By Nan Luo, Head of China, PRI
Carbon neutrality has become a central topic in China since President Xi Jinping’s announcement of targeting carbon neutrality by 2060 last year. The 2060 targets have given investors a new direction in terms of policy but there remains a lack of clarity on how these targets can be achieved. The transition to net zero won’t be easy for China considering the ongoing expansion of its coal projects – instead, a systemic social and economic reform will be required.
Recently, the PRI hosted China Carbon Neutrality Week in partnership with the China Green Finance Committee. Policy makers, investors and experts discussed the policy and regulatory developments and responsible investment practices needed to achieve carbon neutrality in the country. We have rounded up some highlights of the discussion.
A comprehensive climate change law is needed
Meeting the carbon neutrality goal urgently requires introducing a comprehensive and specific climate change law. Revisions to the existing laws on ecology, environment and energy are not enough to meet the 2060 targets.
Climate change has been incorporated into the legislating agenda since 2009. According to Chinese officials at the panel discussion, the framework of the climate change law has been well developed. The Ministry of Ecology and Environment is currently improving the draft while taking the new targets into consideration. The climate change law is fundamental for systematically addressing climate change and could provide legal safeguards to establish a governance mechanism to address climate change, including clarifying the responsibilities of the authorities, and establish a GHG accounting and data management system, implement the Paris agreement, facilitate fiscal and financial support, as well as accountability.
A supporting green financial system
It’s estimated that new investments worth trillions of dollars are needed to achieve China’s carbon neutrality goal by 2060. Green finance can help mobilise public and private capital to address this financial need.
China started to develop a green financial framework in 2016 led by the People’s Bank of China (PBOC) with the initial purpose to address China’s environmental issues. The framework was built on five pillars covering: green financing standards, information disclosure, incentivising and constraining measures, financial products, and international cooperation. Progress has been made in this direction, but the framework should be further developed to serve China’s carbon neutrality goal. To better align with the climate objectives and international green finance standards, the PBOC recently revised the green bond catalogue which removed coal projects and introduced a ‘No significant harm’ principle.
In addition to improving the green bond standard, PBOC is looking at developing the financial standards to support the transition away from high carbon industries and also strengthening the carbon related disclosure requirements. Internationally, they are continuing their work with the EU to promote the harmonisation of the global green financial standards.
Mandatory disclosure for companies and financial institutions
Mandatory ESG information disclosure requirements are key to support carbon neutrality but have not been introduced in China yet. According to Dr Ma Jun, the Chair of the China Green Finance Committee, detailed regulatory requirements are expected to be introduced as progress is made towards the national carbon neutrality strategy. In his view, financial institutions will be required to disclose their exposure not just to green assets but brown ones too – a term which currently lacks clarity but broadly refers to the assets allocated in the high emitting industries.
We witnessed regulatory progress on ESG information disclosure following our China Carbon Neutrality Week. Earlier this month, the CSRC published a consultation on the revised guidelines on information disclosure by listed companies. The consultation included a dedicated chapter on environmental and social responsibilities requiring listed firms to disclose information on environmental-related penalties and encouraging them to disclosure their carbon reductions.
A well functioned cap-trade carbon market
With the carbon trading pilot taking place in 2011, China’s national carbon market will finally start online trading in June, with the power sector covering 2,225 enterprises. In line with the recommendations proposed in PRI’s policy briefing on delivering carbon neutrality in China, Professor Qi Shaozhou who spoke at the event suggested an urgent need to increase the industry coverage of the market in order to price carbon effectively. And importantly, the emissions cap needs to be calculated according to the new 2060 carbon neutrality target.
A Stewardship code
Seven Chinese investors have signed up to the Climate Action 100+ and have been engaging with Chinese companies on climate issues. However, stewardship or active ownership are still very new concepts in China. There’s a need to introduce a stewardship code for the asset management industry to raise awareness and drive Chinese investor action to engage companies on the net zero transition.
Positive progress is expected as Mr Cao Deyun, Vice Chair of the Insurance Asset Management Association of China (IAMAC), announced their plan to develop a stewardship code for the asset management industry this year to support China’s 2060 goals.
The role of Chinese asset owners
The role of Chinese asset owners in contributing to the carbon neutrality goal is essential and can be achieved through implementing responsible investment strategies and practices. However, Chinese asset owners are generally still at the very early stage of incorporating ESG, but we hope this could be sped up following President Xi’s announcement on carbon neutrality.
China’s large insurer Ping An group has advanced on ESG investing in China and has taken an initiative to develop its climate strategies towards net zero. Crystal Geng, Ping An’s Head of ESG shared the following suggestions for Chinese asset owners and managers about taking actions on climate change based on their experiences:
- Start taking actions on climate change now;
- Redesign the organisation structure by setting up a committee at executive level to execute the work. For example, Ping An recently established a Net Zero Committee, led by their Chairman;
- Update the green investment catalogue to cover both green and transition projects;
- Create climate risk scenario analysis on your portfolios even if the methodologies and data are not mature. Adjust asset allocation strategy dynamically through a better understanding of climate risks.
- Develop a five-year plan and renew every five years. For example, last month Ping An published their five-year green finance plan, committing to grow their green investment at the rate of no less than 20% annually.
The PRI is working across different areas to drive and support progress towards carbon neutrality through collaboration with policy makers and investors in China. Have a look at the webinar recordings here.
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