By Nan Luo, Head of China, PRI

NAN photo

Although China is making progress towards meeting its net-zero emissions targets, there is still much more to do, particularly on aligning its financial markets with such goals. This blog summarises some of themes raised during the PRI China Conference: Investing for Net Zero and SDGs.

It convened international and Chinese policy makers, regulators, investors and standard setters to discuss what the country has achieved so far, the challenges that remain, and the best practices that need to be adopted to ensure investments are compatible with, and contribute to, net-zero and sustainable development goals.

China’s net-zero transition pathway

China is aiming to reach net-zero emissions by 2060. This will require trillions of dollars to be invested in green and low-carbon industries, and an understanding of the country’s transition pathway.

According to Zhang Xiliang, a carbon neutrality analysis expert from the Tsinghua University, China will need to:

  • derive more than 80% of its energy from non-fossil fuels by 2060. This will require coal, oil and gas consumption to peak by 2025, 2030 and 2035 respectively, energy efficiency to continue to improve until 2035, and carbon capture, utilisation and storage to scale up.
  • expand its carbon market to cover 70% of the energy-related carbon emissions.
  •  price carbon at least at US$10- US$13 per tonne during its 14th five-year plan (between 2021-2025) and at US$100 per tonne by 2050, to encourage emitters reduce their carbon emissions.

Investment challenges

Many Chinese and developing market financial institutions find it difficult to set 2050 net-zero targets as their national net zero goal is by 2060 or even later, according to China Green Finance Committee Chairman Ma Jun. As a result, no major Chinese financial institutions have joined the Glasgow Financial Alliance for Net Zero.

Chinese financial institutions face several challenges, according to Ma and other panellists:

1. Lack of GHG emission data and carbon accounting tools:  To achieve net-zero targets, financial institutions need to know their current financed carbon emissions, but only a handful of companies disclose their carbon data and the necessary carbon accounting tools are not always available. Financial institutions must therefore rely on estimated emissions from most of their clients. Mandatory climate disclosure regulation could resolve this issue, with Ma adding that digital solutions would be needed to address the cost of data collection.

2. Lack of transition scenarios:  Existing transition scenarios presented by organisations such as the International Energy Agency are not applicable to China as they are based on the transition trajectories of developed countries and do not reflect the net-zero timelines, pathways or industry, enterprise and technology developments that China (and other developing countries) might have.

3. Disparate ESG ratings methodologies:  Mainstream ESG rating methodologies are not consistent or transparent, nor do they reflect local characteristics.

Progress on responsible investment

Investor interest in responsible investment has continued to grow over the past two years, despite the challenges presented by the COVID-19 pandemic.

Nearly half of the PRI’s Chinese signatories have joined in the past year, with the 100th Chinese mainland signatory signing up in May.

But Chinese asset owners have lagged local managers on implementing responsible investment – so far only four asset owners have become signatories, compared to 74 investment managers.

Nonetheless, large institutions such as the US$960bn National Council for Social Security Fund are preparing to consider ESG factors in their fund manager evaluations. According to panellist Shao Wei, NCSSF’s Equity & Fixed Income Investment Department Deputy Director General, 13 out of their 18 domestic investment managers are PRI signatories.

China Investment Corporation, the country’s US$1.2trn sovereign wealth fund, published its five-year action plan on carbon and sustainable investment in May, outlining how it will systematically integrate climate change risk into its operational management, research and risk management, among others. Chen Chao, CIC’s Head of Research, noted that the institution wants to strengthen its data capacity and understand the impact of the sustainability accounting standards on the asset pricing.

Upcoming policy and regulation

Although China introduced the National Guidance on Building a Green Financial System in 2016, it has been relatively slow to develop its key sustainable investing policy elements.

Nonetheless, different government departments are trying to progress the policy agenda:

  •  China’s central bank are working on transition financing standards and policies and will continue promoting ESG disclosures.
  • The China Banking and Insurance Regulator (CBIRC) has this month released the Green Finance Guidelines to support the country’s carbon neutrality goal. It requires banking and insurance institutions to promote green finance by increasing support for a low-carbon economy and integrating ESG considerations into their operations.
  •  CBIRC is also developing ESG investing guidelines and an evaluation policy for the insurance sector. It will consider creating preferential policies, such as adjusting the minimum level of capital associated with credit risk, to incentivise insurance capital to support the national strategy.
  • The Insurance Asset Management Association of China is planning to introduce a stewardship code for the sector.
  •  China’s finance ministry is leading a working group to assess how the International Sustainability Standards Board’s standards should be implemented.
  •  The finance ministry issued its first carbon neutrality policy document on 30 May, setting out a three-step roadmap to establish a fiscal policy system for achieving China’s carbon neutrality goals.

Ensuring a just transition

China’s green finance policies and practices have largely focused on environmental considerations while overlooking social ones.  Human rights specialists and investors agreed that to be just, China’s net-zero transition must consider social issues and human rights and should include dialogue with people that may be negatively impacted. 

“[It] will create more job opportunities than losses in China country wide, [but] unless there is appropriate planning, there are risks for the coal-based provinces and other high-carbon sectors,” Yang Fuqiang, Senior Advisor of the Climate Change and Energy Transition Program, Peking University, noted.

Liang Xiaohui, adjunct professor on business and human rights at Peking University Law School, said: “We should not cut emissions for the sake of it. We have to understand [that] the ultimate purpose of the green economy is for the well-being of mankind and social equity.” 

Investors and Chinese companies should integrate tools such as the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises – and take a holistic assessment of the SDGs – in their ESG frameworks to address the social risks and outcomes of their activities, Liang added.

The PRI will continue engaging and working with Chinese signatories and policy makers across areas including mandatory ESG disclosure, stewardship and the just transition, and to promote China’s net-zero transition, as outlined in the PRI policy briefing Delivering carbon neutrality in China.

            The PRI China Conference sessions are available to watch on-demand.

Access the recordings 

This blog is written by PRI staff members and guest contributors. Our goal is to contribute to the broader debate around topical issues and to help showcase some of our research and other work that we undertake in support of our signatories. Please note that although you can expect to find some posts here that broadly accord with the PRI’s official views, the blog authors write in their individual capacity and there is no “house view”. Nor do the views and opinions expressed on this blog constitute financial or other professional advice.If you have any questions, please contact us at [email protected].