China takes lead on climate change
China is emerging as an unequivocal driver of global climate change mitigation, sustainability and green finance, as its representatives forcefully communicated during a recent U.N. climate change conference in Morocco.
The talks in Marrakech, which ended on Nov. 19 after almost two weeks of proceedings, have solidified the agreement on climate change made at the December 2015 Paris Climate Conference, known as COP21. That treaty was ratified in October, thanks to fast-tracking by the U.S., China and India, as well as by other Asian participants including Indonesia, Singapore and Thailand.
Principles for Responsible Investment, a U.N.-supported initiative to foster the growth of environmental, social and corporate governance among global investors, has welcomed the swift ratification of COP21 and recognized that China has been a prime mover in that process -- the fastest-ever ratification of a multilateral treaty.
Getting an agreement approved by 195 countries is a Herculean task, to say the least, especially against a backdrop of existing and potential geopolitical conflict around the world.
But most of the attendees at the talks in Marrakech, known as COP22, saw room for optimism, much of which came from the powerful momentum generated by China. Beijing also led the G-20 group of the largest economies in September in talks on climate change and sustainable development goals.
Principles for Responsible Investment has worked closely with the G-20 green finance study group, initiated by China, in calibrating sustainability policies, which solidified in 2015 thanks to recommendations from the green Finance Committee, established by the People's Bank of China, and the U.N. Environment Program Inquiry into the Design of a Sustainable Financial System.
These principles, now enshrined in China's latest five-year plan, comprise 35 specific actions that have been adopted by seven government ministries, ranging from policies on green bonds, designed to raise funds for environmentally-beneficial projects, to the credit and carbon trading markets.
A key plank of the new policies is the aim of reducing funding costs and mobilizing private capital in the drive for environmental sustainability, facilitated by fiscal support incentives such as subsidies for selected projects and a green guarantee program, which will enable companies with lower credit ratings to enjoy access to international capital markets via credit enhancement.
Only 10% of bank credit currently outstanding in China meets green criteria, and the aim is to boost that to around 40%. Meanwhile, the staggering growth of China's green bond market from zero at the end of 2015 to a total of $27 billion in November -- accounting for 40% of green bond issuance globally -- is set to continue apace, as China continues to be the world's largest issuer of such bonds.
This will be achieved through a consolidation of green bond standards set out by China's National Development and Reform Commission and the Green Finance Committee, accompanied by stringent third-party verification to assure investment product quality and the avoidance of "greenwashing" -- the use of marketing or public relations, rather than substantive initiatives, to present an environmentally friendly image.
China also plans to foster the growth of a market for climate bonds, which differ from green bonds in that they are subject to measurable climate standards, and to establish a national green development fund to complement funds established by the 12 provinces with the highest pollution levels. Sustainability criteria will be applied to all investments in these funds' portfolios, including equity and debt products.
Alongside this, the NDRC is designing a nationwide carbon trading market, which will include products such as futures, options and carbon bonds. This will become increasingly significant as China establishes a mandatory pollution liability system.
Divestment away from polluting industries and stringent stress testing by China's banks on credit risk linked to sustainability will also drive China's "greening." One of the country's largest state-owned banks, Industrial and Commercial Bank of China, has been conducting stress tests on its loan portfolio for 18 months, and is trying to shift away from environmentally risky lending.
China's banks can also take advantage of internet finance, which is crucial to the country's financial system, perhaps more than in any other economy, to promote climate change awareness and lower the costs of transmission and emissions reduction among small- and medium-sized enterprises.
Few of the attendees in Marrakech will have been under the illusion that meeting the three main goals set in Paris -- to hold the global average increase in temperature to less than 2 degrees Celsius above pre-industrial levels, to build capacity for low carbon development, and help provide financing towards this effort -- will be easy.
But China is clearly doing its best to hit the targets. Speaking at a signing ceremony at the China Pavilion, Jiang Zhaoli, deputy director general of the NRDC's climate change department, said: "China's low carbon city program has expanded to 100 cities and provinces. More than 30 of them have pledged to peak their emissions much earlier than the national target of peaking by 2030."
Even more importantly, perhaps, this is the first time in history when such a high priority has been given to climate finance, as Li Goa, deputy director general of the department, put it. China's bold efforts at addressing climate change, as well as transforming the country's economic structure, are leading the global agenda.
Fiona Reynolds is managing director of Principles for Responsible Investment, a U.N.-supported international investor network.