China’s environmental, social and governance (ESG) market growth goes hand-in-hand with the development of the country’s green finance market. Hence, ESG policy cannot be discussed without considering the evolution of the country’s green finance policies.
After years of research, the People’s Bank of China (PBOC) developed the policy ideas of “three functions” and “five pillars” for green finance. The “three functions” refer to green finance’s function in resource allocation, risk management and market pricing. And the “five pillars” refer to the standards system, regulation and information disclosure, incentive constraint mechanisms, product and market system and international cooperation for the green finance business.
By following the framework set forth by the “five pillars,” this article aims to review the progress of policy development of ESG investing and green finance throughout this year and provide a glimpse into the future. The policies discussed cover the Chinese mainland, while some may also include the Hong Kong market.
In early 2022, four authorities, including the PBOC, jointly published the 14th Five-Year Plan for Financial Standardization. The plan views standardization as an essential component of green finance’s sustainable development. It calls for a set of strict, clear, detailed and operable standards in accordance with the principle of “creating a uniform set of domestic standards while aligning with international ones.” The plan also lays out many specific tasks, including unifying standards for green bonds, enriching product and service standards for green finance, formulating environmental information disclosure rules for listed companies and bond-issuing companies, developing and promoting carbon accounting standards for financial institutions, establishing an ESG evaluation standard system, establishing statistical standards for loans that can measure carbon emission reduction, developing standards for carbon finance products and formulating market standards for transition finance. These tasks form the focus of green finance and ESG standards in 2022 and the next few years.
Some efforts have already yielded results in 2022. In April, the China Securities Regulatory Commission (CSRC) issued the Standards for Carbon Financial Products. These new industrial standards stipulate regulatory requirements for the classification and implementation of carbon financial products and offer guidelines for financial institutions to develop and launch carbon financial products. In July, China’s Green Bond Standards Committee released the China Green Bond Principles, marking the official establishment of green bond standards that are unified in China and in line with international standards. Establishing the principles is considered a milestone in promoting the high-quality development of the green bond market. According to the principles, 100% of the funds raised by green bonds must be invested in green projects. Regarding transition finance, the PBOC has also been studying its mechanisms, but has not yet formulated specific policies or standards.
In 2022, there has been explosive growth in ESG group standards. As of November, China already has six standards in place, including the ESG Reporting Guidelines for Listed Companies, the Guidance for Enterprise ESG Evaluation, the Guidance for Enterprise ESG Disclosure, the General Principle of Enterprise ESG Information Disclosure, the General Principle of Enterprise ESG Evaluation and the Specification of Enterprise ESG Evaluation. However, there may be overlaps because these standards and guidance were developed separately by each professional association. Thus, the extent to which the market will accept them remains to be seen.
There are also standards developed by local governments and used as local standards or guidelines. For example, in July, Huzhou, a city in the eastern province of Zhejiang, issued the Specification for Construction and Management of a Carbon Neutrality Bank. This is the 14th local green finance standard since it was approved by the central government as a pilot green finance reform and innovation zone. In September 2022, Shenzhen passed the Guidelines on Environmental Information Disclosure for Financial Institutions in Shenzhen, providing a uniform, detailed, practical and advanced guidance for financial institutions to disclose environmental information. In June, in the southwestern metropolis of Chongqing, the Chongqing Society for Finance and Banking released the Guidelines for Developing Green Finance Digital Platforms.
Workers make building materials at a factory of a new materials technology company in the southwestern city of Chongqing. VCG
ESG or environmental information disclosure has been the subject of great attention. Regulatory authorities, on the whole, support raising the level of ESG information disclosure, but require that there be a proper process. I would therefore describe the progress toward mandatory across-the-board disclosure as a small quick step rather than a giant leap.
At the end of 2021, China’s Ministry of Ecology and Environment (MEE) issued the Administrative Measures for the Legal Disclosure of Enterprise Environmental Information, requiring environmental information disclosure by five types of companies, including listed companies and bond-issuing enterprises. The Guidelines on the Format for the Legal Disclosure of Enterprise Environmental Information was issued in January 2022.
In the capital markets, the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE) updated their Listing Rules in January, introducing corporate social responsibility (CSR) for the first time, in the form of the inclusion of social responsibility in corporate governance, the disclosure of CSR performance in accordance with requirements and the possibility of forced delisting in the case of infringing on the public’s interest. The listing rules clarify that listed companies must prepare and disclose nonfinancial information, including social responsibility reporting. In practice, the exchanges had already imposed mandatory disclosure on some listed companies, including SSE-listed corporate governance sample companies, companies listed both at home and abroad, financial companies and Shenzhen Stock Exchange 100 Index sample companies. In January, the SSE brought the companies included in the Science and Technology 50 Index into the scope of its mandatory disclosure plan. In April, in its Guidelines on Investor Relations Management of Listed Companies, the CSRC introduced ESG information as an element of communication between listed companies and investors required by investor relations management.
At the policy level, two types of enterprises face increased pressure on information disclosure. One type is listed companies controlled by centrally administered state-owned enterprises. In May, the State Council’s State-owned Assets Supervision and Administration Commission (SASAC) issued a work plan requiring listed companies controlled by central state-owned enterprises to improve quality via implementing a new development philosophy, and building and strengthening their ESG systems. This work plan set a clear target encouraging full coverage disclosure in ESG by more central state-owned enterprise-controlled listed companies by 2023. To this end, SASAC Research Center issued its Research on the Guidelines for ESG Information Disclosure by Listed Companies Controlled by Central State-Owned Enterprises.
The other type is financial institutions. In 2021, the PBOC published the Guidelines for Financial Institutions’ Environmental Information Disclosure. While this remains a voluntary standard, it has encouraged more financial institutions, especially banks, to prepare environmental information disclosure reports. At present, financial institutions including Industrial and Commercial Bank of China Ltd. (ICBC), Agriculture Bank of China Ltd. (ABC), China Construction Bank Corp. (CCB) and China Merchants Bank Co. Ltd. publish environmental information disclosure reports separate from their ESG reports. Shenzhen and Shanghai have also implemented regulations compelling some local financial institutions to disclose environmental information. Shenzhen issued its Green Finance Regulations in 2020 and provided detailed guidelines in 2022. Shanghai released its Regulations on the Development of Green Finance in Pudong New Area in June, proposing that banks in Pudong publish annual environmental information reports in accordance with relevant standards, such as the Guidelines for Financial Institutions’ Environmental Information Disclosure. Shanghai also encouraged other financial institutions to voluntarily disclose environmental information reports.
This year, the Hong Kong Stock Exchange adjusted its ESG reporting requirements. From this year on, ESG reports must be published alongside annual reports. The exchange also plans to strengthen climate-related information disclosure, with related industries expected to be required to make disclosures in line with the suggestions of the Task Force on Climate-Related Financial Disclosures by 2025.
Looking at the past few years, it seems that the focus of green finance and ESG investing incentive/constraint mechanisms has been mainly incentives based, supplemented by constraints, and focused on promoting capital inflows, supplemented by cost reductions. In my view, the focus of present-day policies remains on incentives.
In 2022, two policies have had a great impact. One is the Guidelines on Green Finance for the Banking and Insurance Industries issued by the China Banking and Insurance Regulatory Commission (CBIRC) in June. This requires banks and insurance companies to take strategic measures promoting green finance, strengthen support for the green, low-carbon and circular economy and promote the full green transformation of economic and social development. These Guidelines cover banks’ non-credit business, insurance acceptance and asset management, and encourage investment funds to invest in the green finance area, potentially influencing tens of trillions of yuan of assets.
Incentives for the insurance sector, especially asset management, have also seen significant improvements. In September, the Insurance Asset Management Association of China encouraged insurance asset management agencies to actively promote green transformation, shoulder their responsibilities for management, and guide invested firms and other stakeholders to jointly build a green development community, in its Initiative on ESG Management In China’s Insurance Asset Management Industry.
Another important policy concerns climate investment and financing pilot work. This can be traced back to the Guiding Opinions on Promoting Investment and Financing in Response to Climate Change issued by five authorities, including the MEE, in 2020, which proposed a work plan for climate investment and financing pilot areas. In December 2021, nine authorities, including the MEE, issued the Notice on Conducting Climate Investment and Financing Pilot Work, marking the formal declaration of these pilots. In August 2022, the first 23 pilot areas were announced, including 12 cities, four districts and seven national new areas. These pilot areas will soon take action to channel and promote more funds to invest in and finance the climate change sector, including developing carbon financing and setting up project libraries.
China’s dual carbon goals — peaking emissions by 2030 and carbon neutrality by 2060 — have further motivated local governments to accelerate the development of green finance. In the first three quarters of 2022, around 160 green finance policies were published at the provincial, municipal and district levels, of which 61 policies were carbon-related, according to data from the SynTao Green Finance China Green Finance Policy Database. For example, in June, Guangdong province published its Action Plan on Developing Green Finance and Supporting Peak Carbon Dioxide Emissions, setting several clear targets. For example, the growth of green loan balances should not be lower than that of other loan balances, and the green loan balance should account for about 10% of the total loan balance by 2030. This is sure to attract increased funding to green finance.
The development of green finance agencies has also become a trend in local green finance incentives. Regions like Guangdong, Shanghai and Zhejiang have encouraged financial institutions to establish green finance agencies. In June 2021, Shenzhen released its Guiding Opinions on Strengthening the Construction of the Green Finance System in the Banking Sector in Shenzhen (for Trial Implementation). In November of that year, the first 11 green finance agencies were unveiled, with ten more opening in August 2022.
Environmental protection monitors walk through a railway construction site where new-energy equipment is being used for construction. VCG
From largest to smallest, the major ESG investing and green finance products are: green credit, green bonds and ESG security funds. Relevant policies have been also issued to promote product innovation.
After more than ten years of development, the green credit product system is relatively well-established. In November 2021, the PBOC designed two structural monetary policy instruments, its carbon-reduction support tool, and special re-lending support for clean and efficient use of coal, drawing a huge market response. Essentially, these both focus on re-lending, distributing low-cost capital in a targeted manner. The difference between them is that the former offers support in the form of 60% of the principal of the bank loan, while the latter provides 100% of the principal. With an attractive re-lending rate of 1.75%, both instruments have served to motivate banks. Statistics for the first half of 2022 show that funds issued through these instruments reached 182.7 billion yuan ($25.84 billion) and 35.7 billion yuan respectively, leveraging loans worth 304.5 billion yuan and 43.9 billion yuan, and saving a total of 60 million tons of carbon dioxide equivalent.
Many policies to drive product innovation have also been introduced in the area of green bonds. In 2022, the China’s Green Bond Principles included an attachment that defined the types of green bonds, including ordinary green bonds (blue bonds and carbon neutral bonds), carbon incomes (environment-related equities) green bonds, green project benefit bonds and green asset-backed securities. This was the first unified classification of green bonds available in China’s market.
In terms of specific products, the policy on promoting product innovation emphasizes transition bonds, blue bonds and social bonds. In May, the National Association of Financial Market Institutional Investors (NAFMII) issued the Notice on Conducting Pilot Innovation Related to Transition Bonds, officially launching transition bond products. It should be noted that transition bonds are not green bonds; they mainly support the transformation and upgrading of traditional industries, especially the eight major industries with high carbon emissions. In terms of blue bonds, the SZSE issued the first blue bonds in March, marking the start of full coverage of blue bonds in the interbank and exchange markets. In October, Hainan province’s Department of Finance issued 5 billion yuan worth of offshore yuan-denominated bonds in Hong Kong, including 1.2 billion yuan of two-year blue bonds, the first blue bonds to be issued by a local government. In terms of social bonds, NAFMII issued its Q&A on Piloting Social Bonds and the Sustainability Bond Business, and introduced social bonds and sustainability bonds in November 2021. Since the pilot was only open to overseas issuers of Panda bonds, the issuance amount has been relatively small. In the first three quarters of this year, the Asian Infrastructure Investment Bank was the sole issuer of sustainability Panda bonds, issuing 1.5 billion yuan in June.
China has been working with the international community on green finance. Results of this cooperation include the G-20 Sustainable Finance Working Group, the Central Banks and Supervisors Network for Greening the Financial System, the International Platform on Sustainable Finance, the Green Investment Principles for the Belt and Road, the Sustainable Banking and Finance Network, the International Organization for Standardization’s (ISO) ISO/TC 322-Sustainable Finance, and the U.N.’s Principles for Responsible Banking (PRB) and Principles for Responsible Investment (PRI).
In 2022, progress has been made on all relevant work. The PBOC led the formulation of the G-20’s policy framework on financial support for the orderly transformation of high-carbon emission industries and the 2022 G20 Sustainable Finance Report approved at the G-20 Finance Ministers and Central Bank Governors Meeting in October. In September, the ISO officially released ISO 14100: 2022 Guidance on Environmental Criteria for Projects, Assets and Activities to Support the Development of Green Finance, a set of international standards led by the China National Institute of Standardization, and the second set of international standards whose formulation was led by Chinese experts in the field of ISO sustainable green finance. In addition, under policy guidance, Chinese-funded financial institutions actively participated in international platforms and initiatives of all kinds. In 2022, more than 20 Chinese-funded banks signed up for the PRB, and more than 100 Chinese-funded financial institutions signed for PRI, sending the numbers of both Chinese-funded PRB and PRI members to a record high.
In international cooperation, Chinese institutions have adhered to the basic principle of “seeking common ground while shelving differences,” that is, pursuing convergence with international frameworks based on the premise of respecting China’s realities. International cooperation on green finance classification standards is a classic embodiment of this thinking. In 2022, the PBOC and relevant EU departments jointly issued the Common Ground Taxonomy: Climate Change Mitigation, identifying 72 economic activities that greatly contribute to climate change mitigation and laying the foundation for the interconnection of Chinese and international green bond markets. Since it came out, CCB, Bank of China, ABC and Deutsche Bank have continually referred to this taxonomy in their business.
International standards for information disclosure have also been a highlight of China’s participation in international cooperation in 2022. In 2021, the IFRS Foundation established the International Sustainability Standards Board (ISSB), gathering widespread attention. In June 2022, the ISSB appointed a representative of China’s Ministry of Finance (MOF) as a member, and in August, it appointed Hua Jingdong, former vice president of the World Bank, as its vice chairman. Before this, in April, when the ISSB was setting up a task force, it included members from China’s MOF in order to improve the compatibility of global benchmarks and local standards worldwide. This indicates China’s high level of attention to, and active participation in, ISSB’s work. In terms of technology, the ISSB released two sets of draft standards for soliciting public opinion in March 2022. Both the MOF and CSRC gave formal feedback, generally recognizing the value and significance of the ISSB-prepared standards. At the same time, they pointed out several technical issues of concern to the Chinese side, aiming in particular to enhance the inclusiveness of the standards’ adaptation to a variety of situations, including those of developing countries, emerging markets and small and midsize enterprises.
International Finance Corp. signs a green finance agreement with the Hong Kong Monetary Authority, the city’s de facto central bank, Nov. 9, 2020. VCG
Going forward, despite the uncertainties entailed by epidemic prevention and control, the macro economy, the international situation and other factors, I believe that China’s green and low-carbon transformation will remain on a basically unchanged trend in the medium and long term, that China’s ESG market still enjoys considerable room for growth, and that top-down policies remain the most important force driving China’s ESG development.
I think the following policy trends are worth monitoring.
First, discussion on “Chinese-style” ESG policy. The report of the 20th National Congress of the Communist Party of China proposed “Chinese-style modernization.” What role should ESG and green finance play in this style of modernization? How should the ESG information disclosure and rating methodology, and green finance classification, reflect Chinese characteristics? These issues have already been the subject of considerable discussion this year. The China Association for Public Companies’ ESG Professional Committee, established in November, proposed to “develop an internationally recognized ESG management system and evaluation system with Chinese characteristics.” I expect that in the coming year, this issue will be further discussed, probably yielding some initial results.
Second, concern is set to continue over the issue of greenwashing. The PBOC has repeatedly mentioned that great importance should be attached to anti-greenwashing during the development of green finance, with a focus on green credit and bonds. That said, ESG investment funds are at the forefront of anti-greenwashing overseas, and the EU’s Sustainable Finance Disclosure Regulation has already had an impact on various asset management products. I predict that domestic regulators will gradually focus more on anti-greenwashing in the capital markets, especially in public funds.
Third, continuing policy impetus for carbon accounting in financial institutions. In the last year or two, Chinese authorities at the central and local levels have been exploring asset level carbon accounting approaches for financial institutions. Before this, the PBOC had already drawn up its Technical Guide on Carbon Accounting for Financial Institutions (Trial), which was piloted in experimental zones for green finance reform and innovation. In 2023, based on this pilot, we may obtain initial practical experience that can be promoted more widely. Also, issues such as climate stress testing for banks and carbon accounts for individual bank customers are likely to become new concerns for those who make policy and set standards.
Written by Guo Peiyuan. He is chairman of the board of SynTao Green Finance, a leading consultancy providing professional services in green finance and responsible investment in China.
This article was originally published by Caixin Global. It has been republished here with permission.
(Header image: VCG)