively good policy support, investments in this field will generate excessive returns.

From the perspective of the secondary market, the various industrial actions have already begun. There is large room for innovation from the power supply side and the power consumption side. Traditional energy sources are also facing the challenge of improving efficiency in the short term. Thus, listed companies and capital markets will also face opportunities and risks at the same time.

Carbon-neutral technology and industry have huge development potential. Finance is a capital place and a key link in resource gathering and allocation. China’s future capital market will also invest substantially in carbon neutrality. In addition, people’s daily life and consumption patterns are also becoming greener. As said at the Central Finance and Economics Conference on March 15, carbon neutrality is a profound and extensive economic and social change, and it will lead to good results.