ESG Investing Frontiers Forum | Dual Carbon Goal: Leading ESG and Green Finance Development
The 17th ESG Investing Frontiers
Dual Carbon Goal: Leading ESG and Green Finance Development
Chaired by Yu Jiantuo, Deputy Secretary General of China Development Research Foundation, the 17th ESG Investment Frontier Forum was held online on 29 April 2022. The theme of this forum was Dual Carbon Goal: Leading ESG and Green Finance Development.
List of guests:
Ms. FANG Li, Country Director of the World Resources Institute (WRI) China, pointed out that the development of green financial markets is the backbone and information disclosure is the guide of ESG investment in China under the Dual Carbon Goal.
As an important investor, China is receiving worldwide attention for its outbound investment. Fang explained that WRI and the Belt and Road (B&R) International Alliance for Green Development have collaborated on the "Traffic Light" project on outbound investment and released the Belt and Road Project Green Development Guide, which classifies outbound investment projects in a hierarchical manner to better guide B&R green investments. Earlier this year, the Ministry of Commerce and the Ministry of Ecology and Environment issued The Guide to Ecological and Environmental Protection for Foreign Investment and Cooperation Construction Projects.
Domestically, there is also much interest in how China's low carbon path will be set. How to include carbon emission in environmental impact assessments? How to help regions and industries dependent on traditional energy sources to transform? How to define and standardize information disclosure? These problems will require more in-depth consideration and research from many aspects.
According to Fang, the essence of ESG is the integration of externalities into corporate governance, decision-making and economic activities. In the future, the development of ESG needs to be jointly promoted by governments, financial institutions and enterprises. Further, clear market expectations need to be established. The construction of clear national and local targets for total carbon emissions can send clear long-term policy signals to the market. Nowadays, global governance is being reshaped and carbon emission has become one of the core dimensions. Hopefully, Chinese financial and investment institutions will participate in the rule-making of global governance.
Mr. CHEN Daofu, Deputy Director of the Institute of Finance of the Development Research Centre of the State Council, makes three observations on why it is important to focus on ESG.
First, ESG investment expands our understanding of the company, especially for limited liability companies. The introduction of the ESG concept further broadens the concept of the company as a fully interactive and relatively independent organ embedded in nature and society.
Second, the assessment of the value of a company will reflect changes in market consensus. After a certain level of economic growth, issues such as social equity and the environment become the focus. We could see such trend in the late 1920s, and we are seeing it again now. Once it becomes a trend, it will be reflected in prices.
Third, China's current promotion of ESG is highly consistent with our strategy of promoting a new development concept, high-quality growth and the Dual Carbon Goal. It is being implemented by all sectors. We are re-evaluating our investment targets, which are being transformed by ESG.
Chen believes that there are infinite space for Dual Carbon and clean energy in the future. Short-term shocks have slowed down the rate of transition, but provide a rare opportunity for long-term layouts in time and space— a opportunity that long-term investors should cherish.
Ms. WANG Ying, Head of Corporate Sustainability at HSBC China, introduced HSBC's sustainability practices. In October 2020, HSBC published its Global Climate Strategy, which is dedicated to building a net-zero bank, supporting customer transformation and exploring innovative climate solutions. HSBC Group is also driving green finance and sustainability transformation in China, said Wang. In the Chinese market, HSBC offers a range of sustainable financial products and services such as green deposits, green loans and green bonds; it promotes the transformation of energy-intensive industries to low carbon by providing corporate services such as investment and financing portfolios, project operations and risk management.
In January 2021, HSBC successfully helped Bank of China issue the world's first public transformation bond for financial institutions in the overseas market, including a three-year US$500 million and a two-year RMB1.8 billion bond. Raised funds were mainly for natural gas generation projects, natural gas-fired power generation and cement plant waste heat recovery projects.
The same year, HSBC launched a green deposit scheme for corporate clients—a new initiative by foreign bank to support China's Dual Carbon Goals. The scheme helps companies invest their surplus funds in green and low-carbon projects in areas such as renewable energy, high-efficiency buildings, sustainable land use and clean transportation.
YU Jiantuo: The ESG and green finance standards vary greatly within and between countries. Is there any prospect of achieving a fundamental consensus on standards and gaining global consistency? If global consistency is not possible, will there be a regional consensus?
FANG Li: First of all, there is the issue of standards. Many organisations are constantly introducing standards, all hoping to be leaders in the field of standards. The trend is mutual learning and integration.
The second issue is how to integrate. WRI has institutions in developed regions as well as developing countries, but it is difficult to implement uniform and detailed standards. It is also difficult to fully reflect the needs of various regions and countries at different stages of development.
The global industrial layout is different, thus the characteristics of carbon emissions and the emissions of large producing countries versus large consuming countries are absolutely different. In the Regional Comprehensive Economic Partnership (RCEP), in which China participates, we have the opportunity to take the lead and put such standards into the agreement.
YU: Many developing countries and traditional industries are sceptical about equitable transformation, believing that there is a large gap between the cost of transformation and the support provided. What is the solution to the problem of equitable transformation and the financing gap?
FANG: The most primitive form of inequity in transition is the distribution of resources. Initially, development inequity is likely to be a result of different resource endowments. For financial institutions, if individual provinces do not have a total amount of emission reductions, it has no expectation of investment. The earlier the country determines the total amount, the better it is for long-term development and for low-cost emission reduction. How to divide the total amount is the first step of equity because it ensures regional equity.
The second is equity between industries, which can be solved by using the mechanism of allocating targets, coupled with the market mechanism. To reduce carbon emission, the EU implements the European Emissions Trading System (ETS), which covers major industries that are heavy polluters and heavy emitters. Carbon emission indicator can be bought and sold, and resources will then be allocated to the most efficient places, which is a reflection of the fairness of the market.
In terms of disclosure, it will not solve the problem if only absolute numbers are disclosed. What we need to disclose is the relative value variable.How much carbon assets have been reduced for the same industry shows technological progress. It is possible to embed incentives when setting systems and policies. If you just set the absolute amount, people simply divest and nothing more, so it's important to assess the variables, not just the stock.
YU: What are the features of clean energy that are safe and independent, capable of combating climate change?
CHEN Daofu: From the perspective of security and independence, countries with different resource endowments and stages of development may come to different conclusions. Clean energy itself also has its own security and independence issues. Clean energy as a direction should be actively encouraged, but countries with different energy mixes, technologies and stages of development, etc., have divergent understandings of security and independence. Therefore, each country should be allowed to find its own security model and rhythm of clean energy transition that suits its own resource endowment and economic characteristics.
In order to do that, there are three things to do for the financial sector. The first thing is the issue of disclosure and standards. ESG values non-financial indicators, a ranking of objectives. It is not realistic to have exactly the same ranking of objectives in different countries. Therefore, there is still a need for regional consensus and individuality. From an operational and practical point of view, different industries and regions will even have to elaborate their information disclosure and standards. Moreover, information disclosure is not achieved overnight; it is embedded in the process of ESG promotion and application.
The second is the issue of incentives and constraints. For financial institutions, should there be subsidies and changes in the risk weighting of assets? Our central bank has designed a number of structural monetary policy tools and also some refinancing as incentives. The environmental departments have set a large number of standards and requirements as constraints, too.
Does the financial system need to have some constraints? Personally, I think that in promoting ESG, incentives should be the main focus, with a small amount of constraints. In areas such as carbon emissions and environmental protection, the incentives are based on constraints, and the whole framework is about constraining. The People's Bank of China and the CBRC could do more to explore the idea of incentive-oriented model of restraint.
The third is trading. The carbon tax and carbon trading now being explored are actually solutions to the problem of imbalance.
YU: Through what means and methods does HSBC plan to act with its partners to achieve net zero emissions from assets under management?
WANG Ying: The first step is to figure out the carbon benchmarks within your asset portfolio. We have started by setting financing emission targets for two sectors, oil and power. We will also identify the emissions of other key sectors so that we could gradually achieve net zero emissions by 2050.
After that, we will reduce financing for certain industries, such as the coal industry. The EU announced to withdraw from power coal financing by 2030 and other developing markets will do so by 2040. Subsequent lending standards will reduce the investment and financing to high emission sectors. In addition, we will support our clients to make low-carbon transitions by an investment of $750 billion to $1 trillion. We provide a range of green finance-related services to encourage our clients to take more proactive action on low-carbon transformation. Finally, we are investing $100 million in a natural assets asset management company to support clean technologies that can also neutralise our emissions. Through the concerted efforts of several parties, we are hoping to achieve net zero emissions across our portfolio by 2050.
YU: Speaking of the fossil energy sector, should capital markets encourage investment in more efficient extraction and smelting, or should they encourage direct investment in new energy assets?
WANG: The financial sector is a very important player in supporting the development of the real economy. My personal understanding is that the process between us and our customers should be a two-way street. When formulating relevant lending policies, we should not be too hasty and sweeping but leave some space and transformation opportunities for our customers. At the same time, we should also encourage our clients to actively transform through green products and investment and financing.
We have done a lot to help our customers to raise their awareness in this area. We are also actively collaborating with international environmental organisations to advocate a pro bono approach to the market to raise awareness and get more companies to make this transition. We also hope that more financial institutions will join us in this process and work together to implement more productive lending policies, which will also force our customers to make a more productive transition.
Written by China Development Research Foundation
Edited by Ruoyi