I am delighted to attend the 2021 International Forum for China Financial Inclusion (IFCFI) and share with you my views on green finance and its role in carbon neutrality.

I. Green finance facilitates carbon neutrality

“We aim to have CO2 emissions peak before 2030 and achieve carbon neutrality before 2060.” This is a major strategic decision made by China and president Xi based on its goals of achieving sustainable and high-quality development and building a community with a shared future for mankind. Carbon peaking and carbon neutrality involve extensive and profound economic and social transformation; it will not only reshape China’s energy mix and industrial structure, but have an impact on all aspects of economic and social development. Therefore, all sectors, especially the energy sector and manufacturing industry, should rise to the challenge and make concerted efforts to set science-based and realistic targets and plans on carbon reduction and introduce standardized, clear and practical green development initiatives. In particular, the financial sector needs to play an indispensable role in guiding the allocation of resources, supporting the green and low-carbon transformation, and preventing the financial risks brought out by climate change.

Green and low-carbon development is a major trend in global sustainable development. From mandatory emission reductions to nationally determined contributions (NDCs) of countries, the international community is forging a consensus on climate change. From the United Nations Framework Convention on Climate Change, which entered into force for China in 1994, to the Kyoto Protocol in 2005, from Paris Agreement in 2015 to the co-chairing of the Sustainable Finance Study Group (SFSG) by the People’s Bank of China and the US Treasury this year, China has been deeply involved in the global response to climate change, fulfilling its international commitments and assuming the responsibilities of a major developing country. The Chinese government’s commitment to carbon peaking and carbon neutrality is not empty talk but comes with a concrete and feasible roadmap. “Carbon neutrality” is becoming the most important tool to achieve ecological conservation in China. The Political Bureau of the Communist Party of China (CPC) Central Committee held a meeting on July 30, 2021, to study and analyze current economic circumstances and make plans for related work for the second half of 2021. The meeting urged officials to pursue the 30-60 goals in a “coordinated and orderly manner”, called on the country to “stick to a single game nationwide”, “rectify campaign-style ‘carbon reduction’, and establish new rules before breaking old ones. The meeting also instructed officials to “resolutely contain the blind development of ‘dual-high’ projects” – a goal set by the 14th five-year plan. The Central Economic Work Conference, which ended last week in Beijing, focused on how to understand the concept of “carbon peaking and carbon neutrality”. The meeting stressed that achieving the 30-60 goals is an inherent requirement for promoting high-quality development and should be promoted with determination, but it is impossible to achieve it all in one go. We must follow the principles of exercising nationwide planning, prioritizing conservation, leveraging the strengths of the government and the market, coordinating efforts on the domestic and international fronts, and guarding against risks. The gradual withdrawal of traditional energy sources should be based on the safe and reliable substitution of new energy sources. Conditions should be created for an early shift from dual controls over energy intensity and total energy consumption to dual controls of total volume and intensity of CO2 emissions.

Compared with developed countries, China is still in the process of rapid industrialization and urbanization where the economy will maintain medium-to-high speed growth for a long period of time, so per capita energy consumption will continue to grow, resulting in some strains on future carbon emission reduction. According to international organizations and research institutes, China’s peak carbon emissions will exceed 10 billion tons, while that of the U.S. is 5.7 billion tons, and the EU, 4.4 billion tons. Moreover, China only has 30 years to reach carbon neutrality following its carbon peaking, compared to 60 years for the European Union and 45 years for the United States. Carbon peaking and carbon neutrality should not be achieved at the expense of economic growth, national wealth and people’s living standards; instead, we need to achieve comprehensive, coordinated, sustainable and high-quality development under the constraint of carbon emission reduction. This requires us to balance the relationship between ecological conservation and economic and social development fully, rationally and intelligently. In the coming decades, green and low-carbon transformation will be the core of all economic activities and become the basis of decision-making of investment, production, consumption, and distribution. Economic development and people’s lifestyles will also shift from being unsustainable and highly resource-dependent to continuously iterative and innovative. Therefore, China needs to promote “carbon peaking and carbon neutrality” at its own pace, strive to balance economic development with carbon-emission-reduction targets and prevent and mitigate transition risks, so that an orderly and just green transition can be achieved.

Green finance plays an important role in achieving the “carbon neutrality” goal. UN estimated that about US$90 trillion is needed to achieve the temperature control target set by the Paris Agreement. A number of organizations projected that China needs to invest approximately RMB 150 to 300 trillion to achieve the 30-60 goals. This means that China will invest an average of RMB 3.75 to 7.5 trillion per year in the coming years, equivalent to 10% of the annual total investment. Such a scale of green investment will bring new opportunities for growth in China and the world. But the question is how to get such a huge amount of money. Based on previous figures, we estimate that green finance will support up to 90% of the funds needed, while government financial support will only account for the rest 10%. Green finance can guide private capital into green development and environmental protection, optimize the allocation of production factors across the board and play an indispensable role in providing carbon-neutral funds.

Back in 2016, at the 27th session of the Central Leading Group for Comprehensively Deepening Reforms, President Xi Jinping pointed out that green financing is one of the essential measures to achieve green development, and an integral part of the structural reform of the supply side. We will channel more social capital towards green industries and give incentives for doing so, through creative financial regimes and arrangements, and in the meantime, effectively restrain investments that lead to incremental pollution. Later, China issued the Guidelines for Establishing the Green Financial System to build a top-down green financial policy system to promote a booming green financial market in China. Through the unremitting efforts of the public sector and financial institutions, green finance has provided substantial financial support for economic activities to improve China’s environment, climate change response and resources efficiency. It has become an important financial tool to guide resources into green industries and support national and regional green development. This year, the Central Leading Group on Carbon Peaking and Carbon Neutrality has formulated and released the “1+N” policy framework. “1” refers to the “Guiding Opinions” for China’s 30-60 goals. “N” refers to the Carbon Peaking Action Plan, policy measures and actions from all major emitting sectors. One of which is “developing green finance to expand financial support and investment”. Of course, we must also be wary of the potential socio-economic costs of irrational investment, as there are numerous international examples of economic and financial risks associated with irrational exuberance in emerging industries. Therefore, in the process of achieving the 30-60 goals, we need to make rational decisions, take prudent actions, conduct the capacity warning and risk monitoring, so as to guide a steady and sustained green development.

II. Green finance development requires better institutional environment and endogenous market vitality.

In recent years, great achievements have been made in green finance. In terms of the scale of existing green finance-related products and tools, the total amount of green credit of China’s major commercial banks ranks first in the world, and the stock amount of green bonds, the second. Moreover, financial institutions have explored the green industries and launched a series of green finance innovative products such as carbon-neutral bonds, sustainability-linked bonds and carbon finance contracts. However, compared with developed countries, from carbon peaking to carbon neutrality, the length is 20 to 40 years shorter for China; therefore, China faces more problems and difficulties in green development and green finance. Although the total amount of green credit in China ranks first in the world, the proportion is not high. The green bonds are developing fast, but the underlying assets are mainly green credit assets, while green industry funds, green trusts, green insurance, carbon finance are yet to be developed, making it difficult to meet the differentiated demands of market entities. More importantly, the lack of unified standards for green finance and solid systems and regulations has made it more difficult and costly for the management of financial institutions and hindered the flow of green financial products. The current structure of the green financial market, with banks as the main participants, has led to the dominance of green credit products in green financial products, while the market shares of green bonds, green insurance, green funds and carbon finance have been low for a long time. The green financial system is a crucial part of the national strategy, and the sound policy system and institutional environment are important protections for the rapid and healthy development of green finance. Therefore, it is imperative to optimize the institutional environment and continuously improve the green financial system, to release and stimulate its vitality and potential and enhance its three major functions of resource allocation, risk management and market pricing. More attention should be paid to the systematic, holistic and synergistic nature of green financial development. All of these would help contribute wisdom and strength to the 30-60 goals and promote high-quality economic and social development.

First, we should draw on the experience of developed economies to build the standard system of green finance. Green finance standards are not only the technical basis for the regulation and sustainable development of green finance, but also an important facilitator for economic and social development and participation in global economic and financial governance. Therefore, it is necessary to focus on the principle of “Do No Significant Harm (DNSH)” proposed by the EU, strengthen biodiversity-related standard setting, and build a unified Chinese system of green finance standards in line with the international standards. In addition, it is of great importance to improve the policy environment for environmental, social and governance (ESG) investment and make the ESG concept extensively accepted in light of the Post COVID-19 green recovery, study and introduce a mandatory environmental information disclosure system, require financial institutions to establish a comprehensive green accounting and account system. In doing so, the carbon data information management will be further strengthened with a clear “carbon footprint” of each green financing. The National Green Growth Strategy will be implemented in real earnest.

Second, we should improve the policy incentive and restraint mechanism to promote the development of green finance and release the potential of green finance. The central and local governments should work out investment and financing plans for green industries and key projects as soon as possible, and improve incentive mechanisms in guarantee, tax deduction and interest subsidies to lower financing costs for green projects, give full play to the guiding role of the government in investment, to leverage private capital into green investment and improve the accessibility of green finance. It is important to build pilot zones for green finance reform and innovations, further improve resource allocation, market pricing, and risk management in respect of financial support for green and low-carbon development, and replicate success stories nationwide. Regulators should strengthen credit policy guidance, including supporting various financial institutions in developing green financial business, green credit, and guiding financial institutions to innovate green finance in department setting, resource allocation, incentive policy, performance assessment, product innovation and information disclosure, so as to better meet the financing needs of green and low-carbon industries. Financial institutions should use the policy support tools for carbon emission reduction, conduct in-depth research in the fields of clean energy, energy conservation and environmental protection, and carbon emission reduction technologies and give timely feedback on the problems, difficulties and challenges encountered. By doing so, they can provide a reference for monetary authorities to improve the accuracy and effectiveness of policy support instruments. In the future, more green products should be allowed to be included as eligible collateral for the lending facility of the People’s Bank of China (PBoC); financial institutions will be incentivized to provide support for carbon emission reduction and low-carbon technology development, and leverage more private funds to reduce carbon emission. In addition, we can also strengthen the green finance evaluation mechanism by establishing a statistical system of carbon emission reduction project loans for financial institutions that can measure the effect of carbon emission reduction in a bid to enhance the performance of green finance business.

Third, it is important to uphold the concept of green development, and improve the strategic awareness and ability of financial institutions to serve green development. Firstly, financial institutions must integrate ESG and green development concepts into their development strategies and corporate governance, and make environmental protection a basic policy for their social responsibility and a crucial criterion for evaluating business performance. We should use differentiated evaluation and incentive policies to encourage the business department to increase the supply of green finance, to give full play to the role of finance in guiding and allocating social resources. It is also necessary to accelerate the innovation of green financial products and services to meet differentiated financing needs. In particular, we should accelerate the development of green industries including new energy, green buildings, low carbon transport, energy conservation and environmental protection, and increase the proportion of green assets. We should also increase financial support for green transformation of high-carbon industries, such as petrochemical and chemical industry, electric power, and steelmaking industry, to optimize the asset structure.

The vigorous growth of digital technology has provided new development momentum for financial inclusion and green finance. Digital service channels break time and space constraints, and thus enables financial institutions to provide services at lower costs for a large number of micro and small enterprises (MSEs) and other inclusive groups. The comprehensive use of big data also reduces the information asymmetry between banks and businesses, thus helping financial institutions better identify customers through more precise portraits, and increasing the availability of finance for MSEs. It can also reduce “greenwashing” risk, thus reducing resistance to the development of financial inclusion and green finance. In this way, with data being a production factor, financial institutions should not only accelerate their own digital transformation but also integrate digital technology with various industries. They should also integrate green finance, financial inclusion, and sci-tech finance to improve production efficiency, reduce energy consumption, and promote green and low-carbon economic development of various industries. Financial inclusion serves many targets and crossovers with other fields. Key groups of financial inclusion, such as MSEs and farmers, are vulnerable to climate change, but they are also important groups to fight climate change. High-tech startups are mostly MSEs; supply chain finance reaches these MSEs through core businesses. That means finance can make a big difference in green and sci-tech supply chains and other fields.

Fourth, we must improve risk management capabilities to deal with the relationship between green development and risk prevention and control. Financial institutions will inevitably suffer institutional, technological, market, nation, and environmental and climate risks in their transition to green assets and businesses. Therefore, it is necessary to explore a complete and effective risk prevention and control mechanism and system for green finance, which can guard against climate-related risks and maintain economic and financial stability. Climate-related risks are featured by low-probability and high-loss, and could easily lead to structural changes in the economic and financial system; they are now being taken seriously by the global macroeconomic authorities and financial regulators. Georgieva, Managing Director of the International Monetary Fund (IMF), said that “We see climate as a fundamental risk for economic and financial stability.” Mark Carney, the former governor of the Bank of England, also noted that: “Climate change could affect financial stability.” Gang Yi, governor of the People’s Bank of China (PBoC), mentioned on many occasions: “Climate change can affect financial stability and monetary policy”, “China’s central bank will promptly assess the impact of climate change on financial stability and monetary policy.” To develop green finance, we should incorporate climate change factors into “Response Functions” of monetary policy, the macro stress testing of climate and environmental risks into the scope of financial supervision, climate risks into the balance sheet management of financial institutions, and the monitoring and management of climate risks into the corporate governance. These measures are conducive to comprehensive management at both macro and micro levels and better response to climate risks, and maintenance of the stability of the financial system.

In short, the development of green finance for carbon neutrality should strike a balance between development and emission reduction, short-term and medium and long-term goals and between the global and local development. Therefore, we should demonstrate determination and pull wisdom of the whole nation to find solutions. I believe that’s also what this forum is all about.

Thank you!

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